ITEM 1. BUSINESS.
AEI Income & Growth Fund XXI Limited Partnership (the "Partnership" or the "Registrant") is a limited partnership which was organized pursuant to the laws of the State of Minnesota on August 22, 1994. The registrant is comprised of AEI Fund Management XXI, Inc. (“AFM”) as Managing General Partner, Robert P. Johnson, the President and sole director of AFM, as the Individual General Partner, and purchasers of partnership units as Limited Partners. The Partnership offered for sale up to $24,000,000 of limited partnership interests (the "Units") (24,000 Units at $1,000 per Unit) pursuant to a registration statement effective February 1, 1995. The Partnership commenced operations on April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the Partnership offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units ($24,000,000) was reached.
The Partnership was organized to acquire existing and newly constructed commercial properties located in the United States, to lease such properties to tenants under net leases, to hold such properties and to eventually sell such properties. From subscription proceeds, the Partnership purchased ten properties including partial interests in seven properties, at a total cost of $19,686,525. The balance of the subscription proceeds was applied to organization and syndication costs, working capital reserves and distributions, which represented a return of capital. The properties are commercial, single tenant buildings leased under net leases.
The Partnership's properties were purchased without any indebtedness. The Partnership will not finance properties in the future to obtain proceeds for new property acquisitions. If it is required to do so, the Partnership may incur short-term indebtedness, which may be secured by a portion of the Partnership's properties, to finance day-to-day cash flow requirements (including cash flow necessary to repurchase Units). The amount of borrowings that may be secured by the properties is limited in the aggregate to 10% of the purchase price of all properties. The Partnership will not incur borrowings prior to application of the proceeds from sale of the Units, will not incur borrowings to pay distributions, and will not incur borrowings while there is cash available for distributions.
The Partnership will hold its properties until the General Partners determine that the sale or other disposition of the properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell properties, the General Partners will consider factors such as potential appreciation, net cash flow and income tax considerations. The Partnership expects to sell some or all of its properties prior to its final liquidation and to reinvest the proceeds from such sales in additional properties. The Partnership reserves the right, at the discretion of the General Partners, to either distribute proceeds from the sale of properties to the Partners or to reinvest such proceeds in additional properties, provided that sufficient proceeds are distributed to the Limited Partners to pay federal and state income taxes related to any taxable gain recognized as a result of the sale.
Page 2 of 37
ITEM 1. BUSINESS. (Continued)
The prospectus under which Units were initially sold indicated that the General Partners intended to liquidate the Partnership 12 to 15 years after formation, depending upon the then current real estate and money markets, the economic climate and the income tax consequences to the Limited Partners. Although it has been 17 years since the first admission of Limited Partners to the Partnership, the General Partners do not believe that current market conditions are particularly favorable at this time. As a result, the General Partners do not believe that sale of properties and liquidation of the Partnership is in the best interest of the Limited Partners. Until the economic conditions improve, it is difficult to estimate when the Partnership may be able to commence its liquidation.
Leases
Although there are variations in the specific terms of the leases, the following is a summary of the general terms of the Partnership's leases. The properties are leased to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Partnership is responsible for repairs to the structural components of the building, the roof, and the parking lot. At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term. The leases provide for base annual rental payments, payable in monthly installments, and contain rent clauses which entitle the Partnership to receive additional rent in future years based on stated rent increases.
Property Activity During the Last Three Years
As of December 31, 2008, the Partnership owned a significant interest in eleven properties and a minor interest in three properties with a total original cost of $17,696,193. As of December 31, 2008, one of these properties was under construction and the Partnership had a commitment to expend an additional $1,266,000 to complete the building. During the years ended December 31, 2009, 2010 and 2011, the Partnership sold five property interests and received net sale proceeds of $329,208, $1,102,212 and $1,457,405, which resulted in net gains of $135,884, $253,923 and $467,366, respectively. During 2009, the Partnership expended $1,283,742 to complete the construction of one building. During 2010, the Partnership expended $1,433,468 to purchase one additional property as it reinvested cash generated from property sales. As of December 31, 2011, the Partnership owned a significant interest in ten properties and a minor interest in one property with a total original cost of $17,108,142.
Major Tenants
During 2011, five tenants each contributed more than ten percent of the Partnership's total rental revenue. The major tenants in aggregate contributed 70% of total rental revenue in 2011. It is anticipated that, based on minimum rental payments required under the leases, each major tenant, with one exception, will continue to contribute more than ten percent of rental revenue in 2012 and future years. The tenant of the KinderCare daycare centers will not continue to be a major tenant as one of the daycare centers was sold in 2011. Any failure of these major tenants could materially affect the Partnership's net income and cash distributions.
Page 3 of 37
ITEM 1. BUSINESS. (Continued)
Competition
The Partnership is a minor factor in the commercial real estate business. There are numerous entities engaged in the commercial real estate business which have greater financial resources than the Partnership. At the time the Partnership elects to dispose of its properties, the Partnership will be in competition with other persons and entities to find buyers for its properties.
Employees
The Partnership has no direct employees. Management services are performed for the Partnership by AEI Fund Management, Inc., an affiliate of AFM.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Not required for a smaller reporting company.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not required for a smaller reporting company.
ITEM 2.
ITEM 2. PROPERTIES.
