The Interplay Between DHI to RAD Diversified REIT Inc. Raises Liquidity Concerns

LIT Update

From RAD’s own website:

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 July 12, 2023, our net asset value gave us a Determined Share Value of $25.04, which became the new calculated selling price per share as of July 12, 2023.

SEC Filing

Item 9. Other Events (LIT: Liquidity)

On June 27, 2024, the board of directors (the “Board”) of RAD Diversified REIT, Inc. (the “Company”) met to consider its Share Redemption Program. Although the Board is beginning to see improved liquidity throughout the Company based on actions it has been and will continue taking, the Board perceives that the real estate market remains relatively stagnant. The Board therefore believes it prudent to proceed cautiously at this time. As a result, the Board decided, in accordance with the terms of its Share Redemption Program, to continue the temporary freeze of the Company’s redemption program. The Company will not process any pending requests that have not been redeemed as of February 1, 2024, nor will it accept any new redemption requests. Pending redemption requests will remain in queue until the Company recommences the redemption program.

The Board intends to reassess this decision to determine whether to recommence the redemption program no later than January 1, 2025.

March 6, 2022

When Tylisha Slaughter learned that the West Philadelphia rowhouse she rented was going to be auctioned off in a sheriff’s sale, she sensed opportunity.

Slaughter, now 30, aimed to buy the home near Cobbs Creek Park on the cheap and restore it from the “slumlord”-like conditions she, her boyfriend, and her two young children had been living in.

But on the day of the sale, she said, she found herself up against an out-of-towner with lots of money to spend: Brandon “Dutch” Mendenhall.

“He outbid me,” said Slaughter, whose rent has risen from $700 to $900 since Mendenhall’s RAD Diversified REIT became her new landlord in late 2019, even as she says her complaints to RAD’s property managers about pests and leaky pipes have gone unanswered.

Slaughter’s home is part of a five-state empire of real estate bought through sheriff’s sales and “We Buy Houses” signs that Mendenhall, RAD’s chief executive, has been selling to investors on Facebook, YouTube, and other social media, touting what he portrays as the venture’s market-beating performance.

Mendenhall, who is based in Southern California, has described Philadelphia as the biggest market for RAD, a firm founded in Florida that specializes in buying distressed real estate then renting it out. The company and others that he runs own nearly 100 properties across the city’s low-income neighborhoods, records show. RAD’s real estate holdings nationwide were worth some $24 million as of last fall, the company has reported.

According to one of the 81 ads for RAD running earlier this week on Facebook and its sibling social-media sites, RAD shares surged from $14.23 in January 2021 to $18.52 in January 2022, an increase of 30%.

“Our returns are so good right now, it makes it hard for people to even believe in them,” Mendenhall boasts in another ad. “That’s frustrating.”

But RAD’s official disclosures tell a more doleful story than its online ads.

During the first six months of last year, the most recent period covered in RAD’s latest investors’ circular, filed with the U.S. Securities and Exchange Commission in January, the company’s real estate business lost $1.12 million, although the firm had relatively little debt compared with the stated value of its assets.

The company also disclosed that it may use new investors’ money to pay dividends to existing ones. Experts say it can be risky for an investment fund to operate this way, since it may require ever more participants to be brought on board, rather than making money from its business.

More than 60% of RAD’s operating expenses in 2020, the most recent period for which the company has released audited financial information, consisted of asset-management fees and other payments to a separate company owned by Mendenhall and other RAD executives called RAD Management LLC, according to an analysis of the financial data.Those fees and payments amounted to more than $730,000 that year, RAD said.

“We have limited operating capital, few significant assets and limited revenue from operations,” RAD wrote in the January document, which sought to raise up to about $58 million in new funds, for a total of $75 million of company shares. “If we are unable to continue to raise sufficient capital through this offering, there is a strong likelihood our business will fail and you may lose your entire investment.”

RAD declined to directly answer detailed lists of questions from The Inquirer, saying in a statement that they contain “various inaccuracies.”

