PART II AND III 2 tm2110697d2_partiiandiii.htm PART II AND III

 

OFFERING STATEMENT 

 

This Offering Circular Uses the Form S-11 Disclosure Format

 

RAD DIVERSIFIED REIT, INC.

 

Minimum Offering Amount: $1,000,000 in Shares of Common Stock (1)

Maximum Offering Amount: $50,000,000 in Shares of Common Stock (1)

 

$13.67 Per Share*

 

(1) As of September 30, 2020, 561,222 shares of Common Stock have been sold in this offering for a total of $6,184,715. Some of these securities have been bought back by the Company so current outstanding shares of Common Stock are 559,775. We have met our minimum offering amount and intend to raise up to an additional $43,815,285.

 

*The offering price per share is calculated based on the net asset value (NAV) of the company divided by the number of outstanding common shares. As of September 30, 2020, our net asset value was 7,649,560.33, and outstanding shares were 559,775. This gave us a Determined Share Value of $13.67, which became the new calculated selling price per share as of November 1, 2020.

 

NO MARKET FOR SECURITIES

 

Although we do not intend to list our common shares for trading on a stock exchange or other trading market, we intend to adopt a redemption plan designed to provide our stockholders with limited liquidity on a semi-annual basis for their investment in our shares.  At this time, there is no public trading market for shares of our Common Stock.

 

RISK FACTORS

 

Investing in shares of our Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 17  of this Offering Circular for a discussion of the risks that should be considered in connection with your investment in our shares.

 

STATE LAW EXEMPTION

 

OUR COMMON SHARES ARE BEING OFFERED AND SOLD ONLY TO “QUALIFIED PURCHASERS” (AS DEFINED IN REGULATION A UNDER THE SECURITIES ACT). AS A TIER 2 OFFERING PURSUANT TO REGULATION A UNDER THE SECURITIES ACT, THIS OFFERING WILL BE EXEMPT FROM STATE LAW “BLUE SKY” REVIEW, SUBJECT TO MEETING CERTAIN STATE FILING REQUIREMENTS AND COMPLYING WITH CERTAIN ANTI-FRAUD PROVISIONS, TO THE EXTENT THAT OUR COMMON SHARES OFFERED HEREBY ARE OFFERED AND SOLD ONLY TO “QUALIFIED PURCHASERS” OR AT A TIME WHEN OUR COMMON SHARES ARE LISTED ON A NATIONAL SECURITIES EXCHANGE. SEE “INVESTOR REQUIREMENTS”.

 

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THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE COMMISSION, DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

This Offering Circular is Dated March 24, 2021.

 

Our offering will terminate on November 1, 2021, unless amended otherwise.

 

Our original offering circular was dated October 24, 2019 and was qualified on November 1, 2019.

 

OFFERING CIRCULAR SUBJECT TO AMENDMENT

 

This Offering Circular is part of an offering statement that we filed with the SEC, using a continuous offering process.  Periodically, we will file offering circular supplements that may add, update or change information contained in this Offering Circular. Any statement that we make in this Offering Circular may be modified, contradicted or superseded by any statement made by us in a subsequent offering circular supplement. The offering statement and all supplements and reports that we have filed or will file in the future can be read at the SEC website.

 

OFFERING CIRCULAR SUBJECT TO COMPLETION

 

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is re-qualified.

 

This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular or the offering statement in which such Final Offering Circular was filed may be obtained.

 

RESTRICTIONS ON TRANSFER OF SHARES

 

Transfer of shares is also subject to approval by the Company. The Company has a significant interest in preserving its status as a REIT. In order to ensure compliance with REIT requirements, the Company requires that no single stockholder holds more than 9.8% of the stock outstanding. Should any attempt to transfer shares violate this condition, the Company shall not recognize such attempted transfer and the transfer shall be void.

  

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INVESTOR REQUIREMENTS

 

The Common Stock is offered only to “Qualified Purchasers”, which include: (i) “accredited investors” under Rule 501(a) of Regulation D and (ii) all other investors so long as their investment in our common shares does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).  We reserve the right to reject any investor’s subscription in whole or in part for any reason, including if we determine in our sole and absolute discretion that such investor is not a “qualified purchaser” for purposes of Regulation A.

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth.  Different rules apply to accredited investors and non-natural persons.  Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A.  For general information on investing, we encourage you to refer to investor.gov.

  

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TABLE OF CONTENTS

 

Summary Information, Risk Factors And Ratio of Earnings To Fixed Charges 5
Determination of Offering Price 58
Dilution 60
Selling Security Holders 61
Plan of Distribution 61
Use of Proceeds 66
Management’s Discussion And Analysis 89
General Information About The Company 91
Company Policy Regarding Certain Activities 91
Investment Strategies And Policies 94
Real Estate Holdings 100
Operating Data 102
Tax Treatment of Company And Its Security Holders 102
Determination of Market Price 126
Description of Registrant’s Securities 126
Rescission Offer 130
No Legal Proceedings 130
Security Ownership of Certain Beneficial Owners And Management 130
Directors And Executive officers 133
Executive Compensation 137
Certain Relationships And Related Transactions 139
Selection, Management And Custody of Investments 139
Policies With Respect To Certain Transactions 140
Limitations of Liability 140
Financial Statements And Information 141
Interests of Named Experts And Counsel 142
Securities And Exchange Commission Position Regarding Indemnification of Securities Act Violations 142

 

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SUMMARY INFORMATION, RISK FACTORS AND

RATIO OF EARNINGS TO FIXED CHARGES

 

Summary

 

RAD Diversified REIT, Inc., a Maryland corporation referred to herein as our Company, was formed to acquire, reposition, renovate, lease and manage income-producing single-family residential, multi-family residential, and mixed use residential-commercial properties in select markets in the United States, with a focus on acquisition of properties at discounts to fair market value or expected fair value.  

 

We are externally managed and advised by RAD Management, LLC, a Delaware limited liability company, or the “Manager”.  The Manager will make all investment decisions for us.  Our Manager intends to employ a variety of acquisition strategies in building our portfolio of investments, with a particular focus on obtaining properties in on-market transactions, off-market transactions, tax deed foreclosure sales, bank foreclosures, Real Estate Owned (“REO”) properties and similar transactions.  

 

We are offering a minimum of $1,000,000 and a maximum of $50,000,000 of shares of our Company’s Common Stock, which we refer to as shares, at an offering price of $13.67 per share.  The minimum purchase requirement per investor is $1,000 in shares; however, we can waive the minimum purchase requirement in our sole discretion.

 

As of September 30, 2020, 561,222 shares of Common Stock have already been sold in this offering for a total of $6,184,715.

 

The sale of shares pursuant to this offering will begin as soon as practicable after this Offering Circular has been re-qualified by the United States Securities and Exchange Commission and is expected to continue until we raise the maximum amount being offered, unless terminated by us at an earlier time in the discretion of our board of directors. 

 

Although we do not intend to list our common shares for trading on a stock exchange or other trading market, we intend to adopt a redemption plan designed to provide our stockholders with limited liquidity on a semi-annual basis for their investment in our shares.  At this time, there is no public trading market for shares of our Common Stock.

 

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  Per Share Total Minimum Total Maximum
Offering Price (1)(2)

 

 

$13.67

 

 

 

$1,000,000(3)

 

 

 

$50,000,000

 

Underwriting Discounts and Commissions ------ ------ -----
Broker-Dealer Fees (6)

 

 

$30,000 Advisory/Consulting Fee

 

$10,000 Advance on Expenses

 

1% Commission on All Sales

 

3% Commission on Facilitated Sales

 

 

 

$30,000

 

$10,000

 

$10,000

 

$30,000

 

 

 

$30,000

 

$10,000

 

$500,000

 

$1,500,000

 

Proceeds to Us from this Offering (Before Expenses) (4)

 

 

$11.88 (Not Facilitated)

 

$11.64 (Facilitated Sale)

 

 

 

$950,000 (Not Facilitated)

 

$930,000 (All Facilitated)

 

 

 

$49,460,000 (Not Facilitated)

 

$48,460,000 (All Facilitated)

 

 

   
1.Initially, the price per share was arbitrarily determined by our Manager to be $10.00 per share. Now, based on the calculation method described below, our share price is $13.67 per share corresponding to the “Determined Share Value”, as defined below.  

 

2.Beginning in 1Q 2020, the per share purchase price for our shares in this offering equals the sum of the consolidated net asset value (“NAV”) of our Company divided by the number of our common shares which are outstanding as of the end of the prior fiscal quarter (hereinafter, the “Determined Share Value” or “DSV” per share).  Thereafter, the per share purchase price is adjusted every fiscal quarter as of January 1, April 1, July 1 and October1 of each year (or as soon as commercially reasonable and announced by us thereafter) based on the three previous months. As an example, we close our books in December, and then in January, we calculate the new share price based on the previous three months. This new share price will be effective come February 1, and continue for three months (e.g. February, March, and April). As of the date of this filing, the company has adjusted the DSV per share four times as further detailed under “Determination of Offering Price” on page 58.

 

3.

This is a “best efforts” offering.  The Company has met the Minimum Offering Amount.  See “Plan of Distribution”.

 

4.Investors will not pay upfront selling fees or commissions in connection with their purchase of shares.

 

5.At the end of the 2nd year, we will start to reimburse our Manager, without interest, for organization and offering costs incurred both before and after such date, which we estimate to be $600,000.00.  Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.50% of the aggregate gross offering proceeds from this offering.  If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.50% limit), calculated on an accumulated basis, until our Manager has been reimbursed in full.
   
 

6.

The total maximum compensation the Company’s broker-dealer, Entoro Securities LLC, would be entitled to if the Company issued the maximum number of securities under a $50,000,000 raise would be $1,540,000, comprising $1,500,000 in 3% commission and $40,000 in maximum advisory fees and expenses.

 

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SUMMARY OF OFFERING

 

This offering summary highlights the information contained elsewhere in this Offering Circular. Because it is a summary, it may not contain all the information that you should consider before investing in our shares.  To fully understand this offering, you should carefully read this entire Offering Circular, including the more detailed information set forth under the caption “Risk Factors.”  Unless the context otherwise requires or indicates, references in this Offering Circular to “us,” “we,” “our” or “our company” refer to RAD Diversified REIT, Inc., a Maryland corporation.  

 

We refer to RAD Management, LLC, as our “Manager”.  As used in this Offering Circular, an affiliate of, or person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

 

Unless the context otherwise requires or indicates, the information set forth in this Offering Circular assumes the effectiveness of the Management Agreement that we expect to enter into simultaneously with the completion of this offering between us and our Manager, or the “Management Agreement” see Exhibit 6.

 

The Company

 

RAD Diversified REIT, Inc. was formed as of May 11, 2017 as a Maryland corporation, and we have elected to be taxed as a REIT for federal income tax purposes, for which the company qualified initially on November 1, 2019. We are currently in compliance with our REIT qualification 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”.  

 

REIT Status

 

We have elected to be treated as a REIT for federal income tax purposes, which we have achieved on November 1, 2019. As long as we maintain our qualification as a REIT, we generally will not be subject to federal income or excise tax on income that we intend to distribute to our stockholders.

 

Under the Internal Revenue Code of 1986, as amended (the “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 stockholders.

 

If we fail to maintain our qualification as a REIT in any year, our income will be subject to federal income tax at regular corporate rates, regardless of our distributions to stockholders, and we may be precluded from qualifying for treatment as a REIT for the four-year period immediately following the taxable year in which such failure occurs.

 

Even if we qualify for treatment as a REIT, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.  

 

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Investment Company Act Considerations

 

We intend to conduct our operations so that we will not be required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).   

 

Management

 

Company is Externally Managed

 

We are externally managed by RAD Management, LLC, a Delaware limited liability company or the “Manager.”  The Manager will make all investment decisions for us.  The Manager’s principals and their respective affiliates specialize in acquiring, repositioning (where applicable) and managing residential real estate, particularly in states such as Pennsylvania, California, Texas and Florida.

 

Our Manager has particular experience in purchasing tax deeds in such states as a means to acquire properties at attractive prices which show strong potential for profits both in the form of rental income and capital appreciation.  

 

The Manager intends to apply this experience to identify suitable Investments and to present an opportunity for outside investors to take advantage of the principals’ experience through a pooled investment vehicle.  

 

The Manager will oversee our overall business and affairs, and will have broad discretion to make operating decisions on our behalf and to make Investments. Our stockholders will not be involved in our day-to-day affairs.  

 

Experienced Management Team

 

Our management team has significant real estate experience, which includes experience in acquisition, management, development and financing of multiple properties.  

 

Overall, our management team has 30+ years combined experience in the real estate business as both portfolio managers and educators.  

 

Our Chief Executive Officer, Brandon “Dutch” Mendenhall started The Seminar Solution in 2007, an education platform that still provides mentoring to thousands of people who want to successfully invest in real estate, especially through the use of tax-auctions.  

 

Our management team has relevant experience in managing private real estate funds with investment objectives and strategies that are substantially similar to our strategy and objectives.

 

Please see page 138 for more information about compensation of our Named Executive Officers.

 

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Manager’s Track Record

 

The Manager’s staff (i.e. “Management Team”) has, through other fund management companies, compiled a strong track record of success in management of privately offered real estate funds.  

 

Since late 2015, our Management Team has managed three real estate funds:

 

  · DHI Holdings, LP.  
     
  · DDH Fund, LP.
     
  · DHI Fund, LP.

 

Prospective Investors should refer to Page 68, entitled “Past Performance of Management Team”.  Prospective Investors are further cautioned that any performance history of these three prior funds is not indicative of any future results of our Company. DHI Holdings, LP, DDH Fund, LP or DHI Fund, LP are collectively referred to as the “DHI Companies”.

 

Prospective Investors should note, however, that they will have no interest in DHI Holdings, LP, DDH Fund, LP or DHI Fund, LP. 

 

Management Compensation

 

Our Manager and its affiliates will receive fees and expense reimbursements for services relating to this offering and the investment and management of our assets.  The items of compensation are summarized in the following table.  Neither our Manager nor its affiliates will receive any selling commissions or dealer manager fees in connection with the offer and sale of our common shares.

 

We do not have an agreement to limit any losses suffered by Our Manager.

 

The projected compensation laid out above relates to all stages of our company, including offering stage, organizational stage, acquisition stage, and liquidation stage.

 

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Asset Management Fee:

The Asset Management Fee is equal to 2% of our Net Asset Value every year. This fee is payable to our Manager monthly. 

 

The Asset Management Fee compensates our Manager for managing all of our assets. 

 

In the first year, if we use maximum leverage, we expect to pay our Manager $240,589 in Asset Management Fees.

 

Acquisition Fees:

The Acquisition Fees are equal to $1,000 per property acquired in that period. This compensates roughly $500 in travel per property, and roughly $500 in research per property. 

 

These fees compensate our Manager for traveling to, and researching properties that are suitable for investment.

 

In the first year, if we use maximum leverage, we expect to pay our Manager $216,000 in Acquisition Fees.

 

Property Management Fee:

The Property Management Fee is equal to 4% of the monthly rental income from each of our properties managed by our Manager. 

 

The Property Management Fee compensates our Manager for managing, renting, and overseeing our properties that are available for rent. 

 

In the first year, if we use maximum leverage, we expect to pay our Manager $54,721 in Property Management Fees.

 

Financial Management Fee:        

The Financial Management Fee is equal to 20% of the increase in our Net Asset Value that is not attributable to investment.

 

The Financial Management Fee compensates our Manager based on the appreciation in value of our assets.

 

In the first year, if we use maximum leverage, we expect to pay our Manager $1,604,491 in Financial Management Fees.

 

 

 

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  · Compensation to our Manager is never based on capital raised through this offering. Our Manager is instead compensated based on the services provided to us by our Manager, for example, the Asset Management Fee is a fixed fee based on a percentage of our NAV. Even though a portion of our NAV represents investment of capital raised through this offering, the Asset Management Fee is based on management of our assets not on our ability to raise capital.

 

  · For the Asset Management Fee, our Company will not pay this fee until our NAV is calculated.

 

  · All of the fees to our Manager will be paid cumulatively.

 

  · For the Financial Management Fee, our Manager will exclude all short and long term investments that are not properties. The Financial Management fee is based on the quarterly increase of our combined Net Asset Value less increase attributable to investments, which equals: (i) the fair market value of all of our real estate assets, as determined by external third party appraisers, less (ii) the fair market value of all of our real estate liabilities, and less (iii) the aggregate amount of proceeds from this Qualified Offering and subsequent offerings based on this Qualified Offering. As the nation continues to experience Covid-19 issues, the Company may use online appraisals, including Zillow Estimates.

 

Conflicts of Interest

 

Our officers and directors, and the owners and officers of our Manager and its affiliates are involved in, and will continue to be involved in, the ownership and advising of other real estate entities and programs, including those sponsored by the DHI Companies and its affiliates or in which one or more of the DHI Companies is a manager or participant.

 

These pre-existing interests, and similar additional interests as may arise in the future, may give rise to conflicts of interest with respect to our business, our investments and our investment opportunities.

 

Our officers and directors, and the owners and officers of our Manager and its affiliates will not acquire any real estate for any other holding company or REIT for a period of 3 years after the date of the Management Agreement (See Exhibit 6). However, our officers and directors, and the owners and officers of our Manager and its affiliates may acquire real estate for another holding company affiliated with Our Manager to replenish the inventory of that holding company due to divestment of an asset by that holding company.

  

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Investment Objectives

 

Our primary investment objectives are:

 

·To acquire single family residential, multi-family residential, and mixed use residential-commercial properties at substantial discounts to fair market value;

 

·To grow net cash from operations so that an increasing amount of cash flow is available for distributions to investors over the long-term;

 

·To pay attractive and consistent cash distributions;

 

·

To preserve and protect stockholder value; and

 

·To realize growth in the value of our investment by timing their sale to maximize value.

 

·There is no assurance that any of our investment objectives will be met.  

 

Investment Strategy

 

We intend to use substantially all of the proceeds of this offering to acquire, manage, renovate or reposition, operate, selectively leverage, and lease single family and multi-family residential properties, as well as mixed residential-commercial properties throughout the United States, with a particular concentration on markets in Texas, California, Pennsylvania and Florida where our Manager, through its affiliates, has established a strong deal sourcing, transaction execution and property management presence.  

 

Our acquisition strategy primarily consists of the purchase of tax deeds that evidence assessments on real property which arise when an owner of the property fails to pay taxes to the appropriate tax collector, treasurer or assessor (“Tax Collector”).

 

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 then rehabilitate the property to rentable condition and rent the property. As such, we get to keep and accumulate the gained equity of the difference between the property as rehabilitated and its now fair market value.

 

We do not rehabilitate a property until that jurisdiction’s redemption period has ended. During the redemption period, the former owner of the property can “redeem” / get back the property by paying the Tax Collector the back taxes and any associated fees and interests. This means that, should the former owner redeem the property, we will have lost our acquisition fees and management fees for managing the property during the redemption period. However, we do reclaim our purchase price and / or down payment from the Tax Collector should the former owner redeem the property.

 

Please see the Risk Factors Section beginning on Page 17 for the risks involved with this offering. Please also see Page 22 for some of the risks involved with our strategy of purchasing tax deeds.

 

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Income Distribution Policy

 

In order to maintain our REIT qualification, 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.

 

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.   

 

March 2020 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 stockholder 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.

 

The Offering 

 

Common Stock offered by us: 3,205,214 shares (1) 

Common Stock to be outstanding after this Offering (assuming the maximum offering amount is sold):

 

3,764,990 shares
Dividend rights

Holders of our Common Stock will share proportionately in any dividends authorized by our board of directors and declared by us. 

 

Voting rights        

Each share of our Common Stock will entitle its holder to one vote per share. 

 

Use of Proceeds         If the maximum number of shares are sold, we estimate that the total net proceeds of this Offering (including the proceeds already received) will be approximately, $46,860,000, after deducting organizational and offering expenses, working capital reserves and commissions to our Broker-Dealer.  See “Use of Proceeds”.  Net proceeds from this Offering will be used to acquire Investments, to pay for expenses incurred by the Company from continued operations and for any other proper Company purpose.

 

(1) As of September 30, 2020, 561,222 shares of Common Stock have been sold in this offering for a total of $6,184,7145 and we intend to issue shares for up to $43,815,285 after the offering is re-qualified.

 

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Common Stock

 

As set forth in the table above, we are offering a total of 3,205,214 shares of our Common Stock at a price of $13.67 per share. To date we have sold 561,222 shares of Common Stock in this offering or a total of $6,184,715. We have exceeded our minimum offering amount and intend to raise up to an additional $43,815,285. Holders of our Common Stock will share proportionately in any dividends authorized by our board of directors and declared by us. Each share of our Common Stock will entitle its holder to one vote per share. Common Stock offered through this Offering Circular does not have any pre-emptive purchasing rights, nor are there cumulative voting rights. This means that it will be more difficult to affect control over issues upon which holders of Common Stock are entitled to vote.

  

Restrictions on the Transfer of Common Stock

 

Generally, our Investors will be able to freely transfer their shares to any other person because the shares  qualified under this Offering Circular are “unrestricted”.