Investment Objectives
The Partnership's investment objectives are to acquire existing or newly-developed commercial properties throughout the United States that offer the potential for (i) regular cash distributions of lease income; (ii) growth in lease income through rent escalation provisions; (iii) preservation of capital through all-cash sale-leaseback transactions; (iv) capital growth through appreciation in the value of properties; and (v) stable property performance through long-term lease contracts. The Partnership does not have a policy, and there is no limitation, as to the amount or percentage of assets that may be invested in any one property. However, to the extent possible, the General Partners attempt to diversify the type and location of the Partnership's properties.
Description of Properties
The Partnership's properties are commercial, single tenant buildings. The properties were acquired on a debt-free basis and are leased to various tenants under net leases, classified as operating leases. The Partnership holds an undivided fee simple interest in the properties.
The Partnership's properties are subject to the general competitive conditions incident to the ownership of single tenant investment real estate. Since each property is leased under a long-term lease, there is little competition until the Partnership decides to sell the property. At this time, the Partnership will be competing with other real estate owners, on both a national and local level, in attempting to find buyers for the properties. In the event of a tenant default, the Partnership would be competing with other real estate owners, who have property vacancies, to attract a new tenant to lease the property. The Partnership's tenants operate in industries that are very competitive and can be affected by factors such as changes in regional or local economies, seasonality and changes in consumer preference.
Page 4 of 37
ITEM 2. PROPERTIES. (Continued)
The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2011.
(1) Does not include acquisition costs that were expensed.
Page 5 of 37
ITEM 2. PROPERTIES. (Continued)
The properties listed above with a partial ownership percentage are owned with the following affiliated entities and/or unrelated third parties: Jared Jewelry store in Hanover, Maryland (AEI Net Lease Income & Growth Fund XX Limited Partnership); Jared Jewelry store in Auburn Hills, Michigan (AEI Income & Growth Fund 25 LLC); CarMax auto superstore (AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership); Applebee’s restaurant (AEI Income & Growth Fund XXII Limited Partnership); Best Buy store (AEI Income & Growth Fund 23 LLC and AEI Income & Growth Fund 26 LLC); Fresenius Medical Center (AEI Income & Growth Fund 24 LLC); Tractor Supply Company store (AEI Income & Growth Fund 27 LLC) and Scott & White Healthcare (AEI Net Lease Income & Growth Fund XX Limited Partnership and AEI Income & Growth Fund 25 LLC). The remaining interests in the Arby’s restaurant and the Winn-Dixie store are owned by unrelated third parties.
The Partnership accounts for properties owned as tenants-in-common with affiliated entities and/or unrelated third parties using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses.
At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term.
Pursuant to the lease agreements, the tenants are required to provide proof of adequate insurance coverage on the properties they occupy. The General Partners believe the properties are adequately covered by insurance and consider the properties to be well-maintained and sufficient for the Partnership's operations.
For tax purposes, the Partnership's properties are depreciated under the Modified Accelerated Cost Recovery System (MACRS). The largest depreciable component of a property is the building which is depreciated, using the straight-line method, over 39 or 40 years. The remaining depreciable components of a property are personal property and land improvements which are depreciated, using an accelerated method, over 5 and 15 years, respectively. Since the Partnership has tax-exempt Partners, the Partnership is subject to the rules of Section 168(h)(6) of the Internal Revenue Code which requires a percentage of the properties' depreciable components to be depreciated over longer lives using the straight-line method. In general, the federal tax basis of the properties for tax depreciation purposes is the same as the basis for book depreciation purposes except for properties purchased after January 1, 2009. For those properties, acquisition expenses that were expensed for book purposes were capitalized and added to the basis of the property for tax depreciation purposes.
At December 31, 2011, all properties listed above were 100% occupied.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
Page 6 of 37
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) As of December 31, 2011, there were 1,234 holders of record of the registrant's Limited Partnership Units. There is no other class of security outstanding or authorized. The registrant's Units are not a traded security in any market. During the period covered by this report, the Partnership did not sell any equity securities that are not registered under the Securities Act of 1933.
Cash distributions of $11,758 and $11,798 were made to the General Partners and $1,163,992 and $1,167,994 were made to the Limited Partners for 2011 and 2010, respectively. The distributions were made on a quarterly basis and represent Net Cash Flow, as defined, except as discussed below. These distributions should not be compared with dividends paid on capital stock by corporations.
As part of the Limited Partner distributions discussed above, the Partnership distributed net sale proceeds of $41,138 and $92,740 in 2011 and 2010, respectively.
(b) Not applicable.
(c) Pursuant to Section 7.7 of the Partnership Agreement, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during September of each year. The purchase price of the Units is based on a formula specified in the Partnership Agreement. Units tendered to the Partnership are redeemed on October 1st of each year subject to the following limitations. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.
Small Business Issuer Purchases of Equity Securities
Period
Total Number
of Units
Purchased
Average
Price Paid
per Unit
Total Number of Units
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number
of Units that May Yet
Be Purchased Under
the Plans or Programs
10/1/11 to 10/31/11
10.50
$297.81
1,336.89(1)
(2)
11/1/11 to 11/30/11
--
--
--
--
12/1/11 to 12/31/11
--
--
--
--
(1)
The Partnership's repurchase plan is mandated by the Partnership Agreement as included in the prospectus related to the original offering of the Units.
(2)
The Partnership Agreement contains annual limitations on repurchases described in the paragraph above and has no expiration date.