The firm did say it works to “comply with all securities, licensing, landlord-tenant, and other applicable laws and regulations.”

Now, the SEC wants to tell federal prosecutors about allegations concerning the divergence between RAD’s online pitches and its more downbeat official self-descriptions.

The allegations are contained in a complaint sent to the SEC by a fraudster-turned-self-styled whistle-blower named Barry Minkow, who said he gathered material from RAD for his report by pretending to be a potential investor in the company.

Late last month, the SEC asked Minkow for his consent to share the document with the Office of the U.S. Attorney for the Central District of California. Minkow gave his approval, according to copies of the correspondence that he provided to The Inquirer.

Since finishing his most recent prison stint for fraud and other offenses in 2018, Minkow has established a side business of researching companies he suspects of malfeasance and reporting them to the SEC as a whistle-blower. Whistle-blowers can sometimes claim a cut of what a company disgorges if they provide information used in a successful SEC investigation.

His report about RAD to the SEC is among 11 complaints he has filed with the agency. Another focused on National Realty Investment Advisors, a New Jersey-based firm with a big Philadelphia property-development footprint that promises large returns to investors on national TV and radio ads. NRIA has denied any wrongdoing and no government action has been taken against it.

“The sad reality is that many investors are relying upon a complete and total misrepresentation of material facts about the profitability and financial stability of the company to make an investment decision,” Minkow wrote of RAD’s advertisements in an October update to his report to the SEC on that company, originally filed in April. He provided the documents to The Inquirer.

RAD said in its statement that it strives to make its regulatory filings and offering materials “accurate and complete.”

RAD “is an incredible company making a positive impact on our investors, team of employees, contractors, neighborhoods, non-profits and more,” Mendenhall said in an email.

A U.S. Attorney spokesperson declined to say whether the office was conducting an investigation into RAD, citing Justice Department policy not to comment on any investigations that the office may, or may not, be pursuing. An SEC spokesperson also declined to comment.

No criminal charges or civil complaints are known to have been made against RAD or any of its employees.

RAD did not directly respond to questions about any potential investigations of the company. “RAD Diversified has and will respond to and cooperate with any requests from pertinent regulatory and law enforcement entities,” it said in its statement. “Terms offered to investors by RAD Diversified are in line with those offered by similar, competitor REITs.”

John Carney, who helps lead the securities, enforcement, and litigation team at BakerHostetler in New York, said any move by the SEC to share an outside report would not have been taken lightly by the agency. “The fact that the SEC is taking the time to share information with the Department of Justice is a serious step,” said Carney, who previously served as an attorney with both agencies.

In the videos he posts to YouTube on a near-weekly basis, Mendenhall, 42, projects a clean-cut if casual figure, appearing in button-down shirts — only seldom wearing a tie — with a neatly trimmed Vandyke beard as he brightly talks up his business.

“I’m literally the nation’s leading expert in tax liens and tax deeds,” he boasts in one installment. “So we invest in that exact modality and make more money at it than anybody else.”

The entrepreneur also appears in many of the ads for RAD across Facebook, Facebook Messenger, Instagram, and other applications.

The pitches appear to be bearing some fruit: RAD had between 1,500 and 2,000 investors, as of late October, and was adding more at a clip of 200 per month, according to an email from a company official to Minkow. The official believed Minkow to be a potential investor at the time.

In other videos for one of RAD’s side businesses, a network of leasable off-the-grid-encampments called the American Survivalist Project — “a plan B for when disaster strikes,” according to the venture’s website — Mendenhall’s banter can take a darker turn.

“One of the scariest things that happen in the worst-case scenarios is people turn on people,” he said in one clip after listing a few such scenarios: a new, more-virulent pandemic; artificial intelligence run amok; nuclear war; or “the real war with China and Russia and cybertechnology and the Cold War.”