 

Holders of our Common Stock will, however, be required to conform to the requirements of our Subscription Agreement. The Subscription Agreement, among other things, requires holders of our Common Stock to receive permission to sell their shares. In fact, the Company can require a transferee, or the intended purchaser of our Common Stock to provide an affidavit as to the quantity of shares that are intended to be purchased.

 

The purpose of this permission process is not to prevent the general transfer of shares, but is rather intended to ensure that the intended purchaser of our Common Stock will not hold more than an allowed 9.8% of our then outstanding shares of Common Stock. This restriction is embodied in our Charter. Our charter also allows us to rule on any transfer of stock so that we can again ensure that we do not endanger our standing as a REIT.

  

Ownership Restrictions on Common Stock

 

Our charter contains a restriction on ownership of our shares that generally prevents any one person from owning more than 9.8% in value of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock, unless otherwise excepted (prospectively or retroactively) by our Board of Directors. Our charter also contains other restrictions designed to help us maintain our qualification as a REIT.  See “Description of Registrant’s Securities  - Restrictions on Ownership and Transfer.”

  

Exempt Offering

 

This is a Tier 2 offering under Regulation A where the offered securities will not be listed on a registered national securities exchange upon qualification. This Offering is being conducted pursuant to an exemption from registration under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”).

 

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Tier 2 Reporting Requirement

 

Following this Tier 2 Regulation A offering, we will be required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A.

 

We will be required to file:

 

·an annual report with the SEC on Form 1-K;
·a semi-annual report with the SEC on Form 1-SA; and
·current reports with the SEC on Form 1-U.

 

The necessity to file current reports will be triggered by certain corporate events. Form 1-Z will be filed by us if and when we decide to and if we are no longer obligated to file and provide reports pursuant to the requirements of Regulation A.  

 

Contact Information

 

The mailing address of our principal executive offices is:

 

RAD Diversified REIT, Inc.

211 N. Lois Ave. Tampa, FL 33609

Attn: Investor Relations

 

Our telephone number is 1-855-909-9294 and our website address is RADdiversified.com.

 

You may direct inquiries to:

 

Investors@RADdiversified.com

 

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FORWARD-LOOKING INFORMATION

 

Certain information set forth in the Offering Documents constitutes “forward-looking information”, including “future oriented financial information” and “financial outlook”, under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein and in the Offering Documents constituting forward-looking statements includes, but is not limited to, the (i) projected financial performance of the Company; (ii) completion of, and the use of proceeds from, the sale of the shares being offered hereunder; (iii) the expected development of the Company’s business, projects and joint ventures; (iv) execution of the Company’s vision and growth strategy, including with respect to future M&A activity and global growth; (v) sources and availability of third-party financing for the Company’s projects; (vi) completion of the Company’s projects that are currently underway, in development or otherwise under consideration; (vi) renewal of the Company’s current customer, supplier and other material agreements; and (vii) future liquidity, working capital, and capital requirements. Forward-looking statements are provided to allow potential investors the opportunity to understand management’s beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating an investment.

 

These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements.

 

Although forward-looking statements contained herein and in the Offering Documents are based upon what management of the Company believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements. 

 

INVESTOR RELIANCE ON STATEMENTS MADE HEREIN

 

In making an investment decision, investors must rely on their own examination of the company and the terms of this Offering, including the merits and risks involved. These securities have not been reviewed or recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this Offering Circular. Any representation to the contrary is a criminal offense.

 

ALL INVESTMENTS MADE ARE SPECULATIVE

 

The securities offered hereby are speculative and an investment in the securities involves a high degree of risk. See “Risk Factors.” Investors must be prepared to bear the economic risk of their investment for an indefinite period of time. There is the possibility that the proceeds of this offering will be insufficient to meet the investment objectives the Company has established. Before purchasing any securities offered through this Offering Circular, the Company recommends that each potential investor consult with an attorney, a financial advisor, and/or an accountant to determine if this investment is suitable for them.

 

Summary of Risk Factors

 

Investing in our Common Stock involves a high degree of risk.  You should carefully review the “Risk Factors” section of this Offering Circular, beginning on page 17, which contains a detailed discussion of the material risks that you should consider before you invest in our common shares.  Some of the more significant risks are those set forth below:

 

·We were recently organized and do not have a significant operating history, performance record or financial resources.  There is no assurance that we will be able to successfully achieve our investment objectives.

 

·Investors will not have the opportunity to evaluate or approve any Investments prior to our acquisition or financing thereof.

 

·Investors will rely solely on the Manager to manage the company and our Investments.  The Manager will have broad discretion to invest our capital and make decisions regarding Investments.

 

·We may not be able to invest the net proceeds of this offering on terms acceptable to investors, or at all.

 

·Investors will have limited control over changes in our policies and day-to-day operations, which increases the uncertainty and risks you face as an investor.  In addition, our board of directors may approve changes to our policies, including our policies with respect to distributions and redemption of shares without prior notice or your approval.

 

·An investor could lose all or a substantial portion of its investment.

 

·There is no public trading market for our common shares, and we are not obligated to effectuate a liquidity event or a listing of our shares on any nationally recognized stock exchange by a certain date or at all.  It will thus be difficult for an investor to sell its shares.

 

·We may fail to maintain our qualification as a REIT for federal income tax purposes.  We would then be subject to corporate level taxation and regulation as an investment company and we would not be required to pay any distributions to our stockholders.

 

·The offering price of our shares was not established based upon any appraisals of assets we own or may own.  Thus, the initial offering price may not accurately reflect the value of our assets at the time an investor’s investment is made.  

 

·Substantial actual and potential conflicts of interest exist between our investors and our interests or the interests of our Manager, and our respective affiliates, including conflicts arising out of (a) allocation of personnel to our activities, (b) allocation of investment opportunities between us, and (c) potential conflicts arising out of transactions between us, on the one hand, and our Manager and its affiliates, on the other hand, involving compensation and incentive fees payable to our Manager or dealings in real estate transactions between us and the Manager and its affiliates.

 

·There are substantial risks associated with owning, financing, operating, leasing and managing real estate, and the investment in single-family residences, foreclosure properties, and investment in real estate through the purchase of tax deeds may involve additional risks.

 

·The amount of distributions we make is uncertain.  We may fund distributions from offering proceeds, borrowings, and the sale of assets, to the extent distributions exceed our earnings or cash flows from our operations if we are unable to make distributions from our cash flows from operations.  There is no limit on the amount of offering proceeds we may use to fund distributions.  Distributions paid from sources other than cash flow or funds from operations may constitute a return of capital to our stockholders.  Rates of distributions may not be indicative of our actual operating results.

 

·Stockholders who purchased our Common Stock between February 1, 2020 and September 30, 2020 may have rescission rights that could require us to reacquire the shares for an aggregate repurchase price of up to $5,516,195. 

  

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RISK FACTORS

 

An investment in our common shares involves substantial risks.  You should carefully consider the following risk factors in addition to the other information contained in this offering circular before purchasing shares.  The occurrence of any of the following risks might cause you to lose all or a significant part of your investment.  

 

The risks and uncertainties discussed below are not the only ones we face, but do represent those risks and uncertainties that we believe are most significant to our business, operating results, prospects and financial condition.  Some statements in this offering circular, including statements in the following risk factors, constitute forward-looking statements.  Please refer to the section entitled “Statements Regarding Forward-Looking Information.”.

 

Each prospective investor should consider carefully, among other risks, the following risks, and should consult with his own legal, tax, and financial advisors with respect thereto prior to investing in shares of the company’s Common Stock.

 

Risks Related to Lack of Operating History

 

The Company has just recently been formed and has a limited operating history.  Accordingly, there is no meaningful performance history upon which to decide whether or not to invest in our Common Stock.  

 

We are a recently formed company and have a limited operating history. Accordingly, we have a limited performance history to which a potential investor may refer to in determining whether to invest in our Common Stock.  Our limited operating history significantly increases the risk and uncertainty you face in making an investment in our shares. 

 

We are different in some respects from other investment vehicles sponsored by our Manager and / or its affiliates, and therefore the past performance of such investments may not be indicative of our future results.

 

We are the first publicly-offered investment vehicle and REIT sponsored by our Manager and / or its affiliates. We collectively refer to real estate joint ventures, funds and programs as investment vehicles.  All of the previous investment vehicles sponsored by affiliates of the Manager were conducted through privately-held entities, which were not subject to all of the laws and regulations that govern us, including reporting requirements under the federal securities laws and tax and other regulations applicable to REITs.  

 

The previously sponsored investment vehicles of the Manager and its affiliates are in their early stages of operations and acquisitions.  Thus, the past performance of other investment vehicles sponsored by the Manager or its affiliates may not be indicative of our future results, and we may not be able to successfully operate our business and implement our investment strategy, which may be different in a number of respects from the operations previously conducted by the Manager or its affiliates.  As a result of all of these factors, you should not rely on the past performance of other investment vehicles sponsored by the Manager and its affiliates to predict or as an indication of our future performance.

  

Our Manager’s limited operating history makes it difficult for you to evaluate this investment.

 

Our Manager is a relatively new enterprise, having been formed on August 29, 2017, and may not be able to successfully operate our business or achieve our investment objectives. We may not be able to conduct our business as described in our plan of operation.

 

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Our Manager has provided some material as to its Past Performance. We have included this Past Performance information in this Offering Circular. Any past success realized by our Manager cannot be construed as a guarantee of our future performance.

 

In this Offering Circular, we present past performance history for our Manager, see Page 67, entitled “Past Performance of Management Team”. However, this past performance history cannot, and should not be used to determine future performance of the Company.

 

Potential investors should consider all factors associated with past performance of our Manager and to extrapolate based upon their own experiences and in light of all other Risk Factors presented herein. 

 

Risks Related to our Financial Position

 

We have minimal operating capital, no significant assets and no revenue from operations.

 

We have minimal operating capital and for the foreseeable future will be dependent upon our ability to finance our operations from the sale of equity or other financing alternatives.  There can be no assurance that we will be able to successfully raise operating capital.  The failure to successfully raise operating capital, and the failure to attract sufficient investor purchase commitments, could result in our bankruptcy or other event which would have a material adverse effect on us and the value of our shares.  We have no significant assets or financial resources, so such adverse event could put your investment dollars at significant risk. 

 

Undercapitalization is the greatest risk facing any newly formed business.

 

If we are unable to raise sufficient capital through this offering, there is a strong likelihood our business will fail and you may lose your entire investment.

 

We are subject to risks associated with debt and capital stock issuances, and such issuances may have consequences to holders of shares of our Common Stock.

 

If we were to raise additional capital through the issuance of equity securities, we could dilute the interests of holders of shares of our Common Stock.

 

Further, we may incur indebtedness in the future to finance our operations. Such indebtedness could result in important consequences to holders of our Common Stock, including subjecting us to covenants restricting our operating flexibility, increasing our vulnerability to general adverse economic and industry conditions, limiting our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, requiring the use of a portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements, and limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

 

18

 

 

If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and your overall return will be reduced.

 

Although our distribution policy is to use our cash flow from operations to make distributions, we are permitted to pay distributions from any source, including offering proceeds, borrowings, or sales of assets. We have not placed a cap on the use of proceeds to fund distributions. Until the proceeds from this offering are fully invested and from time to time during the operational stage, we may not generate sufficient cash flow from operations to fund distributions. If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments, and your overall return may be reduced.

  

We do not have guaranteed cash flow.  

 

There can be no assurance that cash flow or profits will be generated by the Investments. If the Investments do not generate the anticipated amount of cash flow, we may not be able to pay the anticipated distributions to the stockholders without making such distributions from the net proceeds of this offering or from reserves.

  

The availability and timing of cash distributions is uncertain.

 

There are many factors that can affect the availability and timing of cash distributions to stockholders. Because we may receive rents and income from our properties at various times during our fiscal year, distributions paid may not reflect our income earned in that particular distribution period. The amount of cash available for distribution will be affected by many factors, including without limitation, the amount of income we will earn from investments in target assets, the amount of its operating expenses and many other variables. Actual cash available for distribution may vary substantially from our expectations.

 

While we intend to fund the payment of quarterly distributions to holders of shares of our Common Stock entirely from distributable cash flows, we may fund quarterly distributions to its stockholders from a combination of available net cash flows, equity capital and proceeds from borrowings. In the event we are unable to consistently fund future quarterly distributions to stockholders entirely from distributable cash flows, the value of our Common Stock may be negatively impacted.

 

We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year in order for us to qualify as a REIT under the Code, which we intend to satisfy through quarterly cash distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. Our board of directors will determine the amount and timing of any distributions. In making such determinations, our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditures, general operational requirements and applicable law. We intend over time to make regular quarterly distributions to holders of shares of our Common Stock.  However, we bear all expenses incurred by our operations, and the funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to stockholders. In addition, our board of directors, in its discretion, may retain any portion of such cash in excess of our REIT taxable income for working capital. We cannot predict the amount of distributions we may make, maintain or increase over time.

 

19

 

 

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

 

We may in the future distribute taxable dividends that are payable in cash and shares of our Common Stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.

 

If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend. Further, there is likely to be no active trading market for our stock, and the stockholder will have find a buyer and negotiate with the found buyer as to the purchase price of the stock. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.

 

In addition, if a significant number of our stockholders determine to sell shares of our Common Stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our Common Stock.  

 

Stockholders who purchased our Common Stock between February 1, 2020 and September 30, 2020 may have rescission rights that could require us to reacquire the shares for an aggregate repurchase price of up to $5,516,195. 

 

Under SEC rules, an issuer that is offering securities on a continuous basis under Rule 251 of Regulation A promulgated under the Securities Act of 1933, as amended (the “Securities Act”) must amend its offering statement annually to update the financial information in the offering circular and also to reflect any other changes to its disclosure including a change to the offering price, although changes in the offering price of less than 20% may be effected by the filing of a supplement to the Offering Circular. Between February 1, 2020 and September 30, 2020 the Company adjusted its offering price three times (on February 1, May 1 and August 1), but did not amend or supplement the offering statement that was qualified by the SEC on November 1, 2019. As a result, that offering statement was no longer available for the Company to make sell Common Stock from February 1, 2020 until September 30, 2020. We sold a total of 494,370 shares of Common Stock Common Stock during that period. Common Stock purchased during that period may not have been exempt from the registration or qualification requirements under federal securities laws, may have been sold in violation of federal securities laws and may be subject to rescission. In order to address this issue, we intend to make a separate rescission offer concurrent with this offering to all holders of Common Stock who purchased their shares from February 1, 2020 until September 30, 2020. We will be offering to repurchase the shares of Common Stock from those stockholders.

 

If the rescission offer is accepted, we could be required to make aggregate payments to those stockholders of up to $5,516,195, plus statutory interest. This exposure is calculated by reference to the acquisition price of the Common Stock, plus statutory interest. Federal securities laws do not provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as required or was not otherwise exempt from such registration requirements. If any or all of the offerees reject the rescission offer, we may continue to be liable under federal and state securities laws for up to an amount equal to the value of those shares plus any statutory interest since February 1, 2020 which we may be required to pay. See “Rescission Offer.”

 

Risks Related to our Proposed Business

 

Risks Related to Our Business Strategy

 

Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions.

 

There can be no assurance that future cash flow will support distributions at the rate that such distributions are paid in any particular distribution period.

 

To the extent that we make payments or reimburse certain expenses to our Manager pursuant to our Management Agreement, our cash flow and therefore our ability to make distributions from cash flow, as well as cash flow available for investment, will be negatively impacted. See “Management Compensation.”

 

Under Maryland law, we may issue our own securities as stock dividends in lieu of making cash distributions to stockholders. We may issue securities as stock dividends in the future. This may dilute your equity in the Company and may reduce the value of your investment.

  

20

 

 

This is a “Blind Real Estate Investment Trust”, this means that, we have authorized our Manager to make investment as the Manager sees fit. Such investments are likely not to be disclosed to you before proceeds from this offering are used to acquire such investments. We may allocate the net proceeds from this offering to investments with which you may not agree.

 

You must understand that we may allocate the net proceeds from this offering to investments with which you may not agree. We will have significant flexibility in investing the net proceeds of this offering.

 

You will have no opportunity to evaluate or approve the manner in which the net proceeds of this offering will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds from this offering to invest in investments with which you may not agree.  

 

The failure of our Manager to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns and could cause the value of our Common Stock to decline.

  

This is a blind pool offering, and we are not committed to acquiring any particular investments with the net proceeds of this offering. You will not have the opportunity to evaluate our investments before we make them, which makes your investment more speculative.

 

This is a blind pool offering whereby we are not committed to acquiring any particular assets or investments with the net proceeds of this offering. We are not able to provide you with any information to assist you in evaluating the merits of any specific investments that we may make.

 

We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in single family residential, multifamily residential, and mixed use residential-commercial real estate.  Because you will be unable to evaluate the economic merit of assets before we invest in them, you will have to rely entirely on the ability of our Manager to select suitable and successful investment opportunities.  

 

We may change our targeted investments without stockholder consent.

 

Our Manager may change our targeted investments and asset allocation at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this Offering Circular. A change in our targeted investments may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common shares and our ability to make distributions to you.  Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this Offering Circular.

 

We may change our investment and operational policies without stockholder consent.

 

We may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of investments described in this filing. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our ability to make distributions.

 

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

 

Our Charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

 

21

 

 

Our Business Strategy is, as of yet, untested and unverified. Our Business Strategy may not produce the results expected. As a consequence, the value of your shares may decrease over time and you may lose your entire investment. Purchasing real-estate assets at lower-than-market prices is at the core of our business model.  If the Company is not able to purchase single and multi-unit residential real-estate at lower-than-market prices, the value of our shares will suffer dramatically.

 

The Company intends to purchase real-estate at tax-deed auctions and through attractive short-sales. A short-sale is a sale where the current owner of the property is in default of their loan and the lender agrees to accept a price that is lower than the outstanding loan amount.

 

Due to the nature of tax deed sales, the sale can sometimes be dissolved which would cause us to lose the property as an investment.

 

Our strategy is to purchase properties at tax deed sales. A tax deed sale can be dissolved for a number of reasons, including mistake by the court or other government official / entity, and pay back of the amount owed by the original owner. If a sale gets dissolved, then the money we paid is returned to us but we lose the property. If this happens too many times, we may be unable to accumulate properties as quickly as hoped.

 

Due to the fact that sales can be dissolved, we must hold onto a property purchased at a tax deed sale for a certain number of months before we can renovate or rent out the property.

 

The length of time in which the sale can be dissolved is limited to a certain period by the law. This period of time varies depending on the state, county, and city in which the property is located. If a sale gets dissolved, we will be paid back the purchase amount by the government entity that held the auction. However, if we have renovated the property during this “dissolvable period of time”, we will likely lose the money we spent on the renovations. As such, we cannot commence renovations or rehabilitations until after this “dissolvable period of time” has ended.

 

This means that we will have money tied up in properties that are just sitting there and waiting to be rehabilitated and rented. We could lose considerable time and expense if we do not properly manage the number of properties that are in this holding period. Further, since our money is tied up in assets that are waiting to be productive, we could miss out on other opportunities. 

 

Houses sold at tax deed auctions can have squatters occupying the property, it can be an expensive and long running process to remove them.

 

Sometimes the properties we purchase have squatters already living in and occupying the premises. We can only remove these squatters after a possibly lengthy and expensive court process. We cannot renovate or do anything with the property so long as the squatters remain. We could lose valuable time and market opportunities if we are forced to constantly eject illegal occupiers for the properties we purchase.

 

22

 

 

Our future growth will depend upon our ability to acquire real estate investments in several competitive real estate markets and to raise additional capital.

 

Our future growth will depend, in large part, upon our initial and continued ability to acquire and lease properties.

 

We face significant competition with respect to our acquisition and origination of assets from many other companies, including other REITs, insurance companies, private investment funds, hedge funds, specialty finance companies and other investors.  

 

Some competitors may have a lower cost of funds and access to funding sources that are not available to us.  In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.  

 

There is significant competition on a national, regional and local level with respect to property management services and in commercial real estate services generally, and we are subject to competition from large national and multi-national firms as well as local or regional firms that offer similar services to ours.  

 

Some of our competitors may have greater financial and operational resources, larger customer bases, and more established relationships with their customers and suppliers than we do.  The competitive pressures we face, if not effectively managed, may have a material adverse effect on our business, financial condition, liquidity and results of operations.

 

As a result of this competition, we may not be able to take advantage of attractive origination and investment opportunities, and therefore may not be able to identify and pursue opportunities that are consistent with our objectives.  

 

Competition may limit the number of suitable investment opportunities offered to us.  It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.  In addition, competition for desirable investments could delay our investment in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to declare and make distributions to our stockholders.

 

23

 

 

Our Manager may not be successful in identifying and consummating suitable investment opportunities in a very competitive market.