Page 7 of 37
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for a smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward-looking statements, should be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following:
-
Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate;
-
the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for the Partners;
-
resolution by the General Partners of conflicts with which they may be confronted;
-
the success of the General Partners of locating properties with favorable risk return characteristics;
-
the effect of tenant defaults; and
-
the condition of the industries in which the tenants of properties owned by the Partnership operate.
Application of Critical Accounting Policies
The preparation of the Partnership’s financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of investments in real estate and the allocation by AEI Fund Management, Inc. of expenses to the Partnership as opposed to other funds they manage.
The Partnership purchases properties and records them in the financial statements at cost (not including acquisition expenses). The Partnership tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value. Changes in these assumptions or analysis may cause material changes in the carrying value of the properties.
Page 8 of 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs. They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage. The Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement.
Management of the Partnership has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing partner of the Partnership.
Results of Operations
For the years ended December 31, 2011 and 2010, the Partnership recognized rental income from continuing operations of $1,312,549 and $1,212,317, respectively. In 2011, rental income increased mainly due to additional rent received from one property acquisition in 2010 and rent increases on two properties. Based on the scheduled rent for the properties owned as of February 29, 2012, the Partnership expects to recognize rental income from continuing operations of approximately $1,337,000 in 2012.
For the years ended December 31, 2011 and 2010, the Partnership incurred Partnership administration expenses from affiliated parties of $227,579 and $235,117, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communication with the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $39,134 and $31,582, respectively. These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs.
For the year ended December 31, 2010, the Partnership incurred property acquisition expenses of $31,422 related to the purchase of the Scott & White Clinic.
For the years ended December 31, 2011 and 2010, the Partnership recognized interest income of $7,654 and $12,843, respectively. In 2011, interest income decreased primarily due to the Partnership having less money invested in a money market account due to a property acquisition in October 2010.
Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations. For the year ended December 31, 2011, the Partnership recognized income from discontinued operations of $551,230, representing rental income less property management expenses of $83,864 and gain on disposal of real estate of $467,366. For the year ended December 31, 2010, the Partnership recognized income from discontinued operations of $416,551, representing rental income less property management expenses and depreciation of $162,628 and a gain on disposal of real estate of $253,923.
Page 9 of 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
In December 2009, the Partnership entered into an agreement to sell the Tumbleweed restaurant in Fort Wayne, Indiana to an unrelated third party. On March 12, 2010, the sale closed with the Partnership receiving net sale proceeds of $428,016, which resulted in a net loss of $11,984. At the time of sale, the cost and related accumulated depreciation was $727,476 and $287,476, respectively.
During 2010, the Partnership sold 33.6699% of the KinderCare daycare center in Ballwin, Missouri, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $674,196, which resulted in a net gain of $265,907. The cost and related accumulated depreciation of the interests sold was $511,034 and $102,745, respectively.
On March 25, 2011, the Partnership sold its remaining 44.5116% interest in the KinderCare daycare center in Ballwin, Missouri, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $902,133, which resulted in a net gain of $362,374. The cost and related accumulated depreciation of the interests sold was $675,587 and $135,828, respectively. At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $539,759.
On January 19, 2011, the Partnership sold its remaining 0.1534% interest in the Champps Americana restaurant in Livonia, Michigan to an unrelated third party. The Partnership received net sale proceeds of $7,861, which resulted in a net gain of $3,904. The cost and related accumulated depreciation of the interest sold was $6,366 and $2,409, respectively. At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $3,957.
During 2011, the Partnership sold 11.5987% of the Winn-Dixie store in Panama City, Florida, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $547,411, which resulted in a net gain of $101,088. The cost and related accumulated depreciation of the interests sold was $537,605 and $91,282, respectively. The Partnership is attempting to sell its remaining 8.8038% interest in the property. At December 31, 2011 and 2010, the property was classified as Real Estate Held for Sale with a carrying value of $338,776 and $785,099, respectively.
Management believes inflation has not significantly affected income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Liquidity and Capital Resources
During the year ended December 31, 2011, the Partnership's cash balances increased $1,419,965 as a result of cash generated from the sale of property, which was partially offset by distributions paid to the Partners in excess of cash generated from operating activities. During the year ended December 31, 2010, the Partnership's cash balances decreased $493,854 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property.
Net cash provided by operating activities increased from $1,052,343 in 2010 to $1,142,483 in 2011 as a result of an increase in total rental and interest income in 2011, a decrease in Partnership administration and property management expenses in 2011 and net timing differences in the collection of payments from the tenants and the payment of expenses. During 2010, cash from operations was reduced by $31,422 of acquisition expenses related to the purchase of real estate. Pursuant to accounting guidance, these expenses were reflected as operating cash outflows. However, pursuant to the Partnership Agreement, acquisition expenses were funded with proceeds from property sales.
The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the years ended December 31, 2011 and 2010, the Partnership generated cash flow from the sale of real estate of $1,457,405 and $1,102,212, respectively. During the year ended December 31, 2010, the Partnership expended $1,433,468 to invest in real properties as the Partnership reinvested cash generated from property sales.
On October 20, 2010, the Partnership purchased a 39% interest in a Scott & White Clinic in College Station, Texas for $1,433,468. The property is leased to Scott & White Healthcare under a Lease Agreement with a remaining primary term of 9.7 years (as of the date of purchase) and annual rent of $120,120 for the interest purchased. The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership and AEI Income & Growth Fund 25 LLC, affiliates of the Partnership.
The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners. The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first week after the end of each quarter. The Partnership attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Partners in the fourth quarter of each year.