RAD’s survivalist-camp business is in the process of gaining control of 20,000 acres of rural property across multiple sites nationwide, Mendenhall said in an interview last month with the financial blogger and stock picker Jim Woods on Woods’ podcast, Way of the Renaissance Man.

But the bulk of the business’ holdings consists of residential real estate, filings show. While RAD also concentrates on areas of Texas, Idaho, California, and Florida for its growing portfolio of rental properties, according to the January offering circular, Philadelphia has been its primary locus of activity.

“Our biggest city is Philadelphia, where we happen to have our longest-running, best team,” Mendenhall said on Woods’ podcast.

Since their first recorded Philadelphia acquisition in July 2016, RAD and three other funds Mendenhall leads — DHI Holdings LP, DHI Fund LP, and DDH Fund LP — paid a total of more than $5.8 million for at least 96 properties in the city, most of them in struggling neighborhoods such as Parkside in West Philadelphia and East Germantown in the city’s northwest.

Before 2020, all but four of the Philadelphia properties were bought at sheriff’s sales, records show. But Mendenhall told Woods that the company has had to retool its approach to acquisitions since then in response to pandemic-era freezes on sheriff’s sales.

“We shifted to a hard-core marketing strategy,” he said. “If you are seeing a billboard of ‘Sell your home’ or ‘We buy houses’ or whatever else, those kinds of things might be us.”

Department of Licenses and Inspections records show about half of the Philadelphia properties owned by RAD or other Mendenhall-led funds were granted rental licenses since those businesses acquired them.

Landlords are required to renew a property’s rental license once a year. The $56-a-unit process requires landlords to be up-to-date on their property taxes and for the properties to be free of any safety or building-code violations.

Since landlords are not legally permitted to collect rent from tenants of a home with an inactive license, the system is designed to serve as a check on property owners, forcing them to address safety violations and pay their taxes.

But Philadelphia’s Department of Licenses and Inspections lacks the resources to hunt down property owners who flout those rules, said Karen Guss, a spokesperson for the agency.

“L&I has to often prioritize, and the things that get prioritized are things like fire safety issues, hazardous buildings,” she said. “License violations, while problematic, isn’t something that automatically jumps to the head of the line.”

The Mendenhall-led funds also own Philadelphia properties with no license at all. City regulations require some kind of license for most property that is uninhabited or otherwise out of active use for three months or longer.

Of the funds’ rental licenses, about 40 have lapsed and have not been renewed, but that doesn’t appear to be stopping Mendenhall from accommodating rent-paying tenants at at least some of those properties.

The Inquirer visited eight properties with lapsed licenses in West and North Philadelphia. One appeared visibly unoccupied, with a mattress and other debris on its porch and its upstairs windows boarded up.

Of the remaining seven homes, The Inquirer was able to question residents of four about whether they continued to be charged rent.

All said they had been.

One tenant, Shanna Anderson, said she stopped being able to afford her $1,750-a-month rent to DHI Fund and RAD at her Parkside rowhouse after losing her job at a real estate brokerage during the pandemic.

In late November, RAD threatened to evict her if she failed to pay $6,530 owed for unpaid rent since August.

Her home’s rental license has been inactive since late July, according to L&I records. L&I’s Guss said the property’s owner had unsuccessfully attempted to renew the license. She did not know why the renewal had not gone through, but noted that the property was delinquent on its property taxes.

In the letter from RAD threatening eviction, which Anderson shared with The Inquirer, the company encouraged her to register for help from the city’s COVID-19 Emergency Rental Assistance Program and provided a link to the program’s website.

Anderson said the house had been newly renovated when she moved in in 2019, but she noticed some signs of shoddy work, like dips in the floorboards and a bathroom faucet affixed to the kitchen sink.

Still, she’d had few serious maintenance complaints about the property and found RAD’s property managers to be sufficiently responsive.

Slaughter, the tenant who was outbid for her West Philadelphia home by Mendenhall, wasn’t as complimentary. She said she has had to pay out-of-pocket for exterminators and plumbers after getting no response to pest and leaky-pipe complaints to RAD’s property managers.