 

Our investment strategy requires us, through our Manager, to identify suitable investment opportunities compatible with our investment criteria.  Our Manager may not be successful in identifying suitable opportunities that meet our criteria or in consummating investments on satisfactory terms or at all.  Our ability to make investments on favorable terms may be constrained by several factors including, but not limited to, competition from other investors with significant capital, including publicly-traded REITs and institutional investment funds, which may significantly increase investment costs; and/or the inability to finance an investment on favorable terms or at all.  The failure to identify or consummate investments on satisfactory terms, or at all, may impede our growth and negatively affect our cash available for distribution to our stockholders.

 

One aspect of our business model is owning many single family residences, this aspect may not succeed and, therefore, we may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.

 

The large-scale ownership and operation of single family rental properties is a relatively new and untested business model.  We may encounter difficulties implementing our business plan, strategies, and investment policies due to unforeseen circumstances which might include competition for housing stock from better financed companies, or changes in real estate trends. We may, therefore, be unable to generate sufficient cash flow from our investments to permit us to make the distributions we expect.  If we pay distributions from the proceeds of the net proceeds of this offering or from borrowings, the amount of capital we ultimately invest may be reduced which may reduce the value of an investment in us.

 

Our Manager may not be successful in identifying and consummating suitable investment opportunities.

 

Our investment strategy requires us, through our Manager, to identify suitable investment opportunities compatible with our investment criteria.  Our Manager may not be successful in identifying suitable opportunities that meet our criteria or in consummating investments on satisfactory terms or at all.  

 

The failure to identify or consummate investments on satisfactory terms, or at all, may impede our growth and negatively affect our cash available for distribution to our stockholders.

 

There can be no assurances that the Manager will be able to identify, make or acquire suitable Investments meeting our investment criteria.  There is no guarantee that any Investment selected by the Manager will generate operating income or gains.  While affiliates of the Manager have been successful in the past in identifying and structuring favorable real estate investments, there is no guarantee that the Manager will be able to identify and structure favorable Investments in the future.

 

Because there is so little time to evaluate potential investments, due diligence by our Manager may not reveal all of the liabilities associated with such investments and may not reveal other weaknesses in such investments, which could lead to investment losses.

 

Because the Company intends to purchase real-estate at below-market-prices, there may not be enough time to investigate the condition of any particular investment. This is especially true where investment property is purchased at a tax-deed auction.

 

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Before making an investment, our Manager will assess the strengths and weaknesses of a target investment property. The Manager will also consider other factors and characteristics that are material to the performance of the investment.  Such other factors may include the pricing trends for similar properties in the area where the target investment property is located.

 

In making such assessments and otherwise conducting customary due diligence, our Manager relies on resources available to it and, in some cases, an investigation by third parties.  There can be no assurance that our Manager’s due diligence process will uncover all relevant facts or that any investment will be successful.

 

A portion of proceeds from this offering will be used to rehabilitate distressed real-estate and such rehabilitation may not result in higher asset values.

 

In many of our intended but yet unidentified real-estate acquisitions, the property value is diminished and real-estate may require significant rehabilitation. The Company intends to perform such rehabilitation using proceeds from this offering in order to increase the rental rates for an acquired property.  

 

When coupled with the limited time to perform due-diligence on any particular investment, proceeds from this offering may be used to rehabilitate a property where the cost of rehabilitation is not justified and will not result in increased asset valuation.

 

We may experience difficulty in ultimately selling any property or groups of properties which no longer fit our investment criteria or are impractical to lease and maintain and could be forced to sell a property at a price that reduces the return to our investors.

 

The real estate market is affected by many factors that are out of our control, including the availability of financing, interest rates and other factors, as well as supply and demand for real estate investments.  As a result, we cannot predict whether we will be able to sell any property or groups of properties which no longer fit our investment criteria or are impractical to lease and maintain on favorable terms, or whether such sale could be made at a favorable price or on terms acceptable to us.  We also cannot predict the length of time which will be needed to obtain a purchaser or to complete the sale of any property.

 

In addition, the terms of our leases and the laws regulating REITs could impact our ability to sell any property or groups of properties.  To qualify as a REIT for federal income tax purposes, we must continually satisfy various tests, including tests regarding the nature of our assets which could restrict our disposition strategy.

 

Lack of diversification in numbers or types of investments increases our dependence on individual investments.

 

Our investment strategy depends in large part on acquiring a diversified portfolio based on the number of properties or investments we acquire relative to our total assets.  Such diversification reduces the risk that a default or other problem with any single property or investment will have a material negative impact on our earnings.  

 

If, due to factors such as lack of adequate capital, or the unavailability of suitable investment opportunities, we acquire relatively few properties or acquire properties or investments that are significant (in terms of capital invested) to our overall asset size, our portfolio could become concentrated, increasing the risk of loss to stockholders if a default or other problem arises.  

 

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Alternatively, property sales may reduce the aggregate amount of our property investment portfolio in value or number.  As a result, our portfolio could become more concentrated, thereby reducing the benefits of diversification by factors such as geography, property type, tenancy or other measures.  While we intend to endeavor to grow and diversify our portfolio through additional property acquisitions, we may never reach a significant size to achieve true portfolio diversity.

 

A substantial majority of our investment portfolio will consist of single family homes, which will subject us to risks inherent in investments in a single type of property.

 

A downturn or slowdown in the rental demand for single family housing may have more pronounced effects on our operations than if we had a more diversified portfolio. A large portion, if not substantially all, of our revenue is expected to come from rents, which are subject to many risks, including decreasing rental rates, vacancies, competition for tenants, lease defaults, and tenant turnover.  

 

Competitive pricing pressure, housing alternatives, or adverse conditions in our target markets or the general economy may impact occupancy rates or limit the rental rates we charge on our properties, which would negatively impact our cash flow and ability to make distributions.  In addition, rental rates for new leases may be lower than the rental rates for expiring leases and our leases are generally only for one year.

 

Our tenants and potential tenants have a number of other housing alternatives to consider. Our properties will compete with apartments, condominiums, and other single family homes which are available for rent or purchase in the markets in which our properties are or will be located.  Competition from these housing alternatives in the markets in which we operate could have an adverse impact on our ability to lease our properties as well as on the rents we may charge.

 

Our success is materially dependent on the financial stability of our tenants.

 

The success of our business is dependent on the financial stability of the tenants occupying our properties. A default of a tenant on its lease payments may cause us to lose some of the anticipated revenue from an investment property.  

 

While our portfolio is relatively small, our exposure to each tenant may be more significant than we expect.  We believe that this exposure will diminish (but not entirely) as we acquire more properties.  

 

In the event of a material default, we may experience delays in enforcing our rights as landlords and we may incur substantial costs in protecting our investment and possibly re-letting the property, as the case may be.  If a lease is terminated, we cannot assure our investors that the property could be leased for the same amount of rent previously received or that we could sell the property without incurring a loss.

 

If we select unqualified tenants or if our tenants default, our operations and financial performance could be negatively impacted. In addition, if a tenant files for bankruptcy, we may be precluded from collecting all sums due to us.

 

Our success will depend in large part on our ability to screen applicants, identify qualified tenants, and avoid tenants who may default.  If our tenants default on our leases or fail to comply with the terms of our leases, the quality and value of our properties could be negatively impacted.  

 

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The process of evicting a defaulting renter from a family residence can be difficult, lengthy, and costly.  And, disgruntled tenants may maliciously damage our property. This will add additional cost and diminish overall profitability,

 

We may disagree with a tenant on whether we are entitled to retain any security deposit we hold.  State laws vary regarding the steps required for a landlord to retain a security deposit.  If a tenant commences, or has commenced against it, any legal or equitable proceeding under any bankruptcy, insolvency, receivership or other debtor’s relief statute or law, we may be unable to collect all sums due to us under that tenant’s lease.  

 

Any or all of the lease obligations of our tenants could be subject to a bankruptcy proceeding which may bar our efforts to collect pre-bankruptcy debts from these persons or their properties, unless we are able to obtain an enabling order from the bankruptcy court.  If our lease is rejected by a tenant in bankruptcy, we may only have a general unsecured claim against the tenant and may not be entitled to any further payments under the lease.  A bankruptcy proceeding could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums, resulting in a decrease or cessation of rental payments and reducing returns to our investors.

 

The Company is externally managed by our Manager. Our Manager has significant authority to make operating decisions and the Board may not be able to act quickly enough to resolve issues that could adversely affect the value of our Common Stock. We are dependent on our Manager and its key personnel for our success.

 

We are, and will continue to be advised by our Manager and, pursuant to the Management Agreement, our Manager is not obligated to dedicate any specific personnel exclusively to us, nor is its personnel obligated to dedicate any specific portion of their time to the management of our business.

 

As a result, we cannot provide any assurances regarding the amount of time our Manager will dedicate to the management of our business. Moreover, each of our officers and non-independent directors is also an employee of our Manager or one of its affiliates, and has significant responsibilities for other investment vehicles currently managed by affiliates, and may not always be able to devote sufficient time to the management of our business. Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed.

 

In addition, we offer no assurance that our Manager will remain our manager or that we will continue to have access to our Manager’s principals and professionals. The initial term of our Management Agreement with our Manager only extends until December 31st, 2019, with automatic one-year renewals thereafter, and may be terminated earlier under certain circumstances. If the Management Agreement is terminated or not renewed and no suitable replacement is found to manage us, we may not be able to execute our business plan, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

 

Our board of directors has approved very broad confidential investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager unless required by our confidential investment guidelines.

 

Our Manager is authorized to follow very broad confidential investment guidelines established by our Board of Directors. Our Board of Directors will periodically review our confidential investment guidelines and our portfolio of assets but will not, and will not be required to, review all of our proposed investments, except in limited circumstances as set forth in our investment policies.

 

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Our Manager has great latitude within the broad parameters of our confidential investment guidelines in determining the types and amounts of assets in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which would materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders.

 

Even though our Manager will be providing real-estate advisory services, our Manager is not a licensed asset manager nor is our Manager a licensed real-estate advisor.

 

Our Manager provides real-estate advisory services on a best-effort basis. Because our Manager is not a licensed professional advisor and is not a licensed real-estate manager, our Manager does not maintain errors and omissions insurance that we could turn to in the event our Manager provides improper investing advice. Should improper investment actions be taken by our Manager, the value of our Common Stock will likely decline.

 

Our board of directors has approved very broad confidential operational guidelines for our Manager and will not approve each transaction decision made by our Manager unless required by our confidential operational guidelines.

 

Our Manager is also authorized to follow very broad confidential operational guidelines established by our Board of Directors. Our Board of Directors will periodically review our confidential operational guidelines but will not, and will not be required to, review every operational decision made by our Manager. Transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors.

 

Our board of directors has developed and very broad operational and investment guidelines for our Manager, but these guidelines are confidential and you will not be able to review them.

 

Our Manager is also authorized to follow broad operational and investment guidelines established by our Board of Directors. However, these operational and investment guidelines are confidential and you will not be able to review or approve these guidelines.

 

Because you will be unable to evaluate the merits of these operational and investment guidelines, you will have to rely entirely on the ability of our Manager and Board of Directors to formulate and follow these operational and investment guidelines.

 

The inability of our Manager to retain or obtain key personnel could delay or hinder implementation of our investment strategies, which could impair our ability to make distributions and could reduce the value of your investment.

 

Competition for highly skilled personnel is intense, and our Manager may be unsuccessful in attracting and retaining such skilled personnel. If our Manager loses or is unable to obtain the services of highly skilled personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline or your investment may be lost entirely.

 

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There will be a significant overlap of persons on our Board of Directors that are also in affiliates of our Manager, and there is significant potential for conflict of interest between these persons and our Company and its stockholders.

 

Our Board of Directors will be controlled by affiliates of our Manager. The very same reports and other information used by our Board of Directors to evaluate the performance of our Manager are prepared by the same Manager and there is no independent review of the information provided by Manager.

 

Termination of our Management Agreement, even for poor performance, could be difficult and costly, including as a result of termination or incentive fees, and may cause us to be unable to execute our business plan.

 

Termination of our Management Agreement without cause, even for poor performance, could be difficult and costly. We may generally terminate our Manager for “cause” (as defined in our Management Agreement, which appears and an exhibit to the Offering Statement of which this Offering Circular forms a part); provided, that if we are terminating due to a “change of control” of our Manager, a majority of our directors must determine such change of control is materially detrimental to us prior to any termination.

 

If we terminate the Management Agreement without cause or in connection with an internalization, or if the Manager terminates the Management Agreement because of a material breach thereof by us or as a result of a change of control of our company, we must pay our Manager a termination fee payable in cash or, in connection with an internalization, acquire our Manager at an equivalent price, which may include a contribution of the Manager’s assets in exchange for shares of our Common Stock or other tax-efficient transaction.

 

The termination fee, if any, will be equal to three times the sum of the management fee and incentive fee earned, in each case, by our Manager during the 12-month period prior to such termination, plus any unreimbursed organization fess, acquisition fees, and maintenance fees, calculated as of the end of the most recently completed fiscal quarter.  These provisions may substantially restrict our ability to terminate the Management Agreement without cause and would cause us to incur substantial costs in connection with such a termination. Furthermore, in the event that our Management Agreement is terminated, with or without cause, and we are unable to identify a suitable replacement to manage us, our ability to execute our business plan could be adversely affected.

 

Because we are dependent upon our Manager and its affiliates to conduct our operations, any adverse changes in the financial health of our Manager or its affiliates or our relationship with them could hinder our operating performance and the return on your investment.

 

We are dependent on our Manager and its affiliates to manage our operations and acquire and manage our portfolio of real estate assets. Under the direction of our board of directors, and subject to our investment guidelines, our Manager makes all decisions with respect to the management of our company. Our Manager depends upon the fees and other compensation that it receives from us in connection with managing our company to conduct its operations. Any adverse changes in the financial condition of our Manager or its affiliates, or our relationship with our Manager, could hinder its ability to successfully manage our operations and our portfolio of investments, which would adversely affect us and our stockholders.

 

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Our investments will be carried at estimated fair market value as determined by our Manager and there may be uncertainty as to the value of these investments.

 

Substantially all of our Investments are illiquid and not publicly traded.  To determine the Net Asset Value of our Company, our Manager estimates the fair market value of our assets on a quarterly basis.  

 

Because such valuations are inherently uncertain, our Company value may fluctuate over short periods of time, and may be based on numerous estimates and assumptions, our determinations of fair market value of our investments are inherently speculative and subject to errors. The value of our Common Stock could be adversely affected if our determinations regarding the fair market value of these investments are materially higher than the values that we ultimately realize upon their disposal.

 

We may incur losses as a result of ineffective risk management processes and strategies.

 

Transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Board of Directors will be controlled by affiliates of our Manager.

 

Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.

 

Prospective Investors in this offering do not have preemptive rights to any shares we issue in the future.

 

Under our Charter, we have authority to issue additional common shares or other securities, although, under Regulation A, we are only allowed to sell up to $50 million of our shares in any 12-month period (although we may raise capital in other ways).

 

In particular, our Charter authorizes, subject to the restrictions of Regulation A and other applicable securities laws, the issuance of up to 100,000,000 shares of stock and to fix the number of shares by resolution authorizing the issuance of such shares, without stockholder approval.

 

After your purchase in this offering, our Manager may elect to (i) sell additional shares in this or future public offerings, (ii) issue equity interests in private offerings, or (iii) issue shares to our Manager, or its successors or assigns, in payment of an outstanding fee obligation.

 

To the extent we issue additional equity interests after your purchase in this offering, your percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, you may also experience dilution in the book value and fair value of your shares.

 

Our Manager is authorized to incur debt, and such debt may have consequences to holders of shares of our Common Stock.

 

We may incur debt in the future to finance our operations. Such debt could result in important consequences to holders of our Common Stock, including subjecting us to covenants restricting our operating flexibility, increasing our vulnerability to general adverse economic and industry conditions, limiting our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, requiring the use of a portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements, and limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

 

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We, through our Manager, are often required to make a number of judgments in applying accounting policies, and different estimates and assumptions in the application of these policies could result in changes to our reporting of financial condition and results of operations.

 

Various estimates are used in the preparation of our financial statements, including estimates related to asset and liability valuations (or potential impairments) and various receivables.  Often these estimates require the use of market data values that may be difficult to assess, as well as estimates of future performance or receivables collectability that may be difficult to accurately predict.  While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our financial condition and results of operations.

 

Risks Related to Our Organization and Corporate Structure

 

Our Charter permits our board of directors to issue stock with terms that may subordinate the rights of Common Stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.

 

Our Charter permits our board of directors and the Company to issue up to 100,000,000 shares of Common Stock. Certain shares of Common Stock issued following this offering may have terms preferential to those of holders of shares issued in this offering.  

 

Our rights and the rights of our stockholders to recover claims against our officers, directors and our Manager are limited.

 

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our Charter, in the case of our directors, officers, employees and agents, and the Management Agreement, in the case of the Manager, require us to indemnify our directors, officers, employees and agents and the Manager and its affiliates for actions taken by them in good faith and without negligence or misconduct.  

 

Additionally, our Charter limits the liability of our directors and officers for monetary damages to the fullest extent permitted under Maryland law. Although our Charter does not allow us to exonerate and indemnify our directors and officers to a greater extent than permitted under Maryland law, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Manager and its affiliates, than might otherwise exist under common law, which could reduce our investor’s and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or the Manager in some cases which would reduce the cash available for distributions.

 

In the future, we may elect to become a reporting company under the Exchange Act, which could lead to increased reporting requirements.

 

We are not currently a public reporting company under the Exchange Act, but we may elect to become a public reporting company in the future or be required to become a public reporting company based on the number of stockholders in our Company or other factors. Following this Tier 2 Regulation A offering, we will need to make periodic reports as laid out in “Summary Of Offering - The Offering - Tier 2 Reporting Requirement.”

 

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If we choose to become a public reporting company or are required to become a public reporting company, we would be required to comply with certain public company reporting requirements, including filing reports on Form 10-K, 10-Q, and 8-K. However, while we are still a Tier 2 Regulation A offering, our Forms 1-SA, 1-K, and 1-U are a lower reporting requirement and require less disclosure than Forms 10-K and 8-K. These increased reporting requirements could lead to more significant legal, accounting and other expenses.

 

Risks Related to Conflicts of Interest

 

The Management Agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

 

Our executive officers, including a majority of our directors, are executives of our Manager. Our Management Agreement was negotiated between related parties and its terms, including fees payable to our Manager, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the Management Agreement because of our desire to maintain our ongoing relationship with the Manager and its affiliates.

 

We may have conflicts of interest with our Manager and other affiliates, which could result in investment decisions that are not in the best interests of our stockholders.

 

There are numerous conflicts of interest between our interests and the interests of our Manager and its respective affiliates, including conflicts arising out of allocation of personnel to our activities, allocation of investment opportunities between us and investment vehicles affiliated with our Manager, purchase or sale of properties, including from or to investment entities affiliated with our Manager, and fee arrangements with our Manager that might induce our Manager to make investment decisions that are not in our best interests. Examples of these potential conflicts of interest include, but are not limited to:

 

oCompetition for the time and services of personnel that work for us and our affiliates;

 

oCompensation payable by us to our Manager and its affiliates for their various services, which may not be on market terms and is payable, in some cases, whether or not our stockholders receive distributions;

 

oThe possibility that our Manager, its officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of properties and other Investments, and that such conflicts may not be resolved in our favor, thus potentially limiting our investment opportunities, impairing our ability to make distributions and adversely affecting the trading price of our stock;

 

oThe possibility that if we acquire properties from investment entities affiliated with our Manager or its affiliates, the price may be higher than we would pay if the transaction were the result of arm’s-length negotiations with a third party;

 

oThe possibility that our Manager will face conflicts of interest, some of whose officers are also our officers and two of whom are directors of ours, resulting in actions that may not be in the long-term best interests of our stockholders;

 

oOur Manager has considerable discretion with respect to the terms and timing of our acquisition, disposition and leasing transactions;

 

oThe possibility that we may acquire or merge with our Manager, resulting in an internalization of our management functions; and

 

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oThe possibility that the competing demands for the time of our Manager, its affiliates and our officers may result in them spending insufficient time on our business, which may result in our missing investment opportunities or having less efficient operations, which could reduce our profitability and result in lower distributions to you.

 

Any of these and other conflicts of interest between us and our Manager could have a material adverse effect on the returns on our investments, our ability to make distributions to stockholders and the trading price of our stock.

 

Our executive officers have interests that may conflict with the interests of stockholders.

 

Our executive officers are also affiliated with or are executive and/or senior officers of our Manager and its affiliates. These individuals may have personal and professional interests that conflict with the interests of our stockholders with respect to business decisions affecting us.

 

Our Manager and its affiliates, including our officers, some of whom are also our directors, face conflicts of interest caused by their ownership of our Manager and their roles with other programs, which could result in actions that are not in the long-term best interests of our stockholders.

 

Our Manager, its officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of real estate investments, and such conflicts may not be resolved in our favor.

 

Conflicts caused by our Manager may severely curtail our investment opportunities, impair our ability to make distributions and reduce the value of your investment in us.  

 

Our Management Agreement provides that our Manager will not sponsor or manage any new real estate entity or program during the period of this offering and until all net proceeds of this offering have been invested; however, our Manager will continue to advise its pre-existing programs, DHI Holdings, LP, DDH Fund, LP and DHI Fund, LP, who may have deployable capital and compete with us for investment opportunities sourced by our Manager.

