REVEN HOUSING REIT, INC. AND SUBSIDIARY
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2013
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Reven Housing REIT, Inc. and Subsidiary
(the “Company”) (formerly known as Bureau of Fugitive Recovery, Inc.) was incorporated in the State of Colorado on
April 26, 1995. The Company provided bounty hunting services for bail bond businesses through July 2, 2012.
A change of control of the Company
occurred on July 2, 2012 when Chad M. Carpenter purchased an aggregate of 5,999,300 shares of the outstanding common stock of
the Company from certain of the Company’s stockholders in a private transaction. As consideration for the shares, Mr.
Carpenter paid a total purchase price of $128,605 in cash from his personal funds. In connection with the transaction, an
aggregate of 1,650,000 shares of the Company’s outstanding common stock were returned to treasury for cancellation.
Immediately upon the closing of the transaction, Mr. Carpenter became the majority shareholder and Chief Executive Officer of
the Company and beneficially owned stock representing 71.8 percent of the outstanding voting shares of the Company.
The Company is now engaged in a new business
and has formerly changed its name from Bureau of Fugitive Recovery, Inc. to “Reven Housing REIT, Inc.” The Company
intends to acquire portfolios of occupied and rented single-family houses throughout the United States in accordance with its new
business plan. The Company’s business plan involves (i) acquiring portfolios of rented houses from investors; and (ii) receiving
income from rental property activity and future profits from sale of rental property at appreciated values.
Discontinued Operations
On July 2, 2012, the Company
discontinued operations related to the Bureau of Fugitive Recovery, Inc. upon Chad M. Carpenter becoming the majority
shareholder of the Company. Accordingly, the former operations are classified as discontinued operations in the accompanying
condensed consolidated statements of operations.
Going Concern
The Company has suffered losses from operations,
has a working capital deficit, and stockholders' deficit. Further, a company owned by the majority stockholder has provided significant
advances to the Company for operations. The Company in all likelihood will be required to make significant future expenditures
in connection with its new business plan of acquiring portfolios of rental homes along with incurring additional general and administrative
expenses. These conditions raise substantial doubt about the Company’s ability to continue as a going concern should the
Company not be successful in raising new capital.
To carry out
its business plan, the Company will need to seek additional funding and
may raise additional capital through the sale of
its equity securities, through an offering of debt securities, and/or through borrowings from financial institutions. There can
be no assurance that such capital will be available on favorable terms or at all or that any additional capital that the Company
is able to obtain will be sufficient to meet its needs.
The Company is currently in the process of reviewing
potential opportunities to purchase portfolios of rented houses in its target markets across the United States and is seeking additional
investment opportunities.
By doing so, the Company hopes to generate revenues from the rental of its future acquired residential
home portfolios. Management believes that actions presently being taken to obtain additional funding will provide the opportunity
for the Company to continue as a going concern.
Basis of Presentation
The accompanying unaudited
condensed consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of managment, all adjustments (which include only normal recurring
adjustments except as noted in management’s discussion and analysis of financial condition and results of operations)
necessary to present fairly the financial position, results of operations and changes in cash flows have been made.
Certain information and
footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes
thereto included in the 2012 Annual Report on Form 10-K, filed March 29, 2013. The results of operations for the quarter
ended March 31, 2013, are not necessarily indicative of the operating results for the full year.
Principals of Consolidation
The accompanying financial statements consolidate the accounts
of the Company and its wholly-owned subsidiary Reven Housing Georgia, LLC. All significant inter-company transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less as cash equivalents.
Advances to Property Manager
Advances to property manager represent
the amount of security deposits and net rental funds which are held by the property manager on behalf of the Company.
Deferred Stock Issuance Costs
Deferred stock issuance costs represent
amounts paid for consulting services in conjunction with the anticipated raising of additional capital to be performed within one
year.
Warrant Issuance and Note Conversion
Feature
The Company accounts for the proceeds
from the issuance of convertible notes payable with detachable stock purchase warrants and embedded conversion features in
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 470-20,
Debt with Conversion and Other Options.
Under FASB ASC 470-20, the proceeds from the
issuance of a debt instrument with detachable stock purchase warrants shall be allocated to the two elements based on the
relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. The
portion of the proceeds allocated to the warrants is accounted for as additional paid-in capital and the remaining proceeds
are allocated to the debt instrument which resulted in a discount to debt which is amortized and charged as interest expense
over the term of the note agreement. Additionally, pursuant to FASB ASC 470-20, the intrinsic value of the embedded
conversion feature of the convertible notes payable is included in the discount to debt and amortized and charged to interest
expense over the life of the note agreement.
Revenue Recognition
Property is leased under rental agreements of varying terms
(generally one year) and revenue is recognized over the lease term on a straight-line basis.