Another tenant of a Mendenhall-led fund, Terry Golden, 41, said he has been dealing for about a year with a flooded basement that his property managers have neglected to repair at his 880-square-foot home in West Philadelphia’s Haddington section.

His living and dining rooms are piled high with belongings he’d previously been storing in the basement: furniture, appliances, trophies from his days coaching little-league football. Other items, such as football equipment from the kids’ league, were destroyed in the flooding, he said.

More leaks have come from the plumbing between his first and second floors, prompting him to leave his light fixtures hanging unmounted from their wires so they don’t fill with water, he said.

Clusters of dead insects cling to one section of his ceiling. Golden said he thinks they were attracted to his home by its dampness.

“They don’t fix things much,” he said of his landlord, whom he pays $1,000 in monthly rent.

No rental license renewals have been sought for Golden’s or Slaughter’s homes, Guss said.

RAD did not respond to requests for comment on these and other properties. The company “cares about its tenants” and believes in providing “above standard living conditions,” it said in its statement.

Other Philadelphia properties owned by RAD or the other businesses have been licensed with L&I as vacant real estate. One of these is at 4243 Leidy Ave., a boarded-up rowhouse across the street from an elementary school in Parkside.

About a year before DDH Fund bought that house in September 2016, street-level images on the city’s Atlas property-data website show that its windows and doors had been intact. Subsequent images on the site show the property’s progressive deterioration over the years.

Another property, a three-story rowhouse at 915 Dauphin St. near the Fairhill neighborhood, underwent a similar decline: Seven months after its November 2016 acquisition by DDH, it too had windows and doors. Today, the door is boarded up and there is no glass in the upper-story windows.

Nicole Lawrence, executive director of the Tenant Union Representative Network, said such deterioration tends to spread blight throughout neighborhoods, diminishing safe, affordable housing opportunities in communities where they’re most needed.

“As a property continues to sit and become dilapidated, it’s like a cancer,” she said. “It’s just an entire ripple effect.”

During the Way of the Renaissance Man podcast interview, Mendenhall told host Woods that he came to real estate after an early career coaching college baseball, a grueling vocation that he said left him feeling burnt out.

Mendenhall did his coaching at the University of San Francisco, according to his biography on RAD’s website. A spokesperson for the school said Mendenhall had not been a paid university employee but had coached as a volunteer in 2001.

In 2008, he started a seminar program for would-be real estate investors called Tax Auction Advisors, according to company filings.

His students there coaxed him into starting his first funds, he said in a video on the website for the seminar company, which remains in operation. “‘Put your money where your mouth is,’” he recalled them saying.

DHI Holdings, DHI Fund, and DDH Fund were formed in the mid-2010s, records show.

RAD, which was established as a real estate investment trust, or REIT, in November 2019, is now in the process of using company stock to buy the real estate accumulated by those funds, according to the circular.

About 20 properties bought by other Mendenhall-led funds in Philadelphia were listed in the document under an inventory of RAD’s real estate holdings as of June 30, 2021. Public records, however, show that the other funds remain the documented owners of those properties. There is no record of them being purchased by RAD among the city’s real estate filings. RAD did not respond to a direct inquiry about this discrepancy.

RAD said in its statement that the founders of the company that handles RAD’s operations, RAD Management, have “significant investing and property management experience.”

RAD Management is led by Mendenhall and other RAD Diversified executives, according to the circular. These executives receive no salary or other employment benefits from RAD Management but “will realize growth as owners/members” of the firm, according to the document.

Under RAD Diversified’s registration with the SEC, any investor — not just “accredited” ones with high net worths — can buy shares, as long as the investment doesn’t exceed 10% of their incomes. RAD allows investors to buy in with as little as $1,000, or even less if it so decides, according to the circular.