 

Our Manager may, without stockholder consent unless otherwise required by law, determine that we should merge or consolidate through a merger, acquisition, share exchange or other similar transaction involving other entities, including entities affiliated with our Manager, into or with such entities.

 

If we acquire properties from entities owned or sponsored by affiliates of our Manager, through a merger, acquisition, exchange offer or other transaction or otherwise, the price may be higher than we would pay if the transaction was the result of arm’s-length negotiations with a third party.

 

As a result, the effect of these conflicts of interest on these individuals may influence their decisions affecting the negotiation and consummation of the transactions whereby we acquire Investments from investment entities affiliated with our Manager or affiliates or our Manager.

 

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Our Manager, and the personnel it provides are not exclusively dedicated to management of our business.

 

If the competing demands for the time of our Manager, its key personnel, its affiliates and our officers result in them spending insufficient time on our business, we may miss investment opportunities or have less efficient operations, which could reduce our profitability and result in lower distributions to you.

 

We have not adopted any specific conflicts of interest policies, and, therefore, other than in respect of the restrictions placed on our Manager in the Management Agreement, we will be reliant upon the good faith of our Manager, officers and directors in the resolution of any conflict.

 

We do not have a policy that expressly restricts any of our directors, officers, stockholders or affiliates, including our Manager and its officers and employees, from having a pecuniary interest in an investment in or from conducting, for their own account, business activities of the type we conduct. This may mean that our ability to access the best investments may be curtailed, which could result in greater than expected operating expense, losses and reduced distributions to our stockholders.

 

Risks Related to Investing in Real Estate

 

Our real estate investments are subject to risks particular to real property.

 

Real estate investments are subject to risks particular to real property, including:

 

oAdverse changes in national and local economic and market conditions, including the credit and securitization markets; 

 

oChanges in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; 

 

oTakings by condemnation or eminent domain; 

 

oReal estate conditions, such as an oversupply of or a reduction in demand for real estate space in the area; 

 

oThe perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties; 

 

oCompetition from comparable properties; 

 

oThe occupancy rate of our properties; 

 

oThe ability to collect all rent from tenants on a timely basis; 

 

oThe effects of any bankruptcies or insolvencies of major tenants; 

 

oThe expense of re-leasing space; 

 

oChanges in interest rates and in the availability, cost and terms of mortgage funding; 

 

oThe impact of present or future environmental legislation and compliance with environmental laws; 

 

oActs of war or terrorism, including the consequences of terrorist attacks; 

 

oActs of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and 

 

oCost of compliance with the Americans with Disabilities Act.

 

If any of these or similar events occur, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

 

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The market for real estate investments is highly competitive.

 

Identifying attractive real estate investment opportunities, particularly in the single and multi-family residential real estate sector, is difficult and involves a high degree of uncertainty.  Furthermore, the historical performance of a particular property or market is not a guarantee or prediction of the property’s or market’s future performance.  There can be no assurance that we will be able to locate suitable acquisition opportunities in our target markets, achieve its investment goal and objectives, or fully deploy for investment the net proceeds of this offering.

 

Because of the recent growth in demand for real estate investments, there may be increased competition among investors to invest in the same asset classes as the company.  This competition may lead to an increase in the investment prices or otherwise less favorable investment terms.  If this situation occurs with a particular Investment, our return on that Investment is likely to be less than the return it could have achieved if it had invested at a time of less investor competition for the Investment.  For this and other reasons, the Manager is under no restrictions concerning the timing of Investments.

 

Real estate investments are not as liquid as other types of assets, which may reduce economic returns to our stockholders.

 

Real estate investments are not as liquid as other types of investments.  The market for the sale of residential real estate properties can vary greatly and it may take a significant amount of time for us to sell any particular property on favorable terms, if at all.  As a result, our ability to sell under-performing assets in our portfolio or respond to changes in economic and other conditions may be relatively limited.

 

Investments in real estate-related assets can be speculative .

 

Investments in real estate-related assets can involve speculative risks and always involve substantial risks.  No assurance can be given that the Manager will be able to execute the investment strategy or that stockholders in the company will realize their investment objectives. No assurance can be given that our stockholders will realize a substantial return (if any) on their investment or that they will not lose their entire investment in the company.  For this reason, each prospective purchaser of shares of our Common Stock should carefully read this Offering Circular and all exhibits to this Offering Circular. All such persons or entities should consult with their attorney or business advisor prior to making an investment.

 

Our Investments may be concentrated.

 

We expect to diversify our Investments, and do not expect to concentrate on any single Investment.  However, our investments may nonetheless result in significant concentration in a single Investment, especially in our initial stages of operation, or in a group of Investments in one or more target markets. If such an Investment experienced a material adverse event, or if Investments in a particular target market experienced material adverse event specific to that particular market, the company and our stockholders would likely be significantly and adversely affected.

 

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We will likely receive limited representations and warranties from sellers  

 

Investments will likely be acquired with limited representations and warranties from the seller regarding the condition of the Investment, the status of leases, the presence of hazardous substances, the status of governmental approvals and entitlements and other significant matters affecting the use, ownership and enjoyment of the Investment.  As a result, if defects in an Investment or other matters adversely affecting an Investment are discovered, we may not be able to pursue a claim for damages against the seller of the Investment.  The extent of damages that we may incur as a result of such matters cannot be predicted, but potentially could result in a significant adverse effect on the value of the Investments.

 

We may be subject to the risk of liability and casualty loss as the owner of an Investment  

 

It is expected that the Manager will maintain or cause to be maintained insurance against certain liabilities and other losses for an Investment, but the insurance obtained will not cover all amounts or types of loss. There is no assurance that any liability that may occur will be insured or that, if insured, the insurance proceeds will be sufficient to cover the loss.  

 

There are certain categories of loss that may be or may become uninsurable or not economically insurable, such as earthquakes, floods and hazardous waste. Further, if losses arise from hazardous substance contamination that cannot be recovered from a responsible party, the financial viability of the affected Investment may be substantially impaired.  It is possible that we will acquire an Investment with known or unknown environmental problems that may adversely affect our Investments.

 

Risk of Criminal Transfer of Title

 

Someone could criminally and fraudulently try to transfer title to a property we own to another person or entity. This would require us to engage in lengthy and costly civil litigation and criminal investigation. Further, these criminal and civil actions could fail and we could lose the investment because of the fraud. Further, even if we succeed on the civil action and get back possession of the property, we may be unable to recover our costs from the criminal party or any other person.

 

As a result, we could lose an entire property, or considerable expense in regaining possession of the property.  The extent of damages that we may incur as a result of such matters cannot be predicted, but potentially could result in a significant adverse effect on the value of the Investments.

 

We could be exposed to environmental liabilities with respect to Investments to which we take title.

 

In the course of our business, and taking title to properties, we could be subject to environmental liabilities with respect to such properties.  In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property.  The costs associated with investigation or remediation activities could be substantial.  If we become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

 

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Liability relating to environmental matters may impact the value of the properties that we may acquire or underlying our investments.

 

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property.  These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If we fail to disclose environmental issues, we could also be liable to a buyer or lessee of a property.

 

There may be environmental problems associated with our properties which we were unaware of at the time of acquisition.  The presence of hazardous substances may adversely affect our ability to sell real estate, including the affected property, or borrow using real estate as collateral.  The presence of hazardous substances, if any, on our properties may cause us to incur substantial remediation costs and potential costs of indemnification in the case of properties we sell or rent to others, thus harming our financial condition.  The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.

 

Discovery of previously undetected environmentally hazardous conditions, including mold or asbestos, may lead to liability for adverse health effects and costs of remediating the problem could adversely affect our operating results.

 

Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims related to any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our security holders.

 

Properties may contain toxic and hazardous materials

 

Federal, state and local laws impose liability on a landowner for releases or the otherwise improper presence on the premises of hazardous substances.  This liability is without regard to fault for, or knowledge of, the presence of such substances.  A landowner may be held liable for hazardous materials brought onto the property before it acquired title and for hazardous materials that are not discovered until after it sells the property.  Similar liability may occur under applicable state law.  If any hazardous materials are found within an Investment that are in violation of law at any time, we may be liable for all cleanup costs, fines, penalties and other costs.  This potential liability will continue after we sell the Investment and may apply to hazardous materials present within the Investment before we acquired such Investment.  If losses arise from hazardous substance contamination which cannot be recovered from a responsible party, the financial viability of that property may be substantially affected.  It is possible that we will acquire an Investment with known or unknown environmental problems which may adversely affect us.

 

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Properties may contain mold.

 

Mold contamination has been linked to a number of health problems, resulting in recent litigation by tenants seeking various remedies, including damages and ability to terminate their leases.  Originally occurring in residential property, mold claims have recently begun to appear in commercial properties as well.  Several insurance companies have reported a substantial increase in mold-related claims, causing a growing concern that real estate owners might be subject to increasing lawsuits regarding mold contamination.  No assurance can be given that a mold condition will not exist at one or more of our Investments, with the risk of substantial damages, legal fees and possibly loss of tenants. It is unclear whether such mold claims would be covered by the customary insurance policies to be obtained for us.

 

Adverse economic conditions may negatively affect our results of operations and, as a result, our ability to make distributions to our stockholders or to realize appreciation in the value of our Investments.

 

Our operating results may be adversely affected by market and economic challenges, which may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders or to realize appreciation in the value of our Investments.  These market and economic challenges include, but are not limited to, the following:

 

oany future downturn in the U.S. economy and the related reduction in spending, reduced home prices and high unemployment could result in tenant defaults under leases, vacancies at our office, industrial, retail or multifamily properties, and concessions or reduced rental rates under new leases due to reduced demand;

 

othe rate of household formation or population growth in our target markets or a continued or exacerbated economic slow-down experienced by the local economies where our properties are located or by the real estate industry generally may result in changes in supply of or demand for apartment units in our target markets; and

 

othe failure of the real estate market to attract the same level of capital investment in the future that it attracts at the time of our purchases or a reduction in the number of companies seeking to acquire properties may result in the value of our investments not appreciating or decreasing significantly below the amount we pay for these investments.

 

The length and severity of any economic slow-down or downturn cannot be predicted.  Our operations and, as a result, our ability to make distributions to our stockholders and/or our ability to realize appreciation in the value of our properties could be materially and adversely affected to the extent that an economic slow-down or downturn is prolonged or becomes severe.

 

We may be adversely affected by unfavorable economic changes in the specific geographic areas where our Investments are concentrated.

 

We expect that our Investments will be concentrated in target states where affiliates of the Manager have conducted significant business in the past, namely the States of Texas, California, Pennsylvania and Florida. We expect that initially, most, if not substantially all, of our Investments will be located in these states. Adverse conditions (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) in the areas where our Investments are located and/or concentrated, including any cities or towns within such target States, and local real estate conditions (such as oversupply of, or reduced demand for, office, industrial, retail or multifamily properties) may have an adverse effect on the value of our Investments. A material decline in the demand or the ability of tenants to pay rent, or the general market for sales of homes and multi-family properties in such geographic areas may result in a material decline in our cash available for distribution to our stockholders.

 

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Inflation may adversely affect our financial condition and results of operations.

 

Increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations.  During times when inflation is greater than increases in rent, the contracted rent increases called for under our leases may be unable to keep pace with the rate of inflation.  Additionally, substantial inflationary pressures and increased costs may have an adverse impact on our tenants, which may adversely affect the ability of our tenants to pay rent.

 

Our success is materially dependent on attracting qualified tenants

 

We will not collect revenue for a property while it is vacant and we will be responsible for all utility costs and maintenance services until we are able to lease it.  Most of our properties will be occupied by only one family and our success is dependent on the financial stability of these tenants in the aggregate.  If we cannot rent our properties or our tenants default on our leases or fail to comply with the terms of our leases, our operations, financial performance, and the quality and value of our properties could be negatively impacted.

 

We may not be able to re-lease or renew leases at the Investments held by us on terms favorable to us or at all.

 

We are subject to risks that upon expiration or earlier termination of the leases for our properties that such properties may not be re-leased or, if re-leased, the terms of the renewal or re-leasing (including the costs of required renovations or concessions to tenants) may be less favorable than current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by an Investment.  If we are unable to re-lease or renew leases for all or substantially all of our Investments, or if the rental rates upon such renewal or re-leasing are significantly lower than expected, and if our reserves for these purposes prove inadequate, or if we are required to make significant renovations or concessions to tenants as part of the renewal or re-leasing process, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders.

 

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The bankruptcy, insolvency or diminished creditworthiness of our tenants under their leases or delays by our tenants in making rental payments could seriously harm our operating results and financial condition.

 

We will lease our properties to tenants, and we receive rents from our tenants during the terms of their respective leases. A tenant’s ability to pay rent is often initially determined by the creditworthiness of the tenant and the income of the tenant. However, if a tenant’s credit deteriorates or a tenant’s income deteriorates, the tenant may default on its obligations under its lease and the tenant may also become bankrupt.  The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate investments.  Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or its property, unless we receive an order permitting us to do so from the bankruptcy court.  A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay.  A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy estate.  In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under its lease. In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages.  Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.

 

We could be adversely affected by various facts and events related to our Investments over which we have limited or no control.

 

We could be adversely affected by various facts and events over which we have limited or no control, such as:

 

ooversupply of space and changes in market rental rates;

 

oeconomic or physical decline of the areas where the Investments are located; and

 

odeterioration of the physical condition of our Investments.

 

Negative market conditions or adverse events affecting our existing or potential tenants, or the industries in which they operate, could have an adverse impact on our ability to attract new tenants, re-lease space, collect rent or renew leases, any of which could adversely affect our financial condition.

 

An uninsured loss or a loss that exceeds the policies on our Investments could subject us to lost capital or revenue on those properties.

 

Under the terms and conditions of the leases expected to be in force on our Investments, tenants are generally expected to be required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the Investments, except for claims arising from the negligence or intentional misconduct of us or our agents.  

 

Additionally, tenants are generally expected to be required, at the tenants’ expense, to obtain and keep in full force during the term of the lease, “Renter’s” insurance policies.  Insurance policies for property damage are generally expected to be in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements and insure against all perils of fire, extended coverage, vandalism, malicious mischief and special extended perils (“all risk,” as that term is used in the insurance industry).

 

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Insurance policies are generally expected to be obtained by the tenant providing coverage in varying amounts.  These policies may include liability coverage for bodily injury and property damage arising out of the ownership, use, occupancy or maintenance of the properties and all of their appurtenant areas. To the extent that losses are uninsured or underinsured, we could be subject to lost capital and revenue on those Investments.

 

Significant restrictions on transfer and encumbrance of Investments are expected  

 

The terms of any mortgage or other debt financing for an Investment are expected to prohibit the transfer or further encumbrance of that Investment or any interest in that Investment except with the lender’s prior consent, which consent each lender is expected to be able to withhold.  The relative illiquidity of the Investments may prevent or substantially impair our ability to dispose of an Investment at times when it may be otherwise advantageous for us to do so.  If we were forced to immediately liquidate some or all of our Investments, the proceeds are likely to result in a significant loss, if such a liquidation is possible at all.

 

We may experience delays in the sale of an Investment  

 

Should we need to dispose of an Investment, it may not be possible to sell any or all of our Investments at a favorable price, or at all, in such a time frame.  If we are unable to sell our Investments in the time frames or for the prices anticipated, our ability to make distributions to you may be materially delayed or reduced, you may not be able to get a return of capital as expected or you may not have any liquidity.

 

Risks Associated with Debt Financing

 

We expect to use mortgage and other debt financing to acquire properties or interests in properties and otherwise incur other indebtedness, which increases our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.

 

We are permitted to acquire real properties and other real estate-related investments, including entity acquisitions, by assuming either existing financing secured by the asset or by borrowing new funds. In addition, we may incur or increase our mortgage debt by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay distributions to our stockholders. We also may borrow funds if necessary to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

 

There is no limit on the amount we may invest in any single property or other asset or on the amount we can borrow to purchase any individual property or other Investment. If we mortgage a property and have insufficient cash flow to service the debt, we risk an event of default which may result in our lenders foreclosing on the properties securing the mortgage.

 

If we cannot repay or refinance loans incurred to purchase our properties, or interests therein, then we may lose our interests in the properties secured by the loans we are unable to repay or refinance.

 

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High levels of debt or increases in interest rates could increase the amount of our loan payments, which could reduce the cash available for distribution to stockholders.

 

Our policies do not limit us from incurring debt.  For purposes of calculating our leverage, we assume full consolidation of all of our real estate investments, whether or not they would be consolidated under GAAP.

 

High debt levels will cause us to incur higher interest charges, resulting in higher debt service payments, and may be accompanied by restrictive covenants. Interest we pay reduces cash available for distribution to stockholders.

 

Additionally, with respect to our variable rate debt, increases in interest rates increase our interest costs, which reduces our cash flow and our ability to make distributions to you.  In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss.  In addition, if we are unable to service our debt payments, our lenders may foreclose on our interests in the real property that secures the loans we have entered into.

 

High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flow from operations and the amount of cash distributions we can make.

 

To qualify as a REIT, we will be required to distribute at least 90% of our annual taxable income (excluding net capital gains) to our stockholders in each taxable year, and thus our ability to retain internally generated cash is limited.

 

Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt or equity financing from third parties or the sellers of properties. If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise capital by issuing more stock or borrowing more money.

 

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to you

 

When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, or replace our Manager. These or other limitations may limit our flexibility and prevent us from achieving our operating plans.

 

Our ability to obtain financing on reasonable terms would be impacted by negative capital market conditions

 

Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. Although this condition occurred initially within the “subprime” single-family mortgage lending sector of the credit market, liquidity has tightened in overall financial markets, including the investment grade debt and equity capital markets. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure financing on reasonable terms, if at all.

 

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Some of our mortgage loans may have “due on sale” provisions, which may impact the manner in which we acquire, sell and/or finance our properties

 

In purchasing properties subject to financing, we may obtain financing with “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan. In such event, we may be required to sell our properties on an all-cash basis, which may make it more difficult to sell the property or reduce the selling price.

 

Lenders may be able to recover against our other Investments under our mortgage loans

 

In financing our acquisitions, we will seek to obtain secured nonrecourse loans. However, only recourse financing may be available, in which event, in addition to the Investment securing the loan, the lender would have the ability to look to our other assets for satisfaction of the debt if the proceeds from the sale or other disposition of the Investment securing the loan are insufficient to fully repay it.  Also, in order to facilitate the sale of an Investment, we may allow the buyer to purchase the Investment subject to an existing loan whereby we remain responsible for the debt.

 

If we are required to make payments under any “bad boy” carve-out guaranties that we may provide in connection with certain mortgages and related loans, our business and financial results could be materially adversely affected

 

In obtaining certain nonrecourse loans, we may provide standard carve-out guaranties. These guaranties are only applicable if and when the borrower directly, or indirectly through agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper (commonly referred to as “bad boy” guaranties). Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in the real estate industry have recently sought to make claims for payment under such guaranties. In the event such a claim were made against us under a “bad boy” carve-out guaranty following foreclosure on mortgages or related loan, and such claim were successful, our business and financial results could be materially adversely affected.

 

Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders

 

We may finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.

 

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Interest rates might increase

 

Based on historical interest rates, current interest rates are low and, as a result, it is likely that the interest rates available for future real estate loans and refinances will be higher than the current interest rates for such loans, which may have a material and adverse impact on the company and our Investments. If there is an increase in interest rates, any debt servicing on Investments could be significantly higher than currently anticipated, which would reduce the amount of cash available for distribution to the stockholders. Also, rising interest rates may affect the ability of the Manager to refinance an Investment. Investments may be less desirable to prospective purchasers in a rising interest rate environment and their values may be adversely impacted by the reduction in cash flow due to increased interest payments.

 

We may use floating rate, interest-only or short-term loans to acquire Investments

 

The Manager has the right, in its sole discretion, to negotiate any debt financing, including obtaining (i) interest-only, (ii) floating rate and/or (iii) short-term loans to acquire Investments. If the Manager obtains floating rate loans, the interest rate would not be fixed but would float with an established index (probably at higher interest rates in the future). No principal would be repaid on interest-only loans. Finally, we would be required to refinance short term loans at the end of a relatively short period. The credit markets have recently been in flux and are experiencing a malaise. No assurance can be given that the Manager would be able to refinance with fixed-rate permanent loans in the future, on favorable terms or at all, to refinance the short-term loans. In addition, no assurance can be given that the terms of such future loans to refinance the short-term loans would be favorable to the company.

 

We may use leverage to make Investments

 

The Manager, in its sole discretion, may leverage the Investments. As a result of the use of leverage, a decrease in revenues of a leveraged Investment may materially and adversely affect that Investment’s cash flow and, in turn, our ability to make distributions. No assurance can be given that future cash flow of a particular Investment will be sufficient to make the debt service payments on any borrowed funds for that Investment and also cover operating expenses. If the Investment’s revenues are insufficient to pay debt service and operating expenses, we would be required to use net income from other Investments, working capital or reserves, or seek additional funds. There can be no assurance that additional funds will be available, if needed, or, if such funds are available, that they will be available on terms acceptable to us.