Income Taxes
The Company accounts for income taxes pursuant
to FASB ASC 740,
Income Taxes
. Under FASB ASC 740, deferred taxes are provided on a liability method, whereby deferred
tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company accounts for uncertain tax
positions in accordance with FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. As of December 31, 2012 and March 31, 2013, the Company does not have a liability for unrecognized tax
uncertainties. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense.
As of December 31, 2012 and March 31, 2013, the Company has no interest or penalties related to uncertain tax positions.
Incentive Compensation Plan
During 2012, the Company established
the 2012 Incentive Compensation Plan (“2012 Plan”). The 2012 Plan allows for the grant of options and other
awards representing up to 5,002,500 shares of the Company’s common stock. Such awards may be granted to officers,
directors, employees, consultants and other persons who provide services to the Company or any related entity. Under the
2012 Plan, options may be granted at an exercise price greater than or equal to the market value at the date of the grant,
for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market value. Awards
are exercisable over a period of time as determined by a committee designated by the Board of Directors, but in no event
longer than ten years. No awards have been granted as of March 31, 2013.
Net Loss Per Share
Net loss per share is computed
by dividing the net loss by the weighted average number of shares of common stock outstanding. Warrants, stock options,
and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation
if the effect would be anti-dilutive and would increase the earnings or decrease loss per share. As of March 31, 2012 and
2013 there were no shares that are potentially dilutive.
Financial Instruments
The carrying value of the Company’s
financial instruments, as reported in the accompanying condensed consolidated balance sheets, approximates fair value.
Security Deposits
Security deposits represent amounts deposited
by tenants at the inception of the lease.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of
expenses for the periods presented. Accordingly, actual results could differ from those estimates. Significant estimates
include assumptions used to value warrants and conversion features associated with convertible notes payable (Note 3).
Further, significant estimates include assumptions used to determine the allocation of purchase prices of property
acquisitions (Note 1).
Property Acquisitions
The Company accounts for its
acquisitions of real estate in accordance with FASB ASC 805,
Accounting for Business Combinations, Goodwill, and Other
Intangible Assets
, which requires the purchase price of acquired properties be allocated to the acquired tangible assets
and liabilities, consisting of land, building, and identified intangible assets, consisting of the value of above-market and
below-market leases, the value of in-place leases, unamortized lease origination costs and security deposits, based in each
case on their fair values.
The Company allocates the purchase price
to tangible assets of an acquired property (which includes land and building) based on the estimated fair values of those tangible
assets, assuming the property was vacant. Fair value for land and building is based on the purchase price for these properties.
The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing
and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.
The total value allocable to
intangible assets acquired, which consists of unamortized lease origination costs and in-place leases (including an
above-market or below-market component of an acquired in-place lease), are allocated based on management’s evaluation
of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that
respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the
existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining
term of the lease and the tenant’s credit quality, among other factors. As of December 31, 2012 and March 31,
2013, management has determined that no value is required to be allocated to intangible assets, as the leases assumed
are short-term with values that are insignificant.
NOTE 2. RESIDENTIAL HOMES, NET
Reven Housing Georgia, LLC (a wholly
owned subsidiary of Reven Housing REIT, Inc.) completed the acquisition of nine residential homes (the
“Homes”). The nine Homes are located in various cities in Georgia, consisting of approximately 12,989 rentable
square feet and are located on approximately 2.35 acres of land. Five of these Homes were purchased in 2012 and the remaining
four Homes were purchased on January 10, 2013. The Homes are 100% leased on short-term leases expiring on various dates
through December 31, 2013.
In accordance with ASC 805, the
Company allocated the purchase price of the properties as follows:
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Total
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Residential
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Purchase
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Land
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Homes
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Price
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5242 Station Circle, Norcross Georgia
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$
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13,631
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$
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55,559
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$
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69,190
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615 Cowan Road Covington, Georgia
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14,010
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56,348
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70,358
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110 Bear Run Ct Palmetto, Georgia
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12,874
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52,530
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65,404
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7220 Little Fawn Parkway Palmetto, Georgia
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12,874
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52,530
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65,404
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4860 Lost Colony Stone Mountain, Georgia
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13,631
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55,559
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69,190
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1740 Camden Forrest Trail Riverdale, Georgia
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13,252
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54,044
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67,296
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11352 Michelle Way Hampton, Georgia
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12,874
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52,530
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65,404
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205 Highgate Trail, Covington, Georgia
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13,252
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54,044
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67,296
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924 Lake Terrace Drive, Stone Mountain, Georgia
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13,252
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54,044
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67,296
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$
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119,650
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$
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487,188
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$
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606,838
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Residential
homes purchased by the Company are recorded at cost. The Homes are depreciated over the estimated useful lives using
the straight-line method for financial reporting purposes. The estimated useful life for the residential homes is estimated
to be 27.5 years.