In 2020, RAD declared a dividend of 5%, according to its website, despite having no profits that year. No information about dividends in subsequent years could be found in company filings.

Most REITs are publicly traded, which means that their stock is bought and sold on public exchanges, with their share prices fluctuating according to investor demand.

RAD, however, is among the relatively small set of property companies known as non-traded REITs, whose stock is acquired directly through brokers, not on the open market. Consequently, it’s up to these companies themselves, not demand from investors, to set the value of their shares.

Non-traded REITs own about 10% of the $2.5 trillion in real estate assets held by REITs, not counting private ones whose shares are only available to accredited investors, according to the National Association of Real Estate Investment Trusts, a trade group.

The SEC and the Financial Industry Regulatory Authority, a self-regulatory organization for brokerage firms and exchange markets, issued investor notices in the mid-2010s that warned of potential risks from non-traded REITs.

They include a lack of clarity as to how shares are valued, difficulties in selling shares readily, high fees often paid to managers with possible conflicts of interest, and the potential that investor cash and loan proceeds can be used to pay dividends during unprofitable periods.

More recently, high-profile investment firms such as Blackstone Group and Starwood Capital Group have started their own non-traded property trusts with offers to disclose more information, charge fewer fees, and allow shares to be cashed in more frequently. Blackstone’s non-traded REIT now owns about half of all the real estate within that sector, according to NAREIT.

RAD sets its share price by tallying its net asset value — the total appraised value of its real estate and other assets, minus any money it owes or other liabilities — and dividing that figure by the number of shares it has outstanding, according to the circular.

The last time it publicly broke down its share-price calculation was on Sept. 30, when the stock was selling at $18.52: a net asset value of $27.3 million divided by 1.47 million shares.

RAD’s properties are appraised, in part, based on the income they generate as rentals, according to the circular.

But some of the rents in the document’s inventory of RAD’s holdings appear to be overstated, in light of the buildings’ conditions, as characterized by L&I. The boarded-up rowhouse at 4243 Leidy Ave., for example, is said to be earning the company $14,400 a year in rent — even though it has no rental license and its most recent license was as a vacant property.

Two more properties, 10 W. Pomona St. in Germantown and 6400 Glenmore Ave. in Elmwood, are listed as delivering “projected” rents of $14,400 and $12,300 a year. L&I has labeled both of them as “unsafe,” meaning the agency found them to be “dangerous to the life, health, property or safety of the public or the occupants of the structure.” The designation means no one can live in them.

Those safety issues need to be remedied before the properties’ owners can get the go-ahead from L&I for renovations to make them habitable, Guss said. The agency granted a permit for repairs to make the Pomona Street property structurally sound last month, she said.

The vacant, dilapidated house at 915 Dauphin St., meanwhile, was listed as having a market value of $200,000 in a February 2020 RAD document, about three years after DDH Fund paid $27,000 for that property when images on the Atlas property-data website show it was in better condition.

Those asset-value calculations are behind RAD’s big stock-value jumps. Its shares surged from $10 around when the company was formed in 2019 to $11.07 in January 2020, to $14.23 in January 2021, to $18.52 until January 2022, according to Facebook and Instagram ads. Last month, it told the SEC that its shares were now worth $19.26.

But there’s a catch: Investors can’t exchange their shares for cash at will, as they can with shares of an exchange-traded REIT. Instead, as RAD explains in its circular, investors are given two opportunities each year to cash out their shares.

The rules surrounding these cash-out opportunities — RAD’s “share-redemption program” — are stringent.

For one, investors don’t get the full value of their shares if they’ve held them for less than five years. RAD buys them back at a “discount” of up to 4%, according to the circular.

RAD also caps the amount of stock it will buy back from investors at 10% or less of all the shares it has outstanding, and investors can only sell 25% of their stock at a time, although the company said in another filing that it “routinely” allows investors to cash out all their holdings despite that provision.

Or the company could decide not to buy back any stock at all.

“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,” the company said. “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.”