 

Leveraging an Investment allows a lender to foreclose on that Investment  

 

Lenders to an Investment, even non-recourse lenders, are expected in all instances to retain the right to foreclose on that Investment if there is a default in the loan terms. If this were to occur, we would likely lose our entire investment in that Investment.

 

Lenders may have approval rights with respect to an encumbered Investment

 

A lender to an Investment will likely have numerous other rights, which may include the right to approve any change in the property manager for a particular Investment.

 

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Availability of financing and market conditions will affect the success of the company

 

Market fluctuations in real estate financing may affect the availability and cost of funds needed in the future for Investments. In addition, credit availability has been restricted in the past and may become restricted again in the future. Restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect the Investments and our ability to execute its investment goals.

 

Risks Related to Compliance and Regulation

 

We are offering our common shares pursuant to recent amendments to Regulation A promulgated pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to Tier 2 issuers will make our common shares less attractive to investors as compared to a traditional initial public offering.

 

As a Tier 2 issuer, we will be subject to scaled disclosure and reporting requirements, which may make our common shares less attractive to investors as compared to a traditional initial public offering.  This may make an investment in our common shares less attractive to investors who are accustomed to enhanced disclosure and more frequent financial reporting.  

 

In addition, given the relative lack of regulatory precedence regarding the recent amendments to Regulation A, there is a significant amount of regulatory uncertainty in regards to how the SEC or the individual state securities regulators will regulate both the offer and sale of our securities, as well as any ongoing compliance that we may be subject to.  If our scaled disclosure and reporting requirements, or regulatory uncertainty regarding Regulation A, reduces the attractiveness of our common shares, we may be unable to raise the necessary funds to commence operations, or to develop a diversified portfolio of real estate investments, which could severely affect the value of our common shares.

 

Our use of Form 1-A and our reliance on Regulation A for this Offering may make it more difficult to raise capital as and when we need it, as compared to if we were conducting a traditional initial public offering on Form S-11.

 

Because of the exemptions from various reporting requirements provided to us under Regulation A and because we are only permitted to raise up to $50 million (soon to be increased to $75 million) in any 12-month period under Regulation A (although we may raise capital in other ways), we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected. Investors are cautioned not to confuse an offering proffered under Form S-11 with this Regulation A offering, which uses Form 1-A but  relies on the disclosure requirements established by Form S-11.

 

There may be deficiencies with our internal controls that require improvements, and if we are unable to adequately evaluate internal controls, we may be subject to sanctions.

 

As a Tier 2 issuer, we will not need to provide a report on the effectiveness of our internal controls over financial reporting, and we will be exempt from the auditor attestation requirements concerning any such report as long as we are a Tier 2 issuer.  We believe we have the necessary framework in place. However, internal controls have inherent limitations.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by our internal controls.  However, we believe that our internal controls are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP.

 

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We may not be successful in availing ourselves of the Investment Company Act exclusion, and even if we are successful, the exclusion would impose limits on our operations, which could adversely affect our operations.

 

Even though we intend to conduct our operations so that we will not be required to register as an investment company under the Investment Company Act, the SEC may disagree with our approach.  Consequently, the SEC may require us to register under the Investment Company Act thus requiring us to adjust our investment strategy. Any such adjustment in our strategy could have a material adverse effect on us.  We have not asked the Staff of the SEC for confirmation of our analysis under the Investment Company Act.

 

Laws intended to prohibit money laundering may require us to disclose investor information to regulatory authorities.

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities, and requires the Secretary of the U.S. Department of Treasury to prescribe regulations in connection with anti-money laundering policies of financial institutions.

 

The Financial Crimes Enforcement Network, or FinCEN, an agency of the Department of Treasury, has announced that it is likely that such regulations would subject certain pooled investment vehicles to enact anti-money laundering policies.

 

It is possible that there could be promulgated legislation or regulations that would require us or our service providers to share information with governmental authorities with respect to prospective investors in connection with the establishment of anti-money laundering procedures.  Such legislation and/or regulations could require us to implement additional restrictions on the transfer of our common shares to comply with such legislation and/or regulations.  

 

We reserve the right to request such information as is necessary to verify the identity of prospective stockholders and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN and/or the SEC.

 

In the event of delay or failure by a prospective stockholder to produce any information required for verification purposes, an application for, or transfer of, our common shares may be refused.  We will not have the ability to reject a transfer of our common shares where all necessary information is provided and any other applicable transfer requirements, including those imposed under the transfer provisions of our Charter, are satisfied.

 

We are relying on the exemption for insignificant participation by benefit plan investors under ERISA.

 

The Plan Assets Regulation provides that the assets of an entity will not be deemed to be the assets of a benefits plan if equity participation in the entity by benefit plan investors, including benefit plans, is not significant.  The Plan Assets Regulation provides that equity participation in the entity by benefit plan investors is “significant” if at any time 25% or more of the value of any class of equity interest is held by benefit plan investors.  Because we are relying on this exemption, we will not accept investments from benefit plan investments over 25% of the value of any class of equity interest.  If repurchases of shares cause us to go over 25%, we may repurchase shares of benefit plan investors without their consent until we are under the 25% limit. See the section of this Offering Circular captioned “ERISA Considerations” for additional information regarding the Plan Assets Regulation.

 

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Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act”, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new Securities and Exchange Commission regulations and stock exchange rules and state blue sky laws, regulations and filing requirements, are creating uncertainty for companies such as ours. These new or changed laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity.  As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

Risks Related to Our Taxation as a REIT

 

Our failure to continue to qualify as a REIT would result in higher taxes and reduced cash available for stockholders.

 

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes.  Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis.  Our ability to satisfy some of the asset tests depends upon the fair market values of our assets, some of which are not able to be precisely determined and for which we will not obtain independent appraisals.

 

If we were to fail to qualify as a REIT in any taxable year, and certain statutory relief provisions were not available, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income.  Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution.

 

Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions.  As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our Common Stock. Even if we qualify as a REIT, we may be subject to the corporate alternative minimum tax on our items of tax preference if our alternative minimum taxable income exceeds our taxable income.

 

Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.

 

We have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year ended December 31, 2019. We believe that we have and will continue to operate in a manner qualifying us as a REIT commencing with our taxable year ended December 31, 2019 and intend to continue to so operate.

 

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However, we cannot assure you that we will remain qualified as a REIT. In connection with this offering, we have received an opinion from our tax counsel, that we qualified to be taxed as a REIT under the federal income tax laws for our taxable year ended December 31, 2018, and our organization and current and proposed method of operation will enable us to continue to qualify as a REIT for our taxable year ending December 31, 2019 and in the future.

 

Investors should be aware that tax counsel’s opinion is based upon customary assumptions, conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the conduct of our business, is not binding upon the Internal Revenue Service, or the IRS, or any court and speaks as of the date issued.  In addition, tax counsel’s opinion is based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Please see Exhibit 15(b)7 “Opinion of Tax Counsel.”

 

Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Tax counsel will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

 

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

owe would not be able to deduct dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

owe could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

ounless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

 

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our Common Stock. See “Tax Treatment Of Company And Its Security Holders” for a discussion of material federal income tax consequences relating to us and our Common Stock.

 

REIT distribution requirements could adversely affect our liquidity.

 

In order to maintain our REIT status and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales.  To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains.  

 

In addition, we will be subject to corporate income tax to the extent we distribute less than 100% of our net taxable income including any realized net capital gain.  We intend to make distributions to our stockholders to comply with the requirements of the Internal Revenue Code for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives.  

 

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Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments.  The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long term debt or sell equity securities in order to fund distributions required to maintain our REIT status. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

 

Further, amounts distributed will not be available to fund investment activities.  We expect to fund our investments by raising equity capital and through borrowings from financial institutions and the debt capital markets.  If we fail to obtain debt or equity capital in the future, it could limit our ability to grow, which could have a material adverse effect on the value of our Common Stock.

 

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

 

To maintain our qualification as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

 

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer.

 

In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flows.

 

Even if we remain qualified as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes.

 

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The prohibited transactions tax may subject us to tax on our gain from sales of property and limit our ability to dispose of our properties.

 

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we intend to acquire and hold all of our assets as investments and not for sale to customers in the ordinary course of business, the IRS may assert that we are subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property.

 

The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may inhibit market activity in our stock and may restrict our business combination opportunities.

 

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year.  Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year. Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT.  

 

Unless exempted by the board of directors, no person may own more than 9.8% of the aggregate value of the outstanding shares of our stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock.  The board of directors may not grant such an exemption to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock, would result in the termination of our status as a REIT.  These ownership limits could delay or prevent a transaction or a change in our control that might be in the best interest of our stockholders.

 

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

 

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%.  Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income.  The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our Common Stock.

 

The prohibited transactions tax may subject us to tax on our gain from sales of property and limit our ability to dispose of our properties.

 

A REIT’s net income from prohibited transactions is subject to a 100% tax.  In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business.  

 

Although we intend to acquire and hold all of our assets as investments and not for sale to customers in the ordinary course of business, the IRS may assert that we are subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property.  

 

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Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, not all of our prior property dispositions qualified for the safe harbor and we cannot assure you that we can comply with the safe harbor in the future or that we have avoided, or will avoid, owning property that may be characterized as held primarily for sale to customers in the ordinary course of business.  

 

Failure to make required distributions would subject us to U.S. federal corporate income tax.

 

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to remain qualified as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

 

We may be unable to generate sufficient revenue from operations, operating cash flow or portfolio income to pay our operating expenses, and our operating expenses could rise, diminishing our ability and to pay distributions to our stockholders.

 

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and not including net capital gains, each year to our stockholders. To qualify for the tax benefits accorded to REITs, we intend to continue to make distributions to our stockholders in amounts such that we distribute all or substantially all our net taxable income each year, subject to certain adjustments.

 

However, our ability to make distributions may be adversely affected by the risk factors described herein. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, the size of our investment portfolio, operating expense levels, and certain restrictions imposed by Maryland law.

 

Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay distributions to our stockholders. In the event of a downturn in our operating results and financial performance or unanticipated declines in the value of our asset portfolio, we may be unable to declare or pay annual distributions or make distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification requirements and other tax considerations and capital expenditure requirements as our board of directors may deem relevant from time to time.

 

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our Common Stock.

 

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations or administrative interpretations.

 

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Risks Related to Lack of a Market for our Common Stock

 

Because there is no market for our Common Stock, the offering price of our shares was not established on an independent basis; the actual value of Common Stock you  purchase may be substantially less than what you pay.

 

The purchase price of the shares of our Common Stock has been determined primarily by our capital needs and bears no relationship to any established criteria of value such as book value or earnings per shares, or any combination thereof. Further, the price of the shares is not based on our past earnings.

 

We established the offering price of our shares on an arbitrary basis. The selling price of our shares bears no relationship to our book or asset values or to any other established criteria for valuing shares.  Because the offering price is not based upon any independent valuation, the offering price may not be indicative of the proceeds that you would receive upon liquidation.

 

Further, the offering price may be significantly more than the price at which the shares would trade if they were to be listed on an exchange or actively traded by broker-dealers.  At the end of each fiscal quarter, beginning December 31st, 2018, our outside Manager will estimate our Net Asset Value (“NAV”) per share to determine our offering price. We have adjusted our offering price four times since our Offering Statement was qualified on November 19, 2019 as described in more detail under “Determination of Offering Price”. 

 

Estimates of NAV will be based on available information and judgment of the Manager. Therefore, actual values and results could differ from our estimates and that difference could be significant.  This approach to valuing our shares may bear little relationship and will likely exceed what you might receive for your shares if you tried to sell them or if we liquidated our portfolio.

 

You are limited in your ability to sell your common shares pursuant to our share repurchase program. You may not be able to sell any of your shares back to us, and if you do sell your shares, you may not receive the price you paid upon subscription.

 

We intend to establish a redemption program, which may provide you an opportunity to sell your shares back to us. We anticipate that our shares may be repurchased by us on a semi-annual basis, and stockholders may ask us to repurchase up to 25% of their shares while this offering is ongoing.

 

Our share redemption program contains certain restrictions and limitations, including those relating to the number of our shares that we can repurchase at any given time and limiting the repurchase price.

 

Specifically, our redemption plan limits redemptions to a maximum of:

 

o10.0% of the weighted average number of common shares outstanding during the prior calendar year, during the first 2 years of our fund,

 

o8.0% of the weighted average number of common shares outstanding during the prior calendar year, during years 3-5 of our fund,

 

o5.0% of the weighted average number of common shares outstanding during the prior calendar year, for years 6 and above of our fund.

 

Accordingly, we intend to limit the number of shares to be redeemed during any calendar half to 5.0%, 4.0% and 2.5% respectively, of the common shares outstanding, with excess capacity carried over to the later semi-annual period of that year but not farther.

 

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However, as we intend to make real estate investments of varying terms and maturities, our Board of Directors may elect to increase or decrease the amount of common shares available for redemption in any given semi-annual period, as these real estate assets are paid off or sold, but in no event will we redeem more than 10.0%, 8.0%, and 5% respectively,  during any calendar year.  

 

During the period that this offering is ongoing, all stockholders who have held their shares for at least six months may request that we repurchase up to 25% of their shares semi-annually, up to the aggregate semi-annual and annual limitations discussed above. If we receive redemption requests that exceed the semi-annual limitation, we will accept redemption requests on a pro-rata basis.

 

Upon conclusion of this offering, shares may be repurchased by us on a semi-annual basis as cash flows are available as determined by our Manager. In addition, following the conclusion of this offering, our Manager will reserve the right to reject any share repurchase request for any reason or no reason or to amend or terminate the share redemption program by filing an offering circular supplement.  Therefore, you may not have the opportunity to make a repurchase request prior to a potential termination of the share redemption program, and you may not be able to sell any of your common shares back to us pursuant to the share redemption program.  Moreover, if you do sell your common shares back to us, it is unlikely that you will receive the same price you paid for the common shares being repurchased.

 

If we do not successfully implement a liquidity transaction, you may have to hold your investment for an indefinite period.

 

When necessary, we intend to complete a transaction providing liquidity to stockholders in the future, we are not required to pursue such a liquidity transaction. Market conditions and other factors could cause us to delay the listing of our shares on a national securities exchange, delay developing a secondary trading market, or delay the commencement of a liquidation or other type of liquidity transaction, such as a merger or sale of assets,, including a portfolio sale.

 

If our Manager does determine to pursue a liquidity transaction, we would be under no obligation to conclude the process within a set period of time.  If we adopt a plan of liquidation or portfolio sale, the timing of the sale of assets will depend on real estate and financial markets, economic conditions in areas in which properties are located, and federal income tax effects on stockholders, that may prevail in the future.  We cannot guarantee that we will be able to liquidate any or all assets.  

 

After we adopt a plan of liquidation, we would likely remain in existence until all our investments are liquidated.  If we do not pursue a liquidity transaction, or delay such a transaction due to market conditions, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment to cash easily and could suffer losses on your investment.  

 

Shares of our Common Stock will have limited transferability and liquidity.

 

While we intend to pursue listing on an alternative exchange and once our size permits a listing on a registered national exchange, a market may not develop for our shares. Initially stockholders cannot expect to be able to liquidate their investment in case of an emergency. Further, the sale of the shares may have adverse federal income tax consequences.

 

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A limit on the percentage of our securities a person may own may discourage a takeover or business combination, which could prevent our stockholders from realizing a premium price for their stock.

 

Our charter restricts direct or indirect ownership by one person or entity to no more than 9.8% in value of the outstanding shares of our capital stock or 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of our Common Stock unless exempted (prospectively or retroactively) by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our stockholders.

 

You may be restricted from acquiring or transferring certain amounts of our Common Stock.

 

The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limits in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.

 

In order to qualify as a REIT, five or fewer individuals, as defined in the Code to include specified private foundations, employee benefit plans and trusts, and charitable trusts, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of shares of our capital stock.

 

Our Charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted, prospectively or retroactively, by our board of directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value of the aggregate of our outstanding shares of capital stock or 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of such thresholds does not satisfy certain conditions designed to ensure that we will not fail to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required for REIT qualification.

 

Risk Related to the Possibility that a Market May Develop

 

Future sales of shares of our common shares in a public market or the issuance of other equity may adversely affect the market price of our common shares.  

 

Sales of a substantial number of shares of Common Stock or other equity-related securities in the public market could depress the market price of our Common Stock, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of Common Stock or other equity-related securities would have on the market price of our Common Stock.

 

The price of our common shares may fluctuate significantly if a trading market for our shares develops

 

If a trading market develops, our trading price of our Common Stock may fluctuate significantly in response to many factors, including:

 

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oactual or anticipated variations in our operating results, funds from operations, or FFO, cash flows, liquidity or distributions; 

 

ochanges in our earnings estimates or those of analysts; 

 

opublication of research reports about us or the real estate industry or sector in which we operate; 

 

oincreases in market interest rates that lead purchasers of our shares to demand a higher dividend yield; 

 

ochanges in market valuations of companies similar to us; 

 

oadverse market reaction to any securities we may issue or additional debt it incurs in the future; 

 

oadditions or departures of key management personnel; 

 

oactions by institutional stockholders; 

 

ospeculation in the press or investment community; 

 

ocontinuing high levels of volatility in the credit markets; 

 

othe realization of any of the other risk factors included herein; and 

 

ogeneral market and economic conditions.

 

An increase in market interest rates may have an adverse effect on the market price of our Common Stock and our ability to make distributions to its stockholders.

 

One of the factors that investors may consider in deciding whether to buy or sell shares of our Common Stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate on shares of Common Stock or seek alternative investments paying higher distributions or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of shares of our Common Stock.

 

For instance, if interest rates rise without an increase in our distribution rate, the market price of shares of our Common Stock could decrease because potential investors may require a higher distribution yield on shares of our Common Stock as market rates on interest-bearing instruments such as bonds rise. In addition, to the extent we have variable rate debt, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting our cash flow and its ability to service our indebtedness and make distributions to our stockholders.

 

Other Risk Factors to Consider

 

If you fail to meet the fiduciary and other standards under the Employee Retirement Income Security Act of 1974, as amended or the Code as a result of an investment in our stock, you could be subject to criminal and civil penalties.

 

Special considerations apply to the purchase of stock by employee benefit plans subject to the fiduciary rules of title I of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, including pension or profit sharing plans and entities that hold assets of such plans, which we refer to as ERISA Plans, and plans and accounts that are not subject to ERISA, but are subject to the prohibited transaction rules of Section 4975 of the Code, including IRAs, Keogh Plans, and medical savings accounts. (Collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Code as “Benefit Plans” or “Benefit Plan Investors”). If you are investing the assets of any Benefit Plan, you should consider whether:

 

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oyour investment will be consistent with your fiduciary obligations under ERISA and the Code;

 

oyour investment will be made in accordance with the documents and instruments governing the Benefit Plan, including the Plan’s investment policy;

 

oyour investment will satisfy the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;

 

oyour investment will impair the liquidity of the Benefit Plan;

 

oyour investment will produce “unrelated business taxable income” for the Benefit Plan;

 

oyou will be able to satisfy plan liquidity requirements as there may be only a limited market to sell or otherwise dispose of our stock; and

 

oyour investment will constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.

 

Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of civil and criminal penalties, and can subject the fiduciary to claims for damages or for equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified and all of the assets of the IRA may be deemed distributed and subjected to tax. Benefit Plan Investors should consult with counsel before making an investment in shares of our Common Stock.

 

Plans that are not subject to ERISA or the prohibited transactions of the Code, such as government plans or church plans, may be subject to similar requirements under state law. The fiduciaries of such plans should satisfy themselves that the investment satisfies applicable law.

 

Distributions to tax-exempt investors may be classified as unrelated business taxable income and tax-exempt investors would be required to pay tax on the unrelated business taxable income and to file income tax returns.

 

Neither ordinary nor capital gain distributions with respect to our Common Stock nor gain from the sale of stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

 

ounder certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if our stock is predominately held by qualified employee pension trusts, such that we are a “pension-held” REIT (which we do not expect to be the case);

 

opart of the income and gain recognized by a tax exempt investor with respect to our stock would constitute unrelated business taxable income if such investor incurs debt in order to acquire our Common Stock; and

 

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opart or all of the income or gain recognized with respect to our stock held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Code may be treated as unrelated business taxable income.

 

We encourage you to consult your own tax advisor to determine the tax consequences applicable to you if you are a tax-exempt investor. See “Tax Treatment Of Company And Its Security Holders - Taxation of Tax-Exempt Stockholders.”

 

The subscription agreement has a forum selection provision that requires disputes be resolved in state or federal courts in the State of California, regardless of convenience or cost to you, the investor.