For the years ended December 31, 2011 and 2010, the Partnership declared distributions of $1,175,750 and $1,179,792, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $1,163,992 and $1,167,994 and the General Partners received distributions of $11,758 and $11,798 for the periods, respectively.
Page 11 of 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
During 2011 and 2010, the Partnership distributed net sale proceeds of $41,554 and $93,677 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $1.81 and $4.08 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.
The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.
During 2011, one Limited Partner redeemed a total of 10.5 Partnership Units for $3,127 in accordance with the Partnership Agreement. During 2010, six Limited Partners redeemed a total of 105.5 Partnership Units for $34,800. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 60 Limited Partners redeemed 1,220.89 Partnership Units for $958,469. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $32 and $351 in 2011 and 2010, respectively.
The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.
The Economy and Market Conditions
The impact of conditions in the economy over the last few years, including the turmoil in the credit markets, has adversely affected many real estate investment funds. However, the absence of mortgage financing on the Partnership's properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate investment funds. Nevertheless, a prolonged economic downturn may adversely affect the operations of the Partnership's tenants and their cash flows. If a tenant were to default on its lease obligations, the Partnership's income would decrease, its distributions would likely be reduced and the value of its properties might decline.
ITEM 7A.
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying index to financial statements.
Page 12 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
Page 13 of 37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners:
AEI Income & Growth Fund XXI Limited Partnership
St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI Income & Growth Fund XXI Limited Partnership (a Minnesota limited partnership) as of December 31, 2011 and 2010, and the related statements of income, cash flows and changes in partners' capital for the years then ended. The Partnership's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AEI Income & Growth Fund XXI Limited Partnership as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
March 29, 2012
Page 14 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
BALANCE SHEET
ASSETS
LIABILITIES AND PARTNERS' CAPITAL
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 15 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
STATEMENT OF INCOME
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 16 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 17 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 18 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(1) Organization -
AEI Income & Growth Fund XXI Limited Partnership (“Partnership”) was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner. Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Partnership.
The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer. The Partnership commenced operations on April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively.
During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. Distributions to Limited Partners will be made pro rata by Units.
Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 10% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow; (ii) any remaining balance will be distributed 90% to the Limited Partners and 10% to the General Partners. Distributions to the Limited Partners will be made pro rata by Units.
For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year. Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed. Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners.
Page 19 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(1) Organization - (Continued)
For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 10% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Partners and 10% to the General Partners. Losses will be allocated 98% to the Limited Partners and 2% to the General Partners.
The General Partners are not required to currently fund a deficit capital balance. Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions.
(2) Summary of Significant Accounting Policies -
Financial Statement Presentation
The accounts of the Partnership are maintained on the accrual basis of accounting for both federal income tax purposes and financial reporting purposes.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant items, subject to such estimates and assumptions, include the carrying value of investments in real estate.
The Partnership regularly assesses whether market events and conditions indicate that it is reasonably possible to recover the carrying amounts of its investments in real estate from future operations and sales. A change in those market events and conditions could have a material effect on the carrying amount of its real estate.
Cash Concentrations of Credit Risk
The Partnership's cash is deposited in one financial institution and at times during the year it may exceed FDIC insurance limits.
Page 20 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(2) Summary of Significant Accounting Policies - (Continued)
Receivables
Credit terms are extended to tenants in the normal course of business. The Partnership performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.
Receivables are recorded at their estimated net realizable value. The Partnership follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Partnership is of the belief that such accounts, if any, will be collectible in all material respects and thus an allowance is not necessary. Accounts are considered past due if payment is not made on a timely basis in accordance with the Partnership’s credit terms. Receivables considered uncollectible are written off.
Income Taxes
The income or loss of the Partnership for federal income tax reporting purposes is includable in the income tax returns of the partners. In general, no recognition has been given to income taxes in the accompanying financial statements.
The tax return and the amount of distributable Partnership income or loss are subject to examination by federal and state taxing authorities. If such an examination results in changes to distributable Partnership income or loss, the taxable income of the partners would be adjusted accordingly. Primarily due to its tax status as a partnership, the Partnership has no significant tax uncertainties that require recognition or disclosure.
Revenue Recognition
The Partnership's real estate is leased under net leases, classified as operating leases. The leases provide for base annual rental payments payable in monthly installments. The Partnership recognizes rental revenue according to the terms of the individual leases. For leases that contain stated rental increases, the increases are recognized in the year in which they are effective. Contingent rental payments are recognized when the contingencies on which the payments are based are satisfied and the rental payments become due under the terms of the leases.
Page 21 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(2) Summary of Significant Accounting Policies - (Continued)
Investments in Real Estate
The Partnership purchases properties and records them at cost. The Partnership tests real estate for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Partnership will hold and operate, it compares the carrying amount of the property to the estimated probability-weighted future undiscounted cash flows expected to result from the property and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the property, the Partnership recognizes an impairment loss by the amount by which the carrying amount of the property exceeds the fair value of the property. For properties held for sale, the Partnership determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value.
Prior to January 1, 2009, the Partnership capitalized as Investments in Real Estate certain costs incurred in the review and acquisition of the properties. The costs were allocated to the land, buildings and equipment. For acquisitions completed on or after January 1, 2009, acquisition-related transaction costs were expensed as incurred as a result of the Partnership adopting accounting guidance on business combinations that expands the scope of acquisition accounting.
The buildings and equipment of the Partnership are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 25 years and 5 years, respectively.
Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations.
The Partnership accounts for properties owned as tenants-in-common with affiliated entities and/or unrelated third parties using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses.
Page 22 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(2) Summary of Significant Accounting Policies - (Continued)
The Partnership’s properties are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which the properties are located. These laws could require the Partnership to investigate and remediate the effects of the release or disposal of hazardous materials at these locations if found. For each property, an environmental assessment is completed prior to acquisition. In addition, the lease agreements typically strictly prohibit the production, handling, or storage of hazardous materials (except where incidental to the tenant’s business such as use of cleaning supplies) in violation of applicable law to restrict environmental and other damage. Environmental liabilities are recorded when it is determined the liability is probable and the costs can reasonably be estimated. There were no environmental issues noted or liabilities recorded at December 31, 2011 and 2010.
Fair Value Measurements
As of December 31, 2011, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.
Recently Issued Accounting Pronouncements
Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Partnership’s financial statements.
Reclassification
Certain items related to discontinued operations in the prior year’s financial statements have been reclassified to conform to 2011 presentation. These reclassifications had no effect on Partners’ capital, net income or cash flows.
(3) Related Party Transactions -
The Partnership owns the percentage interest shown below in the following properties as tenants-in-common with the affiliated entities listed: Jared Jewelry store in Hanover, Maryland (50% - AEI Net Lease Income & Growth Fund XX Limited Partnership); Jared Jewelry store in Auburn Hills, Michigan (40% ­­- AEI Income & Growth Fund 25 LLC); CarMax auto superstore (20% ­­- AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership); Applebee’s restaurant (62% - AEI Income & Growth Fund XXII Limited Partnership); Best Buy store (54% - AEI Income & Growth Fund 23 LLC and AEI Income & Growth Fund 26 LLC); Fresenius Medical Center (55% - AEI Income & Growth Fund 24 LLC); Tractor Supply Company store (63% - AEI Income & Growth Fund 27 LLC); and Scott & White Clinic (39% ­­- AEI Net Lease Income & Growth Fund XX Limited Partnership and AEI Income & Growth Fund 25 LLC).
Page 23 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(3) Related Party Transactions - (Continued)
As of December 31, 2011, the Partnership owns an 8.8038% interest in a Winn-Dixie store. The remaining interests in this property are owned by ­­unrelated third parties. AEI Net Lease Income & Growth Fund XIX Limited Partnership, an affiliate of the Partnership, owned a 37% interest in this property until the interest was sold, in a series of transactions, to unrelated third parties in 2009, 2010 and 2011.
AEI received the following reimbursements for costs and expenses from the Partnership for the years ended December 31:
a.
AEI is reimbursed for costs incurred in providing services related to managing the Partnership's operations and properties, maintaining the Partnership's books, and communicating with the Limited Partners.
$
227,579
$
235,117
b.
AEI is reimbursed for all direct expenses it paid on the Partnership's behalf to third parties related to Partnership administration and property management. These expenses included printing costs, legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs. These amounts included $2,057 and $7,283 of expenses related to Discontinued Operations in 2011 and 2010, respectively.
$
41,191
$
38,865
c.
AEI is reimbursed for costs incurred in providing services and direct expenses related to the acquisition of properties on behalf of the Partnership.
$
$
31,422
d.
AEI is reimbursed for costs incurred in providing services related to the sale of property.
$
71,866
$
51,470
The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a, b, c and d. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.
(4) Investments in Real Estate -
The Partnership leases its properties to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Partnership is responsible for repairs to the structural components of the building, the roof, and the parking lot. At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term.
Page 24 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(4) Investments in Real Estate - (Continued)
The Partnership's properties are commercial, single-tenant buildings. The Arby's restaurant was constructed and acquired in 1995. The KinderCare daycare center in Andover, Minnesota was constructed in 1998 and acquired in 2002. The Winn-Dixie store was constructed in 1997 and acquired in 2003. The Jared Jewelry store in Hanover, Maryland was constructed in 2001 and acquired in 2004. The Jared Jewelry store in Auburn Hills, Michigan was constructed in 1999 and acquired in 2005. The CarMax auto superstore was constructed in 2003 and acquired in 2005. The Applebee’s restaurant in Johnstown, Pennsylvania was constructed in 1996 and acquired in 2006. The Best Buy store was constructed in 1990, renovated in 1997 and acquired in 2008. The Fresenius Medical Center was constructed and acquired in 2008. The land for the Tractor Supply Company store was acquired in 2008 and construction of the store was completed in 2009. The Scott & White Clinic was constructed and acquired in 2010. There have been no costs capitalized as improvements subsequent to the acquisitions.
The cost of the properties not held for sale and related accumulated depreciation at December 31, 2011 are as follows:
On October 20, 2010, the Partnership purchased a 39% interest in a Scott & White Clinic in College Station, Texas for $1,433,468. The Partnership incurred $31,422 of acquisition expenses related to the purchase that were expensed. The property is leased to Scott & White Healthcare under a Lease Agreement with a remaining primary term of 9.7 years (as of the date of purchase) and annual rent of $120,120 for the interest purchased.
At December 31, 2011, the Partnership owned a 2.6811% interest in an Arby’s restaurant in Montgomery, Alabama. The remaining interests in this property are owned by unrelated third parties, who own the property with the Partnership as tenants-in-common.