NOTE 3. CONVERTIBLE NOTES PAYABLE
The Company has issued
convertible promissory notes (the “Notes”) to certain accredited investors, shareholders, and officers in the
aggregate principal amount of $1,054,352. Of this total, $500,000 was issued on January 3, 2013 in order to fund the four
additional residential homes purchased in January and to pay operating expenses. The maturity date for the Notes is the
earlier of December 31, 2013, or upon the Company raising $5 million or more of equity capital. The Notes bear interest at a
rate of 10 percent per annum payable in full on the maturity date and are unsecured. Upon the Company successfully raising
additional capital, the Notes may be exchanged by the holders for such securities of the Company at the same price and on the
same terms and conditions being offered to the other investors in such financing, and the principal and accrued interest
under the Notes will be applied towards the purchase price of such security. The Notes may be prepaid in whole or in part at
the Company’s option without penalty.
Of the total Notes, $652,176 have been issued to an
officer, $350,000 have been issued to accredited investors, and $52,177 to shareholders.
Warrant Issuance and Note Conversion Feature
In connection with the issuance of the
above Notes, the Company also issued to the investors 5-year detachable warrants exercisable for shares of the Company’s
common stock (the “Warrants”). The exercise price of the Warrants will be the same as the price per share of
the equity securities sold to investors in the qualified equity financing and each Warrant provides for 100% warrant coverage on
the principal amount of the related Note.
The fair value of the Warrants
and debt beneficial conversion feature were determined using the Monte-Carlo simulation valuation model that uses
assumptions for expected volatility, expected dividends, and the risk-free interest rate. Expected volatilities are based on
weighted averages of the selected peer group of thirteen companies as the Company has no trading history and are estimated
over the expected term of the warrants. The risk-free rate is based on the U.S. Treasury yield curve at the date of issuance
for the period of the expected term. Accordingly, the fair value of the proceeds attributable to Warrants of $309,892 and
the debt beneficial conversion feature of $309,891 totaling $619,783, have been recorded as an increase in additional paid-in
capital and as a corresponding discount to the convertible notes payable. Upon the issuance of the additional $500,000 of
convertible notes payable on January 3, 2013 mentioned above, $291,920 of this increase in additional paid-in capital and
corresponding debt discount was recorded. The discount is being amortized over the term of the convertible notes payable
using the interest method. Amortization of the discount amounted to $140,814 and is included in interest expense on the
condensed consolidated statements of operations for the three months ended March 31, 2013.
A summary of the assumptions used to
value the warrants and beneficial conversion feature are as follows:
Risk -free interest rate
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0.77
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%
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Expected stock volatility
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47
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%
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Time to expiration (years)
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5
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Fair value of common stock
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$
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1.00
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Expected dividends
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$
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0.00
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NOTE 4. ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
At December 31, 2012 and March 31,
2013 accounts payable and accrued expenses consisted of the following:
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2012
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2013
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Accounts payable
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$
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-
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$
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19,351
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Accrued legal fees
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119,978
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116,329
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$
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119,978
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$
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135,680
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NOTE 5. INCOME TAXES
Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible temporary differences and expected carry-forwards are available
to reduce taxable income. The Company records a valuation allowance when, in the opinion of management, it is more likely than
not, the Company will not realize some or all deferred tax assets. As the achievement of required future taxable income is uncertain,
the Company recorded a valuation allowance equal to the deferred tax asset. At December 31, 2012, the Company had federal net operating
loss carry-forwards of approximately $538,000. The federal tax loss carry-forwards will begin to expire in 2026 and 2019, respectively,
unless previously utilized.
NOTE 6. RELATED PARTY TRANSACTIONS
At December 31, 2012, the Company had convertible notes
payable outstanding to Chad M. Carpenter of $252,176. At March 31, 2013, the Company had convertible notes
payable outstanding to Chad M. Carpenter and Reven Capital, LLC, an entity wholly owned by Mr. Carpenter, in the amount of
$652,176, as described more fully in Note 3.
At December 31, 2012 and March 31, 2013, the Company had
convertible notes payable outstanding to certain other shareholders of the Company in the amount of $52,177.
At December 31, 2012 and March 31, 2013, the Company owed
Reven Capital, LLC $266,877 and $79,204, respectively, for advances made for operating expenses. The advances are due on
demand, unsecured and are non-interest bearing. The Company sub-leases office space on a month-to-month basis from
Reven Capital, LLC. Reven Capital, LLC is wholly-owned by Chad M. Carpenter. Amounts paid to Reven Capital, LLC during the
three months ended March 31, 2013 amounted to $225,169.
For the year ended December 31, 2012, the Company
paid $50,000 for consulting services to a company in which a Board of Director member of the Company is the Senior Managing
Principal which is included in deferred stock issuance costs on the accompanying condensed consolidated balance sheet as of
December 31, 2012 and March 31, 2013. Additionally, in conjunction with the consulting services agreement, the Company is
obligated to pay an amount equal to five percent of any funds raised attributable to the efforts of this company.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Property Management Agreement
The Company has entered into a
property management agreement with HomeSpot Property Management in which the Company will pay six percent of gross rental
receipts.