 

In order to invest in this offering, investors agree to resolve disputes arising under the subscription agreement in state or federal courts located in Orange County, California, for the purpose of any suit, action or other proceeding arising out of or based upon the agreement. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. We believe that the exclusive forum provision applies to claims arising under the Securities Act, but there is uncertainty as to whether a court would enforce such a provision in this context. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.  As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.  You will not be deemed to have waived the company’s compliance with the federal securities laws and the rules and regulations thereunder. This forum selection provision may limit your ability to obtain a favorable judicial forum for disputes with us.   Alternatively, if a court were to find the provision inapplicable to, or unenforceable in an action, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

We are and may continue to be significantly impacted by the worldwide economic downturn due to the COVID-19 pandemic.

 

In December 2019, a novel strain of coronavirus, or COVID-19, was reported to have surfaced in Wuhan, China. COVID-19 has spread to many countries, including the United States, and was declared to be a pandemic by the World Health Organization. Efforts to contain the spread of COVID-19 have intensified and the U.S., Europe and Asia have implemented severe travel restrictions and social distancing. The impacts of the outbreak are unknown and rapidly evolving. A widespread health crisis has adversely affected and could continue to affect the global economy, resulting in an economic downturn that could negatively impact the value of the company’s shares and investor demand for shares generally.

 

The continued spread of COVID-19 has also led to severe disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. It is possible that the continued spread of COVID-19 could cause a further economic slowdown or recession or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

 

The extent to which COVID-19 affects our financial results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 outbreak and the actions to contain the outbreak or treat its impact, among others. Moreover, the COVID-19 outbreak has had and may continue to have indeterminable adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely affected to the extent that COVID-19 or any other pandemic harms the global economy generally.

 

The real estate market has experienced difficulties due to the pandemic, including a decrease and fluctuation in rental income and cancelations of public property auctions. While cancellation of existing client contracts due to pandemic-related financial hardship has not occurred to date, some negotiations for expected contracts were delayed or frozen for an indeterminate time, which has had and is expected to have a material effect on the company’s forecasted revenues .

 

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DETERMINATION OF OFFERING PRICE

 

Determination of Offering Price

 

Initial Offering Price

 

The initial offering price of $10.00 per share was arbitrarily determined by our Manager and until beginning of 1Q 2020. We have adjusted the offering price four times, in accordance with the below adjustment schedule. The current price per share and the offering price has been calculated at $13.67.  

 

Adjustments to Offering Price

 

Beginning January 1, 2019, we planned for the per share purchase price to be adjusted every fiscal quarter as of January 1, April 1, July 1 and October 1 of each year (or as soon as commercially reasonable and announced by us thereafter) based on the three previous months. As an example, when we close our books in December, in January, we calculate the new share price based on the previous three months. This new share price becomes effective on February 1, and continues for three months (e.g. February, March, and April). Since the initial qualification of our offering on November 19, 2019, the per share purchase price has been adjusted four times:

 

·As of December 31, 2019, our net asset value was $740,316.52, and outstanding shares were 66,852. This gave us a Determined Share Value of $11.07, which became the new selling price per share as of February 1, 2020.
·As of March 31, 2020, our net asset value was $5,328,200.53, and outstanding shares were 466,439. This gave us a Determined Share Value of $11.42, which became the new selling price per share as of May 1, 2020.
·As of June 30, 2020, our net asset value was $6,044,631.00, and outstanding shares were 503,465. This gave us a Determined Share Value of $12.01, which became the new selling price per share as of August 1, 2020.
·As of September 30, 2020, our net asset value was $7,649,560.33, and outstanding shares were 559,775. This gave us a Determined Share Value of 13.67, which became the new selling price per share as of November 1, 2020 through January 31, 2021.

 

In this offering, we have sold shares of Common Stock as follows:

 

PERIOD   SHARES SOLD     CAPITAL RAISED  
2019     66,852     $ 668,520.00  
1Q 2020     399,587     $ 4,414,409.48  
2Q 2020     37,026     $ 420,052.75  
3Q 2020     57,757     $ 681,732.67  
TOTALS     561,222     $ 6,184,714.90  
      *NOTE - EXCLUDES SHARES BOUGHT BACK       *NOTE - EXCLUDES SHARES BOUGHT BACK  

 

 

The adjusted share price will be the Determined Share Value (the quotient of the Company’s net asset value divided by shares outstanding).

 

The following table demonstrates the components of our NAV calculations:

      
ASSETS     
CURRENT ASSETS     
   Current Assets     
      Cash on Hand and in Banks  $115,397.47 
      Accounts Receivable  $298,018.54 
      DEPOSITS WITH VENDORS  $13,000.00 
      NOTES RECEIVABLE  $4,781,108.85 
      PREPAID EXPENSES  $150.11 
TOTAL CURRENT ASSETS  $5,207,674.97 
      
FIXED ASSETS     
      ACCUMULATED DEPRECIATION  $(3,771.60)
      Investment Properties     
            10 W POMONA  $192,000.00 
               10 W POMONA JV PARTNER  $(96,000.00)
                  10 W POMONA JV PARTNER UNREALIZED GAINS/LOSSES  $(14,000.00)
               Total 10 W POMONA JV PARTNER  $(110,000.00)
               10 W POMONA UNREALIZED GAINS/LOSSES  $28,000.00 
            Total 10 W POMONA  $110,000.00 
            1612 CONESTOGA  $90,000.00 
               1612 CONESTOGA JV PARTNER  $(45,000.00)
                  1612 CONESTOGA JV PARTNER UNREALIZED GAINS/LOSSES  $(29,000.00)
               Total 1612 CONESTOGA JV PARTNER  $(74,000.00)
               1612 CONESTOGA UNREALIZED GAINS/LOSSES  $58,000.00 
            Total 1612 CONESTOGA  $74,000.00 
            1835 HARRISON  $30,000.00 
               1835 HARRISON JV PARTNER  $10,000.00 
                  1835 HARRISON JV PARTNER UNREALIZED GAINS/LOSSES  $(27,500.00)
               Total 1835 HARRISON JV PARTNER  $(17,500.00)
               1835 HARRISON UNREALIZED GAINS/LOSSES  $70,000.00 
            Total 1835 HARRISON  $82,500.00 
            2000 S SALFORD ST  $192,740.00 
               UNREALIZED GAINS/LOSSES 2000 S SALFORD  $57,260.00 
            Total 2000 S SALFORD ST  $250,000.00 
            2120 W SPENCER ST  $130,000.00 
               UNREALIZED GAINS/LOSSES 2120 SPENCER  $50,000.00 
            Total 2120 W SPENCER ST  $180,000.00 
            238 53RD STREET  $250,000.00 
               238 53RD ST - UNREALIZED GAINS  $300,000.00 
            Total 238 53RD STREET  $550,000.00 
            2627 23RD STREET  $17,000.00 
               UNREALIZED GAINS/LOSSES 2627 23RD  $133,000.00 
            Total 2627 23RD STREET  $150,000.00 
            2736 SILVER  $32,000.00 
               2736 SILVER UNREALIZED GAINS/LOSSES  $36,000.00 
            Total 2736 SILVER  $68,000.00 
            2737 W EYRE  $40,000.00 
               UNREALIZED GAINS/LOSSES 2737 EYRE  $30,000.00 
            Total 2737 W EYRE  $70,000.00 
            30 E MEEHAN  $60,000.00 
               30 E MEEHAN JV PARTNER  $(30,000.00)
                  30 E MEEHAN JV PARTNER UNREALIZED GAINS/LOSSES  $(37,500.00)
               Total 30 E MEEHAN JV PARTNER  $(67,500.00)
               30 E MEEHAN UNREALIZED GAINS/LOSSES  $75,000.00 
            Total 30 E MEEHAN  $67,500.00 
            4243 LEIDY  $40,000.00 
               UNREALIZED GAINS/LOSSES 4243 LEIDY  $80,000.00 
            Total 4243 LEIDY  $120,000.00 
            4488 LIVINGSTON  $100,000.00 
               4488 LIVINGSTON JV PARTNER  $(50,000.00)
                  4488 LIVINGSTON JV PARTNER UNREALIZED GAINS/LOSSES  $(57,500.00)
               Total 4488 LIVINGSTON JV PARTNER  $(107,500.00)
               4488 LIVINGSTON UNREALIZED GAINS/LOSSES  $115,000.00 
            Total 4488 LIVINGSTON  $107,500.00 
            4509 20TH STREET  $60,000.00 
               UNREALIZED GAINS/LOSSES 4509 20TH  $45,000.00 
            Total 4509 20TH STREET  $105,000.00 
            5056 SUMMER STREET  $50,000.00 
               5056 SUMMER STREET - JV PARTNER  $(40,000.00)
               UNREALIZED GAINS/LOSSES 5056 SUMMER ST  $30,000.00 
            Total 5056 SUMMER STREET  $40,000.00 
            53 SHARPNACK  $80,000.00 
               53 SHARPNACK JV PARTNER  $(40,000.00)
                  53 SHARPNACK JV PARTNER UNREALIZED GAINS/LOSSES  $(38,500.00)
               Total 53 SHARPNACK JV PARTNER  $(78,500.00)
               53 SHARPNACK UNREALIZED GAINS/LOSSES  $77,000.00 
            Total 53 SHARPNACK  $78,500.00 
            540 E MAYLAND  $85,000.00 
               540 E MAYLAND JV PARTNER  $(42,500.00)
                  540 E MAYLAND JV PARTNER UNREALIZED GAINS/LOSSES  $(10,500.00)
               Total 540 E MAYLAND JV PARTNER  $(53,000.00)
               540 E MAYLAND UNREALIZED GAINS/LOSSES  $21,000.00 
            Total 540 E MAYLAND  $53,000.00 
            5821 CHESTER  $25,000.00 
               5821 CHESTER JV PARTNER  $(12,500.00)
                  5821 CHESTER JV PARTNER UNREALIZED GAINS/LOSSES  $(27,000.00)
               Total 5821 CHESTER JV PARTNER  $(39,500.00)
               5821 CHESTER UNREALIZED GAINS/LOSSES  $54,000.00 
            Total 5821 CHESTER  $39,500.00 
            6019 VINE  $90,000.00 
               6019 VINE JV PARTNER  $(45,000.00)
                  6019 VINE JV PARTNER UNREALIZED GAINS/LOSSES  $(41,500.00)
               Total 6019 VINE JV PARTNER  $(86,500.00)
               6019 VINE UNREALIZED GAINS/LOSSES  $83,000.00 
            Total 6019 VINE  $86,500.00 
            6400 GLENMORE  $30,000.00 
               6400 GLENMORE UNREALIZED GAINS/LOSSES  $16,000.00 
            Total 6400 GLENMORE  $46,000.00 
            6408 CARLTON  $43,000.00 
               UNREALIZED GAINS/LOSSES 6408 CARLTON  $117,000.00 
               Total UNREALIZED GAINS/LOSSES 6408 CARLTON  $117,000.00 
            Total 6408 CARLTON  $160,000.00 
            6661 CORNELIUS STREET  $115,000.00 
               UNREALIZED GAINS/LOSSES 6661 CORNELIUS  $65,000.00 
            Total 6661 CORNELIUS STREET  $180,000.00 
            915 DAUPHIN  $70,000.00 
               915 DAUPHIN JV PARTNER  $(35,000.00)
                  915 DAUPHIN JV PARTNER UNREALIZED GAINS/LOSSES  $(15,500.00)
               Total 915 DAUPHIN JV PARTNER  $(50,500.00)
               915 DAUPHIN UNREALIZED GAINS/LOSSES  $31,000.00 
            Total 915 DAUPHIN  $50,500.00 
            0 FM 1960 RD WEST  $20,000.00 
               UNREALIZED GAINS/LOSSES 0 FM 1960 RD WEST  $5,000.00 
            Total 0 FM 1960 RD WEST  $25,000.00 
            11315 HARBOUR LAKE  $200,000.00 
               11315 HARBOUR LAKE JV PARTNER  $(47,500.00)
                  11315 HARBOUR LAKE JV PARTNER UNREALIZED GAINS / LOSSES  $(52,500.00)
               Total 11315 HARBOUR LAKE JV PARTNER  $(100,000.00)
            Total 11315 HARBOUR LAKE  $100,000.00 
            12907 LEAF GLEN  $40,000.00 
               12907 LEAF GLEN UNREALIZED GAINS/LOSSES  $113,000.00 
            Total 12907 LEAF GLEN  $153,000.00 
            12973 WIREVINE  $22,000.00 
               12973 WIREVINE UNREALIZED GAINS/LOSSES  $94,000.00 
            Total 12973 WIREVINE  $116,000.00 
            1318 BURNWOOD ST  $60,000.00 
               1318 BURNWOOD STREET - JV PARTNER  $(50,000.00)
                  JV PARTNER UNREALIZED GAINS/LOSSES  $(40,000.00)
               Total 1318 BURNWOOD STREET - JV PARTNER  $(90,000.00)
               UNREALIZED GAINS/LOSSES 1318 BURNWOOD  $120,000.00 
            Total 1318 BURNWOOD ST  $90,000.00 
            16419 SALINAS  $182,000.00 
               16419 SALINAS UNREALIZED GAINS/LOSSES  $13,000.00 
            Total 16419 SALINAS  $195,000.00 
            3105 TREEHOUSE CIRCLE  $70,000.00 
               3105 TREE HOUSE CR UNREALIZED GAINS/LOSSES  $37,000.00 
            Total 3105 TREEHOUSE CIRCLE  $107,000.00 
            9107 HUCKINSTON  $254,250.00 
               9107 HUCKINSTON UNREALIZED GAINS/LOSSES  $19,750.00 
            Total 9107 HUCKINSTON  $274,000.00 
            917 ALMOND  $180,000.00 
               UNREALIZED GAINS/LOSSES 917 ALMOND  $45,000.00 
            Total 917 ALMOND  $225,000.00 
            9842 RIBBONWOOD  $83,750.00 
               9842 RIBBONWOOD UNREALIZED GAINS/LOSSES  $23,250.00 
            Total 9842 RIBBONWOOD  $107,000.00 
      
      Total Investment Properties  $4,060,500.00 
   Total Fixed Assets  $4,056,728.40 
   Other Assets     
      LEGAL FEES ADVANCED / RETAINERS  $9,812.50 
   Total Other Assets  $9,812.50 
TOTAL ASSETS  $9,274,215.87 
      
LIABILITIES AND EQUITY     
   Liabilities     
         Accounts Payable  $1,328,973.82 
         Credit Cards  $31.72 
         ALLOWANCES FOR LIABILITIES UNDER DISPUTE  $194,250.00 
         JV FUNDS HELD FOR REHAB EXPENSES  $97,500.00 
         PREPAID RENTS  $850.00 
         SECURITY DEPOSITS  $3,050.00 
TOTAL LIABILITIES  $1,624,655.54 
      
   Equity     
      Opening Balance Equity  $(2,149.20)
      RAD Management Equity  $1,000.00 
      Retained Earnings  $71,796.52 
      SHAREHOLDERS’ EQUITY  $6,166,355.85 
      Net Income  $1,412,557.16 
   Total Equity  $7,649,560.33 
TOTAL LIABILITIES AND EQUITY  $9,274,215.87 
      
      
TOTAL ASSETS  $9,274,215.87 
(LESS) TOTAL LIABILITIES  $1,624,655.54 
(EQUALS) TOTAL EQUITY, AKA NET ASSET VALUE  $7,649,560.33 
      
      
NET ASSET VALUE  $7,649,560.33 
(DIVIDED BY) NUMBER OF SHARES OUTSTANDING   559,775 
(EQUALS) NET ASSET VALUE PER SHARE, AKA DERIVED SHARE VALUE  $13.67 
      
PRICE PER SHARE (EQUALS DERIVED SHARE VALUE)  $13.67 

 

Determined Share Value is hereinafter referred to as our “DSV”.

 

Valuation of Our Real Properties

 

It is our intent to use independent valuation experts with experience conducting appraisals in each of our target markets. Given that our selected appraisers will be engaged to perform value appraisals on a quarterly basis, it may be necessary to engage other independent appraisals to confirm the worthiness of appraisals conducted by the normal team of appraisers. We will select our appraisers based on their familiarity with residential real estate and their ability to track and adjust valuations based on real-world events that may materially impact the value of our assets. Our Manager will be responsible for ensuring that the independent valuation expert discharges its responsibilities in accordance with our valuation guidelines as herein described, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility. All such independent 3rd party appraisals shall be conducted in conformance with the Uniform Standards of Professional Practice.

 

According to our guidelines, we will ask our real estate appraisers to develop “open market value” for our properties. Open market value is also known as “fair value”. In order to establish a fair value, we will ask our appraisers to consider three factors:

 

oSales Comparison

 

oIncome Production

 

oCost to Rebuild

 

Sales Comparison

 

This analysis method relies on the sales of at least two similar properties within the last 6 months and within a ten-block radius of the property subject to appraisal. This method will be used each quarter.  

 

Income Production

 

This analysis method is based on a net present value of future income streams for each investment property we hold. This projection is based on a 6% discount rate with a projection span of 10 years. This method will be used each quarter.  

 

Cost to Rebuild

 

This analysis method relies upon data obtained from local contractors in the form of a cost to rebuild per square foot. This method will be used once per year by a second independent appraiser. Of course, the second independent appraiser will also perform a Sales Comparison valuation and Income Production valuation during this annual independent review.

 

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Calculation of Net Asset Value

 

For the purposes of determining fair value for our investments, we shall rely upon objective third party appraisers familiar with the market place in which an investment is situated. Third party appraisers shall determine fair value for each investment on a quarterly basis. To reduce the potential for mis-statement of fair value, we also intend to use a second set of third party appraisers to provide a secondary fair value assessment for each investment on an annual basis.

 

Every quarter, each property we own will be subjected to an independent 3rd party appraisal. The third party appraiser will perform a 2-6-10 Sales Comparison valuation and an Income Production valuation every quarter. Yearly, a second independent appraiser will perform a Cost To Rebuild valuation. (See Page 58 for an explanation of these methods).

 

Each independent third party appraiser will temper their fair value appraisal based upon their knowledge of the local real estate market where each property is located. The independent third party appraisers will filter out comparative sales that lay outside a 95% window. All such independent third party appraisals will be conducted in conformance with the Uniform Standards of Professional Practice.

 

Our Manager, working with external accountants, will prepare a quarterly internal fair value assessment report based on the reports submitted by the third party appraisers. The quarterly internal fair value assessment report will list the fair value of each property we own and the leverage attached to that property.

 

Our Manager, working with external accountants, will then calculate Net Asset Value. The Net Asset Value will be the sum of the total fair value of each of the properties listed in the quarterly internal fair value assessment report minus the leverage attached to each of those properties, plus the addition of any other assets, plus all liabilities we hold. The Net Asset Value will then be divided by the number of our common shares outstanding as of the end of the prior fiscal quarter to arrive at the Determined Share Value.

 

Our Manager anticipates informing the independent valuation expert if a material event occurs between scheduled valuations that our Manager believes may materially affect the value of our assets.

 

Our goal is to provide our stockholders with a reasonable estimate of the market value of our shares on a quarterly basis. However, our assets will consist of real estate investments and, as with any real estate valuation method, the conclusions reached by our independent appraisers will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different assumptions, judgments, or opinions would likely result in different valuation estimates of our real estate assets and investments.

 

In addition, for any given quarter, our published NAV per share may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable. As a result, the quarterly calculation of our NAV per share may not reflect the precise amount that might be paid for your shares in a market transaction, and any potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.

 

However, to the extent quantifiable, if a material event occurs in between quarterly updates of NAV that would cause our NAV per share to change by 5% or more from the last disclosed NAV, we will disclose the updated price and the reason for the change in an offering circular supplement as promptly as reasonably practicable, and will update the NAV information provided on our website.

 

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Our Manager will be responsible for making the final determination of our NAV based on the reports of the above 3rd party appraisers and our external accounting team.

 

We have commenced calculating NAV beginning 1Q 2020.

 

We will inform potential and current investors about changes in our offering price through our regular reports to the SEC and through our website on a quarterly basis.

 

No Warrants Offered

 

The Company is not offering any warrants to any investor as an inducement to invest in the Company.

 

The Company is not offering any warrants, nor are there any warrants held by any officer, director, promotor or other affiliated person or entity.

 

For the purpose of this Offering Circular, a warrant is defined as an obligation by the Company to accept money for purchase of Common Stock at a predetermined price.

 

DILUTION

 

No Disparate Pricing

 

The price of Common Stock offered under this Offering to the public is the same as the effective cash cost to officers, directors, promoters and affiliated persons for common equity acquired by them in transactions during the past five years.

 

No Change in Tangible Net  Asset Value Results from this Offering

 

As securities are sold as a result of this Offering, the Net Asset Value (NAV) will increase proportionally. For example, once we sell $100,000 worth of Common Stock, at $10.00 per share (i.e. 10,000 shares), the Net Asset Value will remain unchanged. Before this offering was qualified, our Manager and Sponsor invested $1,000 (at $10 per share) in our Company.  As such, the NAV prior to the offering is:

 

$1,000

------------------

100 Shares

or, $10.00 per share.

 

After  proceeds are received, our NAV will remain the same. For example, once we sell an additional $100,000 worth of our Common Stock, at $10,00 per share, our NAV, as calculated, shall again be:

 

$101,000

------------------

10,100 Shares

or, $10.00 per share.