Page 25 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(4) Investments in Real Estate - (Continued)
For properties owned as of December 31, 2011, the minimum future rent payments required by the leases are as follows:
$
1,363,493
1,380,814
1,389,000
1,407,275
1,418,419
Thereafter
5,228,388
$
12,187,389
There were no contingent rents recognized in 2011 and 2010.
(5) Major Tenants -
The following schedule presents rent revenue from individual tenants, or affiliated groups of tenants, who each contributed more than ten percent of the Partnership's total rent revenue for the years ended December 31:
Tenants
Industry
Sterling Jewelers Inc.
Retail
$
286,707
$
281,323
Best Buy Stores, L.P.
Retail
256,001
256,001
KinderCare Learning Centers LLC
Child Care
148,537
225,176
CarMax Auto Superstores, Inc.
Retail
146,612
150,309
Tractor Supply Company
Retail
141,750
141,750
Aggregate rent revenue of major tenants
$
979,607
$
1,054,559
Aggregate rent revenue of major tenants as a percentage of total rent revenue
70%
76%
(6) Discontinued Operations -
In December 2009, the Partnership entered into an agreement to sell the Tumbleweed restaurant in Fort Wayne, Indiana to an unrelated third party. On March 12, 2010, the sale closed with the Partnership receiving net sale proceeds of $428,016, which resulted in a net loss of $11,984. At the time of sale, the cost and related accumulated depreciation was $727,476 and $287,476, respectively.
During 2010, the Partnership sold 33.6699% of the KinderCare daycare center in Ballwin, Missouri, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $674,196, which resulted in a net gain of $265,907. The cost and related accumulated depreciation of the interests sold was $511,034 and $102,745, respectively.
Page 26 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(6) Discontinued Operations - (Continued)
On March 25, 2011, the Partnership sold its remaining 44.5116% interest in the KinderCare daycare center in Ballwin, Missouri, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $902,133, which resulted in a net gain of $362,374. The cost and related accumulated depreciation of the interests sold was $675,587 and $135,828, respectively. At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $539,759.
On January 19, 2011, the Partnership sold its remaining 0.1534% interest in the Champps Americana restaurant in Livonia, Michigan to an unrelated third party. The Partnership received net sale proceeds of $7,861, which resulted in a net gain of $3,904. The cost and related accumulated depreciation of the interest sold was $6,366 and $2,409, respectively. At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $3,957.
During 2011, the Partnership sold 11.5987% of the Winn-Dixie store in Panama City, Florida, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $547,411, which resulted in a net gain of $101,088. The cost and related accumulated depreciation of the interests sold was $537,605 and $91,282, respectively. The Partnership is attempting to sell its remaining 8.8038% interest in the property. At December 31, 2011 and 2010, the property was classified as Real Estate Held for Sale with a carrying value of $338,776 and $785,099, respectively.
During 2011 and 2010, the Partnership distributed net sale proceeds of $41,554 and $93,677 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $1.81 and $4.08 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.
The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations for the years ended December 31:
Rental Income
$
85,921
$
170,089
Property Management Expenses
(2,057)
(7,283)
Depreciation
(178)
Gain on Disposal of Real Estate
467,366
253,923
Income from Discontinued Operations
$
551,230
$
416,551
Page 27 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(7) Partners’ Capital -
For the years ended December 31, 2011 and 2010, the Partnership declared distributions of $1,175,750 and $1,179,792, respectively. The Limited Partners received distributions of $1,163,992 and $1,167,994 and the General Partners received distributions of $11,758 and $11,798 for the years, respectively. The Limited Partners' distributions represent $51.34 and $51.33 per Limited Partnership Unit outstanding using 22,671 and 22,753 weighted average Units in 2011 and 2010, respectively. The distributions represent $48.36 and $36.92 per Unit of Net Income and $2.98 and $14.41 per Unit of return of capital in 2011 and 2010, respectively.
As part of the Limited Partner distributions discussed above, the Partnership distributed net sale proceeds of $41,138 and $92,740 in 2011 and 2010, respectively.
The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.
During 2011, one Limited Partner redeemed a total of 10.5 Partnership Units for $3,127 in accordance with the Partnership Agreement. During 2010, six Limited Partners redeemed a total of 105.5 Partnership Units for $34,800. The Partnership acquired these Units using Net Cash Flow from operations. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $32 and $351 in 2011 and 2010, respectively.
After the effect of redemptions, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $1,058.99 per original $1,000 invested.
Page 28 of 37
AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(8) Income Taxes -
The following is a reconciliation of net income for financial reporting purposes to income reported for federal income tax purposes for the years ended December 31:
The following is a reconciliation of Partners' capital for financial reporting purposes to Partners' capital reported for federal income tax purposes for the years ended December 31:
Page 29 of 37
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures.
Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing General Partner, in a manner that allows timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting.
(i) Management’s Report on Internal Control Over Financial Reporting. The Managing General Partner, through its management, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, and for performing an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management of the Managing General Partner; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Partnership's assets that could have a material effect on the financial statements.
Management of the Managing General Partner performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011 based upon criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management of the Managing General Partner determined that our internal control over financial reporting was effective as of December 31, 2011 based on the criteria in Internal Control-Integrated Framework issued by the COSO.
Page 30 of 37
ITEM 9A. CONTROLS AND PROCEDURES. (Continued)
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
(ii) Changes in Internal Control Over Financial Reporting. During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The registrant is a limited partnership and has no officers, directors, or direct employees. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The General Partners are AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner, and Robert P. Johnson, Chief Executive Officer, President and sole director of AFM, the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AFM has only one senior financial executive, its Chief Financial Officer. The Chief Financial Officer reports directly to Mr. Johnson and is accountable for his actions to Mr. Johnson. Although Mr. Johnson and AFM require that all of their personnel, including the Chief Financial Officer, engage in honest and ethical conduct, ensure full, fair, accurate, timely, and understandable disclosure, comply with all applicable governmental laws, rules and regulations, and report to Mr. Johnson any deviation from these principles, because the organization is composed of only approximately 35 individuals, because the management of a partnership by an entity that has different interests in distributions and income than investors involves numerous conflicts of interest that must be resolved on a daily basis, and because the ultimate decision maker in all instances is Mr. Johnson, AFM has not adopted a formal code of conduct. Instead, the materials pursuant to which investors purchase Units disclose these conflicts of interest in detail and Mr. Johnson, as the CEO and sole director of AFM, resolves conflicts to the best of his ability, consistent with his fiduciary obligations to AFM and the fiduciary obligations of AFM to the Partnership. The director and officers of AFM are as follows:
Page 31 of 37
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(Continued)
Robert P. Johnson, age 67, is Chief Executive Officer, President and sole director and has held these positions since the formation of AFM in August 1994, and has been elected to continue in these positions until December 2012. From 1970 to the present, he has been employed exclusively in the investment industry, specializing in limited partnership investments. In that capacity, he has been involved in the development, analysis, marketing and management of public and private investment programs investing in net lease properties as well as public and private investment programs investing in energy development. Since 1971, Mr. Johnson has been the president, a director and a registered principal of AEI Securities, Inc., which is registered with the SEC as a securities broker-dealer, is a member of the Financial Industry Regulatory Authority (FINRA) and is a member of the Security Investors Protection Corporation (SIPC). Mr. Johnson has been president, a director and the principal shareholder of AEI Fund Management, Inc., a real estate management company founded by him, since 1978. Mr. Johnson is currently a general partner or principal of the general partner in nine limited partnerships and a managing member in five LLCs.
Patrick W. Keene, age 52, is Chief Financial Officer, Treasurer and Secretary and has held these positions since January 22, 2003 and has been elected to continue in these positions until December 2012. Mr. Keene has been employed by AEI Fund Management, Inc. and affiliated entities since 1986. Prior to being elected to the positions above, he was Controller of the various entities. From 1982 to 1986, Mr. Keene was with KPMG Certified Public Accountants, first as an auditor and later as a tax manager. Mr. Keene is responsible for all accounting functions of AFM and the registrant.
Since Mr. Johnson serves as the Individual General Partner of the Partnership, as well as the sole director of AFM, all of the duties that might be assigned to an audit committee are assigned to Mr. Johnson. Mr. Johnson is not an audit committee financial expert, as defined. As an officer and majority owner, through a parent company, of AFM, and as the Individual General Partner, Mr. Johnson is not a "disinterested director" and may be subject to a number of conflicts of interests in his capacity as sole director of AFM.
Before the independent auditors are engaged, Mr. Johnson, as the sole director of AFM, approves all audit-related fees, and all permissible nonaudit fees, for services of our auditors.
Section 16(a) Beneficial Ownership Reporting Compliance
Under federal securities laws, the directors and officers of the General Partner of the Partnership, and any beneficial owner of more than 10% of a class of equity securities of the Partnership, are required to report their ownership of the Partnership's equity securities and any changes in such ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established by the Commission, and the Partnership is required to disclose in this Annual Report on 10-K any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 2011. Based upon information provided by officers and directors of the General Partner, all officers, directors and 10% owners filed all reports on a timely basis in the 2011 fiscal year.
Page 32 of 37
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The General Partner and affiliates are reimbursed at cost for all services performed on behalf of the registrant and for all third party expenses paid on behalf of the registrant. The cost for services performed on behalf of the registrant is based on actual time spent performing such services plus an overhead burden. These services include organizing the registrant and arranging for the offer and sale of Units, reviewing properties for acquisition and rendering administrative, property management and property sales services. The amount and nature of such payments are detailed in Item 13 of this annual report on Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information pertaining to the ownership of the Units by each person known by the Partnership to beneficially own 5% or more of the Units, by each General Partner, and by each officer or director of the Managing General Partner as of February 29, 2012:
Name and Address
of Beneficial Owner
Number of
Units Held
Percent
of Class
AEI Fund Management XXI, Inc.
0.00%
Robert P. Johnson
0.00%
Patrick W. Keene
0.00%
Address for all:
1300 Wells Fargo Place
30 East 7th Street, St. Paul, Minnesota 55101
The General Partners know of no holders of more than 5% of the outstanding Units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The registrant, AFM and its affiliates have common management and utilize the same facilities. As a result, certain administrative expenses are allocated among these related entities. All of such activities and any other transactions involving the affiliates of the General Partner of the registrant are governed by, and are conducted in conformity with, the limitations set forth in the Limited Partnership Agreement of the registrant. Reference is made to Note 3 of the Financial Statements, as presented, and is incorporated herein by reference, for details of related party transactions for the years ended December 31, 2011 and 2010.
Neither the registrant, nor the Managing General Partner of the registrant, has a board of directors consisting of any members who are “independent.” The sole director of the Managing General Partner, Robert P. Johnson, is also the Individual General Partner of the registrant, and is the Chief Executive Officer, and indirectly the principal owner, of the Managing General Partner. Accordingly, there is no disinterested board, or other functioning body, that reviews related party transactions, or the transactions between the registrant and the General Partners, except as performed in connection with the audit of its financial statements.
Page 33 of 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued)
The limitations included in the Partnership Agreement require that the cumulative reimbursements to the General Partners and their affiliates for certain expenses will not exceed an amount equal to the sum of (i) 20% of gross offering proceeds, (ii) 5% of Net Cash Flow for property management, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the General Partners. The cumulative reimbursements subject to this limitation are reimbursements for (i) organization and offering expenses, including commissions, (ii) acquisition expenses, (iii) services provided in the sales effort of properties, and (iv) expenses of controlling persons and overhead expenses directly attributable to the forgoing services or attributable to administrative services. As of December 31, 2011, these cumulative reimbursements to the General Partners and their affiliates did not exceed the limitation amount.
The following table sets forth the forms of compensation, distributions and cost reimbursements paid by the registrant to the General Partners or their Affiliates in connection with the operation of the Fund and its properties for the period from inception through December 31, 2011.
Page 34 of 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued)
Person or Entity
Receiving
Compensation
Form and Method
of Compensation
Amount Incurred From
Inception (August 22, 1994)
To December 31, 2011
General Partners
1% of distributions of Net Proceeds of Sale until Limited Partners have received an amount equal to (a) their Adjusted Capital Contributions, plus (b) an amount equal to 12% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously distributed. 10% of distributions of Net Proceeds of Sale thereafter.
$
62,447
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following is a summary of the fees billed to the Partnership by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services rendered for the years ended December 31, 2011 and 2010:
Fee Category
Audit Fees
$
16,861
$
16,670
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
$
16,861
$
16,670
Audit Fees - Consists of fees billed for professional services rendered for the audit of the Partnership’s annual financial statements and review of the interim financial statements included in quarterly reports, and services that are normally provided by Boulay, Heutmaker, Zibell & Co. P.L.L.P. in connection with statutory and regulatory filings or engagements.
Audit-Related Fees - Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of financial statements and are not reported under "Audit Fees." These services include consultations concerning financial accounting and reporting standards.
Tax Fees - Consists of fees billed for professional services for federal and state tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services other than the services reported above.
Policy for Preapproval of Audit and Permissible Non-Audit Services of Independent Auditors
Before the Independent Auditors are engaged by the Partnership to render audit or non-audit services, the engagement is approved by Mr. Johnson acting as the Partnership’s audit committee.
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PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) (1) A list of the financial statements contained herein is set forth on page 13.
(a) (2) Schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or related notes.
(a) (3) The Exhibits filed in response to Item 601 of Regulation S-K are listed below.
3.1
Certificate of Limited Partnership (incorporated by reference to Exhibit 3.1 of the registrant's Registration Statement on Form SB-2 filed October 10, 1994 [File No. 33-85076C]).
3.2
Restated Limited Partnership Agreement to the Prospectus (incorporated by reference to Exhibit A of Amendment No. 2 of the registrant's Registration Statement on Form SB-2 filed January 20, 1995 [File No. 33-85076C]).
10.1
Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the Property at 1485 Bunker Lake Boulevard NW, Andover, Minnesota (incorporated by reference to Exhibit 10.4 of Form 8-K filed June 27, 2002).
10.2
Assignment and Assumption of Lease Agreement dated September 19, 2003 between the Partnership, AEI Net Lease Income & Growth Fund XIX Limited Partnership, AEI Income & Growth Fund 24 LLC and Transmitter Crossing, LLC relating to the Property at 3621 Highway 231 North, Panama City, Florida (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 13, 2003).
10.3
Assignment and Assumption of Lease dated February 9, 2004 between the Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and Transmills, LLC relating to the Property at 7684 Arundel Mills, Hanover, Maryland (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 24, 2004).
10.4
Assignment and Assumption of Lease dated January 14, 2005 between the Partnership, AEI Income & Growth Fund 25 LLC and LMB Auburn Hills I LLC relating to the Property at 3960 Baldwin Road, Auburn Hills, Michigan (incorporated by reference to Exhibit 10.26 of Form 10-KSB filed March 30, 2005).
10.5
Assignment and Assumption of Lease dated March 18, 2005 between the Partnership, AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC, AEI Private Net Lease Millennium Fund Limited Partnership and Silver Capital Net Lease Fund II, LLC relating to the Property at 1977 Thornton Road, Lithia Springs, Georgia (incorporated by reference to Exhibit 10.28 of Form 10-KSB filed March 30, 2005).
10.6
Net Lease Agreement dated September 21, 2006 between the Partnership, AEI Income & Growth Fund XXII Limited Partnership and B.T. Woodlipp, Inc. relating to the Property at 425 Galleria Drive, Johnstown, Pennsylvania (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 14, 2006).
10.7
Assignment and Assumption of Lease dated January 31, 2008 between the Partnership, AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 26 LLC and Eau Claire Equity Fund Limited Partnership relating to the Property at 4090 Commonwealth Avenue, Eau Claire, Wisconsin (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 6, 2008).
31.1
Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ ROBERT P JOHNSON
President (Principal Executive Officer)
March 29, 2012
Robert P. Johnson
and Sole Director of Managing General
Partner
/s/ PATRICK W KEEN
Chief Financial Officer and Treasurer
March 29, 2012
Patrick W. Keene
(Principal Accounting Officer)
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