 

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SELLING SECURITY HOLDERS

 

No Third Party Sellers

 

The Common Stock qualified through this Offering Circular is available only as Common Stock newly issued by the Company in the name of each new investor. Common Stock will not be sold by any third party, including directors, officers, promoters, underwriters or any other affiliated person or entity.

 

PLAN OF DISTRIBUTION

 

We are offering up to $50,000,000 in our common shares pursuant to this Offering Circular adjusted for $6,184,715 worth of shares of Common Stock already sold in his offering.  Our shares of Common Stocks being offered hereby will be offered by: (1) persons associated with us through the RAD Platform at RADdiversified.com; and (2) our Broker-Dealer’s online offer board at entoro.com.  In conducting this offering, such persons of RAD Diversified REIT, Inc. intend to rely on the exemption from registration contained in Exchange Act Rule 3a4-1.  For additional information about the RAD Platform, please see “Offering Summary-About the RAD Platform.”

 

Our RAD Platform website is implemented, but will only start offering the securities hereunder once this offering has been re-qualified by the Securities and Exchange Commission.

  

The RAD Platform is not subject to the registration requirements of Section 304 of the JOBS Act because it does not offer and sell securities pursuant to Section 4(a)(6) of the Securities Act, and, therefore, does not meet the definition of a “funding portal.”

 

This Offering Circular will be furnished to prospective investors upon their request via electronic PDF format and will be available for viewing and download 24 hours per day, 7 days per week on the RAD Diversified REIT Platform website, as well as on the SEC’s website sec.gov.

 

Broker-Dealer

 

We have engaged a Broker-Dealer to promote the sales of our shares. Our Broker-Dealer is:

 

Entoro Securities, LLC

333 W. Loop N Freeway, STE 333

Houston, TX 77204

 

Our Broker-Dealer is a member of the Financial Industry Regulatory Authority (FINRA). FINRA is not a government agency. Rather, it is an independent regulatory body. FINRA has established rules that govern their member brokers and dealers engaged in the sales and promotion of securities.  For more information, please see FINRA’s website at finra.org.

 

Our Broker-Dealer is also a member of Securities Investor Protection Corporation (SIPC). SIPC is an insurance mechanism that protects investors in the event that a broker-dealer, such as Entoro Securities, fails. In such event, investors may regain control over cash and securities that were being held by the broker-dealer at the time of failure. This will likely not provide you any protection because Entoro is not authorized to receive cash from investors and has not been authorized to hold our securities. For detailed information on the scope of Entoro Securities, LLC’s role in the sale and promotion of our shares, please see the engagement contract presented in Exhibit 1.

 

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Our Broker-Dealer has been authorized to promote the sales of our Company Stock through direct solicitation and marketing campaigns and subsequently directing prospective investors to our Technology Platform, which is operated by FundAmerica; see below.

 

The total maximum compensation the Company’s broker-dealer, Entoro Securities LLC, would be entitled to if the Company issued the maximum number of securities under a $50,000,000 raise would be $1,540,000, made up of $1,500,000 in 3% commission and $40,000 in maximum advisory fees and expenses.

 

The broker-dealer is not entitled to fees based on a right of refusal. The agreement with Entoro filed as Exhibit 1 to this Offering Statement specifies that the Company agrees that if the current offering is successfully consummated, it will provide a right of first refusal for six (6) months to act as placement agent or joint placement agent on at least equal economic terms on any future public or private equity financing. Entoro Securities, LLC will be compensated on a basis to be mutually agreed upon with the Company on any future transaction and no additional fees are owed to the broker-dealer in the current offering.

 

Of these expenses, the total maximum amount allowed to be spent on background checks is $300, which the Company has already spent.

 

Technology Platform

 

Our website will also use an “Invest Now” button to direct potential Investor’s to FundAmerica’s SSL encrypted online form. This form will help guide the potential investor through the process of submitting an investment commitment.

 

The FundAmerica online form runs background checks and provides many advantages including:

 

oAnti-Money Laundering and PATRIOT Act Checks;

 

oBad Actor Checks of Company;

 

oPayment Solution and Escrow Account;

 

oStock Subscription Agreement Signing and Distribution;

 

oOnline Investing Technology; and

 

oTransfer to be affected by KoreTransfer.

 

Please See Exhibit 15(b)5 “FundAmerica Online Transactions” for more information. Exhibit 15(b)8 presents the Company’s agreement with FundAmerica.  Exhibit 15(b)9 presents Company’s agreement with KoreTransfer.

 

Offering Amount and Distribution

 

We are offering a minimum of $1,000,000 and a maximum of $50,000,000 adjusted for shares already sold at an anticipated offering price of $13.67 per share. The company has sold 561,222 shares of Common Stock since its first qualification date for a total amount of $6,184,715, which exceeds the Minimum Offering Amount of $1,000,000  (excluding any shares purchased by affiliates of the Manager pursuant to a private placement), and the offering will be conducted through subsequent escrow transfers until the maximum offering amount is sold.

 

The minimum purchase requirement is $1,000 in shares; however, we can waive the minimum purchase requirement in our sole discretion. 

 

We will hold regular internal escrow transfers on the 17th of each month.

 

How to Subscribe

 

In order to subscribe to purchase our common shares, a prospective investor must electronically complete, sign and deliver to us an investment Commitment that includes an executed subscription agreement in the form appearing as an exhibit to the Offering Statement of which this Offering Circular forms a part, and wire funds for its subscription amount in accordance with the instructions provided therein.

 

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Settlement may occur up to 15 days after a prospective investor submits a subscription agreement, depending on the volume of subscriptions received. An investor will become a stockholder of the Company, including for tax purposes, and the shares will be issued, as of the date of settlement. Settlement will not occur until an investor’s funds have cleared and the Manager accepts the investor as a stockholder. The number of shares issued to an investor will be calculated based on the price per share in effect on the date we receive the subscription.

 

Orders will be effective only upon our acceptance, and we reserve the right to reject any order, in whole or in part. An approved custodian or trustee must process and forward to us orders made through IRAs, Keogh plans, 401(k) plans and other tax-deferred plans. If we do not accept your order, the escrow agent will promptly refund any purchase price transferred submitted. Any investment commitment not accepted within thirty (30) days after receipt shall be deemed rejected.

 

Investment Limitations

 

Generally, if you are not an “accredited investor” as defined in Rule 501 (a) of Regulation D (17 CFR Sec. 230.501 (a)) no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to sec.gov. See “Plan of Distribution - Investment Limitations.”

 

As a Tier 2 Regulation A offering, investors must comply with the 10% limitation to investment in the offering. The only investor in this offering exempt from this limitation is an Accredited Investor, as defined under Rule 501 of Regulation D. If you meet one of the following tests you should qualify as an Accredited Investor:

 

(i)    You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint income with your spouse or spousal equivalent in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same income level in the current year;

 

(ii)   You are a natural person and your individual net worth, or joint net worth with your spouse or spousal equivalent, exceeds $1,000,000 at the time you purchase shares (please see below on how to calculate your net worth);

 

(iii)  You are an executive officer or general partner of the issuer or a manager or executive officer of the general partner of the issuer;

 

(iv)  You are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the Code, a corporation, a Massachusetts or similar business trust or a partnership, not formed for the specific purpose of acquiring the shares, with total assets in excess of $5,000,000;

 

(v)   You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, an insurance company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940, as amended, or the Investment Company Act, or a business development company as defined in that act, any Small Business Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined in the Investment Advisers Act of 1940;

 

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(vi)  You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited investor;

  

(vii) You are a trust with total assets in excess of $5,000,000, your purchase of shares is directed by a person who either alone or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, and you were not formed for the specific purpose of investing in the shares;

 

(viii) You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000;

 

(ix) You are a natural person holding in good standing one or more professional certifications or designations or other credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status under 501(a)(10);

 

(x) You are a natural person who is “knowledgeable employee,” as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940 (the “Investment Company Act”), of the private-fund issuer of the securities being offered or sold;

 

(xi) You are a SEC- or state-registered investment advisers or a rural business investment companies to the list of entities as specified in Rule 501(a)(1);

 

(xii) You are a limited liability company as specified in Rule 501(a)(3);

 

(xiii) You are an entity, of a type not listed in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8), not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000;

 

(xiv) You are a “family office,” as defined in Rule 202(a)(11)(G)-1 under the Advisers Act: (i) With assets under management in excess of $5,000,000, (ii) that was not formed for the specific purpose of acquiring the securities offered, and (iii) whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment; or

 

(xv) You are a “family client,” as defined in Rule 202(a)(11)(G)-1 under the Advisers Act, of a family office meeting the requirements in Rule 501(a)(12).

 

Under Rule 251 of Regulation A, non-accredited, non-natural investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). A non-accredited, natural person may only invest funds which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

NOTE : For the purposes of calculating your net worth, or Net Worth, it is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the shares.

 

Reports

 

Tier 2 Reporting Requirement.

 

Following this Tier 2 Regulation A offering, we will be required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A.

 

We will be required to file:

 

·an annual report with the SEC on Form 1-K;
·a semi-annual report with the SEC on Form 1-SA; and
·current reports with the SEC on Form 1-U.

 

The necessity to file current reports will be triggered by certain corporate event. Form 1-Z will be filed by us if and when we decide to and if we are no longer obligated to file and provide reports pursuant to the requirements of Regulation A.

 

Delivery of Reports

 

The Company shall be deemed to have made a report available to each stockholder as required if it has either (i) filed such report with the SEC via its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system and such report is publicly available on such system, or (ii) made such report available on any website maintained by the company and available for viewing by the stockholders.

 

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Annual Reports

 

As soon as practicable, but in no event later than 120 days after the close of our fiscal year, ending December 31, we will make an annual report available, by any reasonable means, to each stockholder as of a date selected by the board of directors.

 

This annual report will be substantially in the form of the SEC’s Form 1-K and will contain audited financial statements of the company for such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, company equity and cash flows. This annual report will also contain management’s discussion and analysis (MD&A) of our liquidity, capital resources, and results of operations.

 

Semi-Annual Reports

 

As soon as practicable, but in no event later than 90 days after the end of the first six months of each financial year, we will make a semi-annual report available, by any reasonable means, to each stockholder as of a date selected by the board of directors.

 

This semi-annual report will be substantially in the form of the SEC’s Form 1-SA and will contain un-audited financial statements of the company for the first 6 months of such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, company equity and cash flows. This semi-annual report will also contain management’s discussion and analysis (MD&A) of the first 6 months of such fiscal year.

 

Tax Information

 

On or before March 31st of the year immediately following our fiscal year, which is currently January 1 through December 31, we will send to each stockholder such tax information as shall be reasonably required for federal and state income tax reporting purposes.

 

Stock Certificates

 

We do not anticipate issuing stock certificates representing shares purchased in this offering to the stockholders. However, we are permitted to issue stock certificates and may do so at the request of our transfer agent. The number of shares held by each stockholder, and each stockholder’s percentage of the aggregate outstanding shares, will be maintained by our transfer agent.

 

Our transfer agent, KoreConX will maintain our roster of stockholders.

 

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USE OF PROCEEDS

 

Our shares of Common Stock will be offered at $13.67 per share.  Our price per share will be adjusted every fiscal quarter and will be based on our NAV as of the end of the prior fiscal quarter. The new share price is effective the beginning of the second month in the following quarter.

 

We expect to use substantially all of the net proceeds from this offering (after paying or reimbursing organization and offering expenses) to invest in and manage a diverse portfolio of Investments.

 

We expect that any expenses or fees payable to our Manager for its services in connection with managing our daily affairs, including but not limited to, the selection and acquisition or origination of our investments, will be paid from cash flow from operations.  

 

If such fees and expenses are not paid from cash flow (or waived) they will reduce the cash available for investment and distribution and will directly impact our quarterly NAV.  See “Management Compensation” for more details regarding the fees that will be paid to our Manager and its affiliates.  

 

Many of the amounts set forth in the table below represent our Manager’s best estimate since they cannot be precisely calculated at this time.

 

We may not be able to promptly invest the net proceeds of this offering in Investments.  In the interim, we may invest in short-term, highly liquid or other authorized investments, subject to the requirements for qualification as a REIT. Such short-term investments will not earn as high of a return as we expect to earn on our real estate related investments.

 

    Minimum Offering
Amount
    Maximum Offering
Amount
 
Gross Proceeds*   $ 1,000,000     $ 50,000,000  
Organizational and Offering Expenses (1)(2)   $ 600,000     $ 600,000  
Working Capital (3)   $ 40,000     $ 1,000,000  
Broker-Dealer Expenses   $ 70,000     $ 1,540,000  
Net Proceeds from this Offering   $ 265,000     $ 46,860,000  
Estimated Amount Available for Investments     265,000     $ 46,860,000  

 

1.Investors will not pay upfront selling fees or commissions in connection with their purchase of shares.
2.At the end of the 2nd year, we will start to reimburse our Manager, without interest, for organization and offering costs incurred both before and after such date, which we estimate to be $600,000.00.  Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed can never exceed 0.50% of the aggregate gross offering proceeds from this offering.  If the sum of the total unreimbursed amount of such organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.50% limit), calculated on an accumulated basis, until our Manager has been reimbursed in full.
3.We intend to maintain a working capital buffer to protect against unexpected expenses due to purchase, renovation, and leasing of our property portfolio, and our business practices.
*

To date, we have sold 561,222 shares of Common Stock at for a total of $6,184,715.

 

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PAST PERFORMANCE OF MANAGEMENT TEAM

 

(BASED ON UNAUDITED FINANCIAL STATEMENTS)

 

As described elsewhere in this Offering Circular, our Directors formed and operate three real-estate investment fund. These three funds include:

•      DDH Fund, LP;

•      DHI Holdings, LP; and

•      DHI Fund, LP.

 

Of these three funds, DDH Fund holds the majority of investments. Most importantly, all three funds have paid out returns.  These funds are not “real-estate investment trusts”, as defined under the IRS Code. Hence, these funds are much more agile when it comes to disposing of assets in order to achieve short-term capital gains.

 

Regarding liquidity and payments, the funds disclosed to their limited partner investors a policy which provided two payment periods each year for reimbursement of a limited partner’s equity: January 1-31 and July 1-30.  In order to receive payment in the January payment period, the limited partner must have requested the withdrawal no later than the by June 30 of the previous year.   In order to receive payment during the July payment period, the limited partner must have requested the withdrawal no later than by December 31 in the prior year. This liquidity and payment schedule policy has been adhered to with no exceptions.

 

Since the beginning of these 3 funds, the principals of our Manager, working with external accountants, prepared quarterly fair value assessments for each property. These internally prepared fair value assessments were based on what is known as the 2-6-10 Sales Comparison Method. This means the property would be compared with 2 other properties that had been sold within the last 6 months within 10 blocks of the property being evaluated. This is one of the methods our independent appraisers will use for properties we acquire for our REIT.

 

The internally prepared fair value assessments were then used to calculate Net Asset Values by taking into account leverage supported by the various properties in each fund. The Net Asset Value was then used as a basis for a Determined Share Value, much as we intend to do for our REIT.

 

Once a year, each property in each fund was subject to an independent 3rd party appraisal that also used the 2-6-10 Sales Comparison Method. Each independent 3rd party appraiser tempered their annual fair value appraisal based upon their knowledge of the local real estate market where each property is located. The independent 3rd party appraisers filtered out comparative sales that lay outside a 95% window. All such independent 3rd party appraisals were conducted in conformance with the Uniform Standards of Professional Practice.

 

 

PRESENTATION FORMAT FOR PAST PERFORMANCE

GAAP Tables

 

The tables below present the prior funds using GAAP compliant accounting. However, the financial statements these tables are based on have not been audited. Because these tables are GAAP compliant, the value of assets and liabilities is stated in “book value”. This means that the value of real estate assets is presented based on the purchase prices, along with refurbishment/rehabilitation costs which have been capitalized.

 

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In many cases, the amount of leverage carried by a particular real estate asset is greater that the stated book value. This is because the book value does not represent what the property is worth on the open market.  It is the “fair value” that is the basis of leverage.

 

This is especially important to note for these prior funds, given their operating strategy. Commensurate with our intended Operating Plan, as presented in Exhibit 15(b)2, these prior funds acquired most of their properties at a lower-than-fair-market-value. Usually, through tax-deed sales and short-sales auctions.

 

As an example, if a particular real estate asset was purchased for $10,000 at a tax auction, but has a fair value of $100,000, then the property will be leveraged based on the fair value of $100,000 and not based on the book value of $10,000. This causes the GAAP tables to show greater amounts of liabilities relative to the stated book value of its assets.

 

PRIOR PERFORMANCE OF DDH FUND, LP

 

Beginning approximately the 2Q2016, DDH Fund, LP began purchasing single-family residences, restoring them as needed and leveraging as appropriate in order to finance additional investments and restorations. Commensurate with our intended Operating Plan, as presented in Exhibit 15(b)2, DDH Fund, LP has acquired most of these properties at a lower-than-fair-market-value. Usually, these acquisitions were accomplished through tax-deed and short-sales auctions.

 

The table below documents DDH Fund, LP’s 50 acquisitions through 4Q2019.

 

The best possible acquisitions are those that require very little to no rehabilitation and still yield income through rents or short term sale. In most cases, DDH Fund, LP typically leverages these properties to purchase additional properties.

 

The total book value for these assets is $2,229,127. The total leverage drawn against these properties is approximately $2,025,984.

 

A real-estate fund that is not operated in accordance with requirements for a REIT has a different operating paradigm. These prior funds incur operating costs in order to increase equity in their real estate holdings. DDH Fund, LP, for example, incurred $2,605,291 in operating costs from inception through the end of 2019, which includes fees paid to the Management Team for managing the fund, and $956,143 in rehabilitation costs in order to increase the value of its real estate holdings.

 

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DDH FUND, LP ACQUISITION PERFORMANCE

Table 6 - Acquisitions of Properties by Program

 

 

DDH Fund, LP

    Location  Purchase Date  Leaseable Space (SqFt)   Units / Other 
 1    Hesperia, CA  May 19, 2016   1,810    1 
 2    Big Bear City, CA  May 18, 2017   760    1 
 3    Philadelphia, PA  August 18, 2016   1,152    1 
 4    Philadelphia, PA  August 19, 2016   1,050    1 
 5    Philadelphia, PA  September 15, 2016   1,104    1 
 6    Philadelphia, PA  December 23, 2016   1,440    1 
 7    Philadelphia, PA  August 18, 2016   2,244    1 
 8    Philadelphia, PA  September 15, 2016   990    1 
 9    Philadelphia, PA  July 20, 2016   1,270    1 
 10    Philadelphia, PA  July 20, 2016   1,276    1 
 11    Philadelphia, PA  March 16, 2018   1,460    3 
 12    Philadelphia, PA  May 26, 2017   1,230    1 
 13    Philadelphia, PA  June 24, 2016   1,600    2 
 14    Philadelphia, PA  July 20, 2016   1,018    1 
 15    Philadelphia, PA  June 24, 2016   1,172    2 
 16    Philadelphia, PA  March 2, 2018   1,550    2 
 17    Philadelphia, PA  February 7, 2017   970    1 
 18    Philadelphia, PA  July 20, 2016   1,288    2 
 19    Philadelphia, PA  June 24, 2016   1,064    1 
 20    Philadelphia, PA  September 20, 2017   1,168    1 
 21    Philadelphia, PA  August 18, 2016   1,036    1 
 22    Philadelphia, PA  February 7, 2017   1,380    1 
 23    Philadelphia, PA  September 15, 2016   960    1 
 24    Philadelphia, PA  February 27, 2017        1 
 25    Philadelphia, PA  September 15, 2016   1,965    3 
 26    Philadelphia, PA  July 20, 2016   1,050    1 
 27    Philadelphia, PA  July 17, 2017   840    1 
 28    Philadelphia, PA  September 15, 2016   1,524    1 
 29    Philadelphia, PA  June 24, 2016   1,179    1 
 30    Philadelphia, PA  July 13, 2017   1,800    1 
 31    Philadelphia, PA  June 24, 2016   1,230    1 
 32    Philadelphia, PA  July 20, 2016   1,500    1 
 33    Philadelphia, PA  June 30, 2017   2,169    3 
 34    Philadelphia, PA  March 13, 2017   1,444    1 
 35    Philadelphia, PA  September 15, 2016   1,444    1 
 36    Philadelphia, PA  July 20, 2016   1,763    2 
 37    Philadelphia, PA  June 19, 2017   1,080    1 
 38    Philadelphia, PA  August 8, 2017   926    1 
 39    Philadelphia, PA  February 7, 2017   1,124    1 
 40    Philadelphia, PA  February 25, 2018   1,344    1 
 41    Philadelphia, PA  November 18, 2016   1,090    1 
 42    Philadelphia, PA  June 24, 2016   1,512    1 
 43    Philadelphia, PA  June 19, 2017   1,056    1 
 44    Philadelphia, PA  August 31, 2017   1,296    1 
 45    Philadelphia, PA  November 18, 2016   2,223    1 
 46    Philadelphia, PA  January 24, 2019   -     Empty Land 
 47    Philadelphia, PA  January 24, 2019   -     Empty Land 
 48    Philadelphia, PA  February 19, 2019   1,776    1 
 49    Philadelphia, PA  February 25, 2019   1,185    1 
 50    Philadelphia, PA  September 9, 2019   1,200    1 

 

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DDH Fund, LP

    Location  Acquisition
Price
   Purchase
Price
   Rehab
(Capitalized)
 
 1    Hesperia, CA   64,380    60,650    3,730 
 2    Big Bear City, CA   86,059    78,709    7,350 
 3    Philadelphia, PA   42,123    32,500    9,623 
 4    Philadelphia, PA   54,000    24,000    30,000 
 5    Philadelphia, PA   10,000    10,000    - 
 6    Philadelphia, PA   -    -    - 
 7    Philadelphia, PA   131,300    125,000    6,300 
 8    Philadelphia, PA   11,000    11,000    - 
 9    Philadelphia, PA   27,000    27,000    - 
 10    Philadelphia, PA   89,256    57,000    32,256 
 11    Philadelphia, PA   23,300    18,500    4,800 
 12    Philadelphia, PA   95,500    63,000    32,500 
 13    Philadelphia, PA   113,678    21,000    92,678 
 14    Philadelphia, PA   17,000    17,000    - 
 15    Philadelphia, PA   80,000    80,000    - 
 16    Philadelphia, PA   35,500    25,500    10,000 
 17    Philadelphia, PA   40,700    29,000    11,700 
 18    Philadelphia, PA   15,000    15,000    - 
 19    Philadelphia, PA   16,100    9,000    7,100 
 20    Philadelphia, PA   14,400    14,400    - 
 21    Philadelphia, PA   20,900    18,000    2,900 
 22    Philadelphia, PA   67,852    35,100    32,752 
 23    Philadelphia, PA   9,200    7,550    1,650 
 24    Philadelphia, PA   26,630    18,000    8,630 
 25    Philadelphia, PA   48,038    4,600    43,438 
 26    Philadelphia, PA   30,135    13,000    17,135 
 27    Philadelphia, PA   24,330    10,000    14,330 
 28    Philadelphia, PA   15,000    15,000    - 
 29    Philadelphia, PA   18,000    18,000    - 
 30    Philadelphia, PA   49,234    10,540    38,694 
 31    Philadelphia, PA   15,000    15,000    - 
 32    Philadelphia, PA   68,310    53,000    15,310 
 33    Philadelphia, PA   56,000    13,500    42,500 
 34    Philadelphia, PA   61,722    26,500    35,222 
 35    Philadelphia, PA   15,977    7,000    8,977 
 36    Philadelphia, PA   93,125    31,500    61,625 
 37    Philadelphia, PA   90,785    40,000    50,785 
 38    Philadelphia, PA   37,875    11,500    26,375 
 39    Philadelphia, PA   28,425    24,500    3,925 
 40    Philadelphia, PA   31,000    31,000    - 
 41    Philadelphia, PA   38,375    12,500    25,875 
 42    Philadelphia, PA   95,000    95,000    - 
 43    Philadelphia, PA   25,500    25,500    - 
 44    Philadelphia, PA   86,418    42,000    44,418 
 45    Philadelphia, PA   27,000    27,000    - 
 46    Philadelphia, PA   2,500.00    2,500.00    - 
 47    Philadelphia, PA   2,500.00    2,500.00    - 
 48    Philadelphia, PA   48,000.00    48,000.00    - 
 49    Philadelphia, PA   47,000.00    47,000.00    - 
 50    Philadelphia, PA   83,000.00    83,000.00    - 

 

PRIOR PERFORMANCE OF DHI HOLDINGS, LP

 

Beginning approximately the 4Q2015, DHI Holdings, LP began purchasing single-family residences, restoring them as needed and leveraging as appropriate in order to finance additional investments and restorations. Commensurate with our intended Operating Plan, as presented in Exhibit 15(b)2, DHI Holdings, LP has acquired most of these properties at a lower-than-fair-market-value. Usually, these acquisitions were accomplished through tax-deed and short-sales auctions.

 

The table below documents DHI Holdings, LP’s 35 acquisitions through 4Q2019.

 

The best possible acquisitions are those that require very little to no rehabilitation and still yield income through rents or short term sale. In most cases, DHI Holdings, LP typically leverages these properties to purchase additional properties.

 

The total book value for these assets is $1,836,886. The total leverage drawn against these properties is approximately $316,700.

 

A real-estate fund that is not operated in accordance with requirements for a REIT has a different operating paradigm. These prior funds incur operating costs in order to increase equity in their real estate holdings. DHI Holdings, LP, for example, incurred $2,036,273 in operating costs from inception through the end of 2019, which includes fees paid to the Management Team for managing the fund, and $655,025 in rehabilitation costs in order to increase the value of its real estate holdings.

 

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DHI HOLDINGS, LP ACQUISITION PERFORMANCE

Table 6 - Acquisitions of Properties by Program

 

DHI Holdings, LP  

    Location  Purchase Date  Leaseable Space (SqFt)   Units/Other 
1   Huntington Beach, CA  June 1, 2018   1,251   1 
2   Philadelphia, PA  September 24, 2018   6,366   funeral home 
3   Philadelphia, PA  December 27, 2016   1,463   1 
4   Philadelphia, PA  May 4, 2018   960   1 
5   Philadelphia, PA  May 15, 2018   1,200   1 
6   Philadelphia, PA  April 13, 2017   1,558   2 
7   Philadelphia, PA  July 13, 2018   1,152   1 
8   Philadelphia, PA  September 24, 2018   1,064   1 
9   Spartanburg, SC  January 1, 2016   1,196   1 
10   Humble, TX  October 4, 2016   2,367   1 
11   Houston, TX  December 1, 2015   1,562   1 
12   Houston, TX  March 6, 2017   1,746   1 
13   Houston, TX  February 2, 2016   1,285   1 
14   Houston, TX  May 2, 2018   2,112   1 
15   Houston, TX  May 2, 2018   1,231   1 
16   Houston, TX  June 6, 2017   2,128   1 
17   Houston, TX  April 4, 2016   1,591   1 
18   Houston, TX  August 2, 2016   1,680   1 
19   Houston, TX  October 6, 2015   1,714   1 
20   Humble, TX  August 27, 2018   2,553   1 
21   Humble, TX  August 27, 2018   2,280   1 
22   Katy, TX  February 2, 2016   1,685   1 
23   Houston, TX  January 5, 2016   362   3 
24   Katy, TX  October 6, 2015   2,404   1 
25   Houston, TX  June 6, 2017   2,138   1 
26   Spring, TX  April 5, 2016   1,137   1 
27   Houston, TX  February 2, 2016   3,231   1 
28   Humble, TX  December 1, 2015   2,184   1 
29   Humble, TX  August 27, 2018   2,690   1 
30   Houston, TX  April 5, 2016   754   1 
31   Houston, TX  November 3, 2015   2,740   1 
32   Houston, TX  January 7, 2016   1,906   1 
33   Houston, TX  February 2, 2016   876   1 
34   Spring, TX  August 10, 2018   2,580   1 
35   Houston, TX  April 4, 2016   908   1 

 

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DHI Holdings, LP  

    Location  Total Acquisition Cost   Purchase Price   Rehab (Capitalized) 
1   Huntington Beach, CA  $70,557.93   $70,557.93   $- 
2   Philadelphia, PA  $75,000.00   $75,000.00   $- 
3   Philadelphia, PA  $19,987.50   $16,500.00   $3,487.50 
4   Philadelphia, PA  $28,000.00   $14,000.00   $14,000.00 
5   Philadelphia, PA  $12,000.00   $12,000.00   $- 
6   Philadelphia, PA  $42,809.83   $20,000.00   $22,809.83 
7   Philadelphia, PA  $34,750.00   $31,000.00   $3,750.00 
8   Philadelphia, PA  $59,000.00   $59,000.00   $- 
9   Spartanburg, SC  $24,000.00   $19,000.00   $5,000.00 
10   Humble, TX  $7,779.62   $6,500.00   $1,279.62 
11   Houston, TX  $19,182.63   $10,000.00   $9,182.63 
12   Houston, TX  $40,000.00   $40,000.00   $- 
13   Houston, TX  $76,196.51   $73,500.00   $2,696.51 
14   Houston, TX  $15,000.00   $15,000.00   $- 
15   Houston, TX  $14,000.00   $14,000.00   $- 
16   Houston, TX  $27,323.00   $24,000.00   $3,323.00 
17   Houston, TX  $31,498.47   $21,425.00   $10,073.47 
18   Houston, TX  $65,400.00   $61,000.00   $4,400.00 
19   Houston, TX  $48,208.81   $35,000.00   $13,208.81 
20   Humble, TX  $88,125.00   $88,125.00   $- 
21   Humble, TX  $182,250.00   $168,750.00   $13,500.00 
22   Katy, TX  $38,500.13   $17,000.00   $21,500.13 
23   Houston, TX  $55,000.00   $55,000.00   $- 
24   Katy, TX  $29,700.00   $25,000.00   $4,700.00 
25   Houston, TX  $12,043.62   $5,500.00   $6,543.62 
26   Spring, TX  $9,970.00   $9,000.00   $970.00 
27   Houston, TX  $149,867.57   $100,000.00   $49,867.57 
28   Humble, TX  $4,137.90   $3,000.00   $1,137.90 
29   Humble, TX  $165,000.00   $165,000.00   $- 
30   Houston, TX  $21,500.00   $21,500.00   $- 
31   Houston, TX  $146,239.45   $145,000.00   $1,239.45 
32   Houston, TX  $35,000.00   $35,000.00   $- 
33   Houston, TX  $15,117.00   $15,117.00   $- 
34   Spring, TX  $40,000.00   $25,000.00   $15,000.00 
35   Houston, TX  $9,851.20   $9,851.20   $- 

 

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PRIOR PERFORMANCE OF DHI FUND LP

 

Beginning approximately the 4Q2016, DHI Fund, LP began purchasing single-family residences, restoring them as needed and leveraging as appropriate in order to finance additional investments and restorations. Commensurate with our intended Operating Plan, as presented in Exhibit 15(b)2, DHI Fund, LP has acquired most of these properties at a lower-than-fair-market-value. Usually, these acquisitions were accomplished through tax-deed and short-sales auctions.

 

The table below documents DHI Holdings, LP’s 11 acquisitions through 4Q2019.

 

The best possible acquisitions are those that require very little to no rehabilitation and still yield income through rents or short term sale. In most cases, DHI Fund, LP typically leverages these properties to purchase additional properties.

 

The total book value for these assets is $765,469. The total leverage drawn against these properties is approximately $204,150.

 

A real-estate fund that is not operated in accordance with requirements for a REIT has a different operating paradigm. These prior funds incur operating costs in order to increase equity in their real estate holdings. DHI Fund, LP, for example, incurred $1,104,033 in operating costs from inception through the end of 2019, which includes fees paid to the Management Team for managing the fund, and $49,478 in rehabilitation costs in order to increase the value of its real estate holdings.

 

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DHI FUND, LP ACQUISITION PERFORMANCE

Table 6 - Acquisitions of Properties by Program

 

                DHI Fund, LP 
     Location  Purchase Date  Leaseable Space (SqFt)   Units / Other 
   1  Philadelphia, PA  November 16, 2018   1,919    1 
   2  Philadelphia, PA  November 22, 2017   1,484    1 
   3  Philadelphia, PA  August 21, 2017   1,696    1 
   4  Philadelphia, PA  December 27, 2016   1,520    1 
   5  Houston, TX  November 1, 2016   1,344    1 
   6  Cypress, TX  January 3, 2017   1,751    1 
   7  Humble , TX  November 1, 2016   5,750    Commercial 
   8  Seabrook, TX  November 1, 2016   -    Empty Land 
   9  Philadelphia, PA  May 28, 2019   1,431    1 
   10  Philadelphia, PA  May 28, 2019   1,242    1 
   11  Philadelphia, PA  November 20, 2019   2,838    3 

 

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      DHI FUND, LP 
   Location  Acquisition Price   Purchase Price   Rehab (Capitalized) 
 1  Philadelphia, PA   29,000   $29,000   $- 
 2  Philadelphia, PA   40,000   $40,000   $- 
 3  Philadelphia, PA   28,000   $28,000   $- 
 4  Philadelphia, PA   23,888   $21,000   $2,887 
 5  Houston, TX   19,000   $19,000   $- 
 6  Cypress, TX   130,000   $130,000   $- 
 7  Humble , TX   46,000   $46,000   $- 
 8  Seabrook, TX   18,582   $18,582   $- 
 9  Philadelphia, PA   57,000.00   $57,000.00   $- 
 10  Philadelphia, PA   63,000.00   $63,000.00   $- 
 11  Philadelphia, PA   311,000.00   $311,000.00   $- 

 

75

 

 

Table 1 - Experience in Raising and Investing Funds

 

The tables below show our Management team’s history of raising and using investment funds in the prior 3 programs. These tables show that the fundamental task our Management team has faced with these three programs has been to balance Net Asset Value of the Fund.

 

The Management team’s primary focus is on making each fund’s Net Asset Value (NAV) go up as high as possible, in order to maximize return for investors. The more properties the funds buy, the more the value of the fund’s real estate holdings increases. However, in order to buy properties, money must be raised through investment or through loans. Please see page 59 - 60, for more information on NAV and its calculation.

 

These tables show that each fund would raise money from investors, and then use that money to purchase properties. However, the Percent leverage row shows that sometimes loans were used to purchase more properties, to rehabilitate current properties, or for other expenses in order to balance the NAV.

 

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   DDH FUND, LP 
       Year   Year   Year   Year 
   Overall   1   2   3   4 
Dollar Amount Offered  $1,679,004   $952,855   $491,828   $357,500   $(123,179)
Dollar amount raised (100%)  $1,802,183   $952,855   $491,828   $357,500   $(123,179)
Less offering expenses:                         
Selling commissions and discounts retained by affiliates  $-   $-   $-   $-   $- 
Organizational expenses  $-   $-   $-   $-   $- 
Other (explain)  $-   $-   $-   $-   $- 
Reserves                         
Percent available for investment   100%   100%   100%   100%   100%
Acquisition costs:                         
Prepaid items and fees related to purchase of property  $-   $-   $-   $-   $- 
Cash down payment  $1,881,318   $916,800   $666,518   $115,000   $183,000 
Acquisition fees  $-   $-   $-   $-   $- 
Other (explain) Rehabilitation  $816,674   $1,997   $162,843   $651,834   $- 
Total acquisition cost  $2,697,992   $918,797   $829,361   $766,834   $183,000 
                          
Percent leverage (mortgage financing divided by total acquisition cost)   63%   27%   44%   106%   934%
                          
Date offering began        May-16    Jan-17    Jan-18    Jan-19 
Length of offering (in months)         8 Months     12 Months     12 Months     12 Months 
Months to invest 90% of amount available for investment         5 Months     8 Months     12 Months     12 Months 
(measured from beginning of offering)                         

 

77

 

 

   DHI HOLDINGS, LP 
       Year   Year   Year   Year   Year 
   Overall    1    2    3    4    5 
Dollar Amount Offered  $1,592,212   $488,695   $695,107   $62,309   $100,000   $246,101 
Dollar amount raised (100%)  $1,592,212   $488,695   $695,107   $62,309   $100,000   $246,101 
Less offering expenses:                              
Selling commissions and discounts retained by affiliates  $-   $-   $-   $-   $-   $- 
Organizational expenses  $-   $-   $-   $-   $-   $- 
Other (explain)  $-   $-   $-   $-   $-   $- 
Reserves                              
Percent available for investment   100%   100%   100%   100%   100%   100%
Acquisition costs:                              
Prepaid items and fees related to purchase of property  $-   $-   $-   $-   $-      
Cash down payment  $2,307,697   $218,000   $583,393   $24,500   $1,481,804   $- 
Acquisition fees  $-   $-   $-   $-   $-   $- 
Other (explain) Rehabilitation  $228,545   $-   $-   $42,671   $185,874   $- 
Total acquisition cost  $2,536,242   $218,000   $583,393   $67,171   $1,667,678   $- 
                               
Percent leverage (mortgage financing divided by total acquisition cost)   105%   0%   0%   19%   12%   0%
                               
Date offering began        Oct-15    Jan-16    Jan-17    Jan-18    Jan-19 
Length of offering (in months)         3 Months     12 Months     12 Months     12 Months    12 Months 
Months to invest 90% of amount available for investment         3 Months     12 Months     6 Months     9 Months    12 Months 
(measured from beginning of offering)                              

 

78

 

 

   DHI FUND, LP 
       Year   Year   Year   Year 
   Overall   1   2   3   4 
Dollar Amount Offered  $1,486,809   $470,506   $726,768   $32,972   $256,563 
Dollar amount raised (100%)  $1,486,809   $470,506   $726,768   $32,972   $256,563 
Less offering expenses:                         
Selling commissions and discounts retained by affiliates  $-   $-   $-   $-   $- 
Organizational expenses  $-   $-   $-   $-   $- 
Other (explain)  $-   $-   $-   $-   $- 
Reserves                         
Percent available for investment   100%   100%   100%   100%   100%
Acquisition costs:                         
Prepaid items and fees related to purchase of property  $-   $-   $-   $-      
Cash down payment  $959,582   $104,582   $365,000   $59,000   $431,000 
Acquisition fees  $-   $-   $-   $-   $- 
Other (explain) Rehabilitation  $23,788   $-   $20,900   $2,888   $- 
Total acquisition cost  $983,370   $104,582   $385,900   $61,888   $431,000 
                          
Percent leverage (mortgage financing divided by total acquisition cost)   17%   0%   -19%   38%   40%
                          
Date offering began        Oct-16    Jan-17    Jan-18    Jan-19 
Length of offering (in months)         3 Months     12 Months     12 Months    12 Months 
Months to invest 90% of amount available for investment         3 Months     11 Months     11 Months    12 Months 
(measured from beginning of offering)                         

 

79

 

 

Table 2 - Compensation to Sponsor

 

The tables below show how much our Management team received while working on these 3 funds. The Management team has a valuable skill set they acquired over many years in our industry, the funds would compensate the Management team for effective management of the Fund’s properties and NAV.

 

The Advisory fee compensated the Management team for advising the fund on which properties to purchase, how to effectively manage its NAV, and how to operate in the real estate industry.

 

The Performance fee compensated the Management team for when the fund’s NAV increased. This indicated that the fund was doing well and improving value for stockholders. This fee was to incentivize the Management team and further motivate them to select and rehabilitate properties the best they could.

 

The Management fee was to compensate the Management team for taking care of the day-to-day management and oversight of fund properties. This included dealing with renters, rehabilitation contractors, rent collection, tenant management, and so forth.

 

These tables also show that the Management team was not paid any fees for raising investment funds or for selling properties. These funds were not REITs and had greater flexibility to sell properties. However, the funds didn’t want to incentivize a “hose flipping” mentality. The funds were looking to rehabilitate and hold onto most properties purchased.

 

80

 

 

   DDH FUND, LP 
       Year   Year   Year   Year 
   Overall   1   2   3   4 
Type of Compensation                         
Date offering commenced        May-16    Jan-17    Jan-18    Jan-19 
Dollar amount raised  $2,436,503   $952,855   $491,828   $357,500   $634,320 
                          
Amount paid to sponsor from proceeds of offering:                         
Underwriting fees  $-   $-   $-   $-   $- 
Acquisition fees                         
- real estate commissions  $-   $-   $-   $-   $- 
- advisory fees  $640,954   $143,571   $281,205   $135,129   $81,049 
- other (identify and quantify)  $-   $-   $-   $-   $- 
Other  $-   $-   $-   $-   $- 
                          
Dollar amount of cash generated from operations before  $598,571   $20,788   $140,155   $350,479   $87,149 
deducting payments to sponsor                         
                          
Amount paid to sponsor from operations:                         
Property management fees  $175,905   $-   $104,443   $22,711   $48,751 
Partnership management fees  $-   $-   $-   $-   $- 
Reimbursements  $33,518   $33,518   $-   $-   $- 
Leasing commissions  $-   $-   $-   $-   $- 
Other (Performance Fees)  $105,766   $-   $51,692   $34,093   $19,981 
                          
Dollar amount of property sales and refinancing before                         
deducting payments to sponsor                         
- cash  $27,593   $208,615   $(33,500)  $(56,431)  $(91,211)
- notes                         
                          
Amount paid to sponsor from property sales and refinancing:                         
Real estate commissions  $-   $-   $-   $-   $- 
Incentive fees1  $-   $-   $-   $-   $- 
Other (identify and quantify)  $-   $-   $-   $-   $- 

 

81

 

 

   DHI HOLDINGS, LP 
       Year   Year   Year   Year   Year 
   Overall   1   2   3   4   5 
Type of Compensation                              
Date offering commenced        Oct-15    Jan-16    Jan-17    Jan-18    Jan-19 
Dollar amount raised  $1,584,212   $488,695   $695,107   $62,309   $100,000   $246,101 
                               
Amount paid to sponsor from proceeds of offering: