ITEM 1. BUSINESS.
AEI Net Lease Income & Growth Fund XIX Limited Partnership (the "Partnership" or the "Registrant") is a limited partnership which was organized pursuant to the laws of the State of Minnesota on September 14, 1990. The registrant is comprised of AEI Fund Management XIX, 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 $30,000,000 of limited partnership interests (the "Units") (30,000 Units at $1,000 per Unit) pursuant to a registration statement effective February 5, 1991. The Partnership commenced operations on May 31, 1991 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. The Partnership's offering terminated February 5, 1993 when the extended offering period expired. The Partnership received subscriptions for 21,151.928 Limited Partnership Units ($21,151,928).
The Partnership was organized to acquire existing and newly constructed commercial properties located in the United States, to lease such properties to tenants under triple net leases, to hold such properties and to eventually sell such properties. From subscription proceeds, the Partnership purchased nineteen properties, including partial interests in four properties, at a total cost of $16,994,880. 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 triple 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 20% of the purchase price of all properties. The Partnership 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. Prior to the third quarter of 2006, the Partnership sold some of its properties and reinvested the proceeds from such sales in additional properties. At the beginning of 2008, the Partnership anticipated that it would sell its remaining properties and liquidate by the end of 2009, depending on market conditions among other things. Beginning in the fourth quarter of 2008, general economic conditions caused the volume of property sales to slow dramatically for all real estate sellers. As a result, the Partnership was unable to sell its remaining properties in 2009. Until the economic conditions improve, it is difficult to estimate when the Partnership may be able to sell its remaining properties and liquidate.
ITEM 1. BUSINESS. (Continued)
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 triple net leases, classified as operating leases. Under a triple net lease, the tenant is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses for the property. At the time the properties were acquired, the remaining primary lease term varied from 13 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
Prior to the third quarter of 2006, the Partnership sold some of its properties and reinvested the proceeds from such sales in additional properties. In the third quarter of 2006, the Partnership decided to discontinue the reinvestment of proceeds from property sales in additional properties and to distribute sales proceeds to the Partners going forward. As of December 31, 2007, the Partnership owned a significant interest in eight properties and a minor interest in five properties with a total original cost of $11,220,237, including acquisition expenses. During the years ended December 31, 2008, 2009 and 2010, the Partnership sold eight property interests and received net sale proceeds of $2,974,814, $2,912,264 and $1,075,669, which resulted in net gains of $584,999, $677,530 and $160,465, respectively. As of December 31, 2010, the Partnership owned a significant interest in four properties and a minor interest in two properties with a total original cost of $4,812,879, including acquisition expenses.
Major Tenants
During 2010, four tenants each contributed more than ten percent of the Partnership's total rental revenue. The major tenants in aggregate contributed 90% of total rental revenue in 2010. It is anticipated that, based on minimum rental payments required under the leases, each major tenant will continue to contribute more than ten percent of rental revenue in 2011 and future years. However, the tenant of the Winn-Dixie store will likely not continue to be a major tenant as the Partnership is attempting to sell the property. Any failure of these major tenants could materially affect the Partnership's net income and cash distributions.
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 were to acquire existing or newly-developed commercial properties throughout the United States that offer the potential for (i) preservation and protection of the Partnership's capital; (ii) partially tax- deferred cash distributions from operations which may increase through rent participation clauses or mandated rent increases; and (iii) long-term capital gains through appreciation in value of the Partnership's properties realized upon sale. 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 attempted 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 triple net leases, classified as operating leases. The only exception is under the Lease for the Advance Auto Parts store, the Partnership is responsible for repairs to the structural components of the building, except for the roof, which is the tenant's responsibility. 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.
ITEM 2. PROPERTIES. (Continued)
The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2010.
Annual Annual Purchase Property Lease Rent Per Property Date Cost Tenant Payment Sq. Ft.
HomeTown Buffet Restaurant Tucson, AZ Summit Family (2.2074%) 6/16/93 $ 28,418 Restaurants, Inc. $ 2,649 $12.49
Champps Americana Restaurant Champps Troy, MI Operating (.016%) 9/3/98 $ 788 Corporation $ 68 $38.42
Champps Americana Restaurant Champps Utica, MI Operating (28%) 2/12/02 $ 963,874 Corporation $ 68,749 $28.60
Biaggi's Restaurant Ft. Wayne, IN Biaggi's Ristorante (50%) 7/3/03 $1,379,347 Italiano, LLC $130,540 $27.62
Winn-Dixie Store Panama City, FL Winn-Dixie Stores (18.1551%) 9/19/03 $ 840,449 Leasing, LLC $ 67,900 $ 7.23
Advance Auto Parts Store Advance Stores Harlingen, TX 2/17/06 $1,600,003 Company, Inc. $111,210 $16.43
The properties listed above with a partial ownership percentage are owned with affiliates of the Partnership and/or unrelated third parties. The remaining interests in the Champps Americana restaurant in Utica, Michigan are owned by AEI Net Lease Income & Growth Fund XX Limited Partnership and unrelated third parties. The remaining interest in the Biaggi's restaurant is owned by AEI Net Lease Income & Growth Fund XX Limited Partnership. The remaining interests in the Winn-Dixie store are owned by AEI Income & Growth Fund XXI Limited Partnership and unrelated third parties. The remaining interests in the HomeTown Buffet restaurant and the Champps Americana restaurant in Troy, Michigan 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 term varied from 13 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.
ITEM 2. PROPERTIES. (Continued)
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 31.5 or 39 years, depending on the date when it was placed in service. 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.
At December 31, 2010, all properties listed above were 100% occupied.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. REMOVED AND RESERVED.
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, 2010, there were 1,461 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 $16,497 and $28,365 were made to the General Partners and $1,633,183 and $2,808,092 were made to the Limited Partners for 2010 and 2009, 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 $1,320,878 and $2,335,259 in 2010 and 2009, respectively. The distributions reduced the Limited Partners' Adjusted Capital Contributions.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(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. Beginning in 2009, the formula resulted in a purchase price equal to zero. Therefore, the Partnership will no longer purchase Units under this plan. During the last three months of 2010, the Partnership did not purchase any Units by any other arrangement.
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 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
The Partnership purchased properties and recorded them in the financial statements at cost (including capitalized acquisition expenses), as all the properties were purchased prior to January 1, 2009. 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.
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, 2010 and 2009, the Partnership recognized rental income from continuing operations of $311,780 and $365,905, respectively. In 2010, rental income decreased mainly due to a reduction in rent for the Champps Americana restaurant as discussed below. Based on the scheduled rent for the properties owned as of February 28, 2011, the Partnership expects to recognize rental income from continuing operations of approximately $317,000 in 2011.
For the years ended December 31, 2010 and 2009, the Partnership incurred Partnership administration expenses from affiliated parties of $113,736 and $133,424, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Partners. As the Partnership's asset base decreases due to property sales, it is allocated a smaller share of expenses that are allocated by AEI Fund Management, Inc. based on the relative assets of the funds under management. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $22,413 and $24,514, 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
In September 2009, Champps Operating Corporation, the tenant of the Champps Americana restaurant in Utica, Michigan, approached the Partnership with a request to adjust the rent on the property to a market rental rate based on the restaurant's performance and the current conditions in the market. In December 2009, after reviewing the financial statements for the restaurant and Champps, the Partnership agreed to amend the Lease to reduce the annual rent for the property by 45% to $68,749 for the next three years. On January 1, 2013, the rent will revert to the original amount due under the Lease. During the three- year period, the amendment provides for additional rental payments if the restaurant's sales exceed certain stated amounts.
For the years ended December 31, 2010 and 2009, the Partnership recognized interest income of $11,584 and $12,470, 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. For the year ended December 31, 2010, the Partnership recognized income from discontinued operations of $286,309, representing rental income less property management expenses and depreciation of $125,844 and gain on disposal of real estate of $160,465. For the year ended December 31, 2009, the Partnership recognized income from discontinued operations of $917,200, representing rental income less property management expenses and depreciation of $239,670 and gain on disposal of real estate of $677,530.
In February 2009, the Partnership entered into an agreement to sell the Taco Cabana restaurant in San Antonio, Texas to an unrelated third party. On March 13, 2009, the sale closed with the Partnership receiving net proceeds of $1,259,658, which resulted in a net gain of $419,943. At the time of sale, the cost and related accumulated depreciation was $1,147,274 and $307,559, respectively.
In May 2009, the Partnership entered into an agreement to sell the Tractor Supply Company retail store in Mesquite, Texas to an unrelated third party. On July 2, 2009, the sale closed with the Partnership receiving net proceeds of $1,332,125, which resulted in a net gain of $192,222. At the time of sale, the cost and related accumulated depreciation was $1,231,625 and $91,722, respectively.
On June 3, 2009, the Partnership sold its remaining 2.5775% interest in the Marie Callender's restaurant in Henderson, Nevada to an unrelated third party. The Partnership received net sale proceeds of $45,359, which resulted in a net gain of $9,570. The cost and related accumulated depreciation of the interest sold was $44,142 and $8,353, respectively.
On September 3, 2009, the Partnership sold 5.5187% of the Winn-Dixie store in Panama City, Florida to an unrelated third party. The Partnership received net sale proceeds of $275,122, which resulted in a net gain of $55,795. The cost and related accumulated depreciation of the interest sold was $255,475 and $36,148, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
During 2010, the Partnership sold an additional 13.3262% of the Winn-Dixie store in Panama City, Florida, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $637,586, which resulted in a net gain of $107,969. The cost and related accumulated depreciation of the interests sold was $616,905 and $87,288, respectively. The Partnership is attempting to sell its remaining 18.1551% interest in the property. At December 31, 2010 and 2009, the property was classified as Real Estate Held for Sale with a carrying value of $721,532 and $1,251,149, respectively.
In March 2009, Tumbleweed, Inc., the tenant of the Tumbleweed restaurant in Chillicothe, Ohio filed for Chapter 11 bankruptcy reorganization. In July 2009, the tenant contacted the Partnership and offered to assume the Lease and extend the Lease term five years in exchange for a 15% rent reduction for a five-year period beginning on September 1, 2009. The Partnership accepted this offer and agreed to a Lease Amendment, which was subject to court approval of the tenant's Plan of Reorganization. In December 2009, the bankruptcy court approved the Plan of Reorganization. Under the Plan, Tumbleweed assumed the Lease for this property and the Lease amendment became effective. On September 1, 2014, the rent would have reverted to the original amount due under the Lease. As of the date of sale, Tumbleweed had complied with all Lease terms.
In April 2010, the Partnership signed a non-binding letter of intent to sell the Tumbleweed restaurant in Chillicothe, Ohio to an unrelated third party. In August 2010, the parties entered into a written purchase agreement. On October 28, 2010, the sale closed with the Partnership receiving net proceeds of $438,083, which resulted in a net gain of $52,496. At the time of sale, the cost and related accumulated depreciation was $505,224 and $119,637, respectively.
In the third quarter of 2006, the Partnership decided to discontinue the reinvestment of proceeds from property sales in additional properties. As a result, the Partnership's rental income and operating income will decrease in the future as the Partnership sells its remaining properties.
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.
Liquidity and Capital Resources
During the year ended December 31, 2010, the Partnership's cash balances increased $943,389 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, 2009, the Partnership's cash balances increased $482,973 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Net cash provided by operating activities decreased from $460,811 in 2009 to $305,279 in 2010 as the result of a decrease in total rental and interest income in 2010, which was partially offset by a decrease in Partnership administration and property management expenses in 2010 and net timing differences in the collection of payments from the tenants and the payment of expenses.
During the years ended December 31, 2010 and 2009, the Partnership generated cash flow from the sale of real estate of $1,075,669 and $2,912,264, respectively.
The Partnership's primary use of cash flow is distribution 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.
For the years ended December 31, 2010 and 2009, the Partnership declared distributions of $1,649,680 and $2,836,457, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $1,633,183 and $2,808,092 and the General Partners received distributions of $16,497 and $28,365 for the periods, respectively. In December 2010, the Partnership declared a special distribution of net sale proceeds of $1,212,121, which resulted in a higher distributions payable at December 31, 2010. In June and September 2009, the Partnership declared special distributions of net sale proceeds of $1,010,101 and $1,313,131, respectively. In 2010, regular distributions were paid on a capital balance that was reduced by the special distributions of net sale proceeds in 2009. As a result, distributions declared in 2010 were lower than distributions declared in 2009.
During 2010 and 2009, the Partnership distributed net sale proceeds of $1,334,220 and $2,358,847 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $65.49 and $115.81 per Limited Partnership Unit, 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 current economy, 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 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
At the beginning of 2008, the Partnership anticipated that it would sell its remaining properties and liquidate by the end of 2009, depending on market conditions among other things. Beginning in the fourth quarter of 2008, general economic conditions caused the volume of property sales to slow dramatically for all real estate sellers. As a result, the Partnership was unable to sell its remaining properties in 2009. Until the economic conditions improve, it is difficult to estimate when the Partnership may be able to sell its remaining properties and liquidate.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND 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.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2010 and 2009
Statements for the Years Ended December 31, 2010 and 2009:
Income
Cash Flows
Changes in Partners' Capital
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners: AEI Net Lease Income & Growth Fund XIX Limited Partnership St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI Net Lease Income & Growth Fund XIX Limited Partnership (a Minnesota limited partnership) as of December 31, 2010 and 2009, 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 Net Lease Income & Growth Fund XIX Limited Partnership as of December 31, 2010 and 2009, 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 25, 2011
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP BALANCE SHEET DECEMBER 31
ASSETS
2010 2009 CURRENT ASSETS: Cash $ 1,795,417 $ 852,028 Receivables 0 950 ----------- ----------- Total Current Assets 1,795,417 852,978 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 1,351,917 1,558,642 Buildings and Equipment 2,620,513 2,919,012 Accumulated Depreciation (598,665) (627,628) ----------- ----------- 3,373,765 3,850,026 Real Estate Held for Sale 721,532 1,251,149 ----------- ----------- Net Investments in Real Estate 4,095,297 5,101,175 ----------- ----------- Total Assets $ 5,890,714 $ 5,954,153 =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 11,458 $ 19,484 Distributions Payable 1,321,511 109,390 Unearned Rent 0 3,105 ----------- ----------- Total Current Liabilities 1,332,969 131,979 ----------- ----------- PARTNERS' CAPITAL: General Partners 1,527 6,585 Limited Partners, $1,000 per Unit; 30,000 Units authorized; 21,152 Units issued; 20,166 Units outstanding 4,556,218 5,815,589 ----------- ----------- Total Partners' Capital 4,557,745 5,822,174 ----------- ----------- Total Liabilities and Partners' Capital $ 5,890,714 $ 5,954,153 =========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31
2010 2009
RENTAL INCOME $ 311,780 $ 365,905
EXPENSES: Partnership Administration - Affiliates 113,736 133,424 Partnership Administration and Property Management - Unrelated Parties 22,413 24,514 Depreciation 88,273 88,273 ----------- ----------- Total Expenses 224,422 246,211 ----------- -----------
OPERATING INCOME 87,358 119,694
OTHER INCOME: Interest Income 11,584 12,470 ----------- -----------
INCOME FROM CONTINUING OPERATIONS 98,942 132,164
Income from Discontinued Operations 286,309 917,200 ----------- ----------- NET INCOME $ 385,251 $ 1,049,364 =========== =========== NET INCOME ALLOCATED: General Partners $ 11,439 $ 29,295 Limited Partners 373,812 1,020,069 ----------- ----------- $ 385,251 $ 1,049,364 =========== =========== INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 4.86 $ 6.49 Discontinued Operations 13.68 44.09 ----------- ----------- Total $ 18.54 $ 50.58 =========== =========== Weighted Average Units Outstanding - Basic and Diluted 20,166 20,166 =========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
2010 2009
CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 385,251 $ 1,049,364
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 90,674 105,775 Gain on Sale of Real Estate (160,465) (677,530) (Increase) Decrease in Receivables 950 (950) Decrease in Payable to AEI Fund Management, Inc. (8,026) (18,953) Increase (Decrease) in Unearned Rent (3,105) 3,105 ----------- ----------- Total Adjustments (79,972) (588,553) ----------- ----------- Net Cash Provided By Operating Activities 305,279 460,811 ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sale of Real Estate 1,075,669 2,912,264 ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: Distributions Paid to Partners (437,559) (2,890,102) ----------- -----------
NET INCREASE IN CASH 943,389 482,973
CASH, beginning of year 852,028 369,055 ----------- ----------- CASH, end of year $ 1,795,417 $ 852,028 =========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31
Limited Partnership General Limited Units Partners Partners Total Outstanding
BALANCE, December 31, 2008 $ 5,655 $7,603,612 $7,609,267 20,165.79
Distributions Declared (28,365) (2,808,092) (2,836,457)
Net Income 29,295 1,020,069 1,049,364 -------- ---------- ---------- ---------- BALANCE, December 31, 2009 6,585 5,815,589 5,822,174 20,165.79
Distributions Declared (16,497) (1,633,183) (1,649,680)
Net Income 11,439 373,812 385,251 -------- ---------- ---------- ---------- BALANCE, December 31, 2010 $ 1,527 $4,556,218 $4,557,745 20,165.79 ======== ========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(1) Organization -
AEI Net Lease Income & Growth Fund XIX Limited Partnership ("Partnership") was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management XIX, 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 May 31, 1991 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. The offering terminated February 5, 1993 when the extended offering period expired. The Partnership received subscriptions for 21,151.928 Limited Partnership Units. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $21,151,928, 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 12% 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 98% to the Limited Partners and 2% to the General Partners.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(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 12% 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.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(2) Summary of Significant Accounting Policies - (Continued)
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.
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 triple 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.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(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.
The buildings and equipment of the Partnership are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 30 years and 10 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.
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, 2010 and 2009.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(2) Summary of Significant Accounting Policies - (Continued)
Fair Value Measurements
As of December 31, 2010, the Partnership has 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 2010 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: Champps Americana restaurant in Utica, Michigan (28% - AEI Net Lease Income & Growth Fund XX Limited Partnership and unrelated third parties); Biaggi's restaurant (50% - AEI Net Lease Income & Growth Fund XX Limited Partnership) and Winn-Dixie store (18.1551% - AEI Income & Growth Fund XXI Limited Partnership and unrelated third parties).
The Partnership owned a 50% interest in a Tractor Supply Company store. AEI Net Lease Income & Growth Fund XX Limited Partnership owned a 50% interest in this property until the property was sold to an unrelated third party in 2009. The Partnership owned a 40% interest in a Tumbleweed restaurant in Chillicothe, Ohio. AEI Real Estate Fund XVIII Limited Partnership and an unrelated third party owned the remaining 60% interest in this property until the property was sold to an unrelated third party in 2010.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(3) Related Party Transactions - (Continued)
AEI received the following reimbursements for costs and expenses from the Partnership for the years ended December 31: 2010 2009
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. $ 113,736 $ 133,424 ======== ======== 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 $7,219 and $8,603 of expenses related to Discontinued Operations in 2010 and 2009, respectively. $ 29,632 $ 33,117 ======== ======== c.AEI is reimbursed for costs incurred in providing services related to the sale of property. $ 45,107 $ 95,632 ======== ========
The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a, b and c. 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 triple net leases, classified as operating leases. Under a triple net lease, the tenant is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses for the property. The only exception is under the Lease for the Advance Auto Parts store, the Partnership is responsible for repairs to the structural components of the building, except for the roof, which is the tenant's responsibility. At the time the properties were acquired, the remaining primary lease term varied from 13 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.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(4) Investments in Real Estate - (Continued)
The Partnership's properties are commercial, single-tenant buildings. The HomeTown Buffet restaurant was constructed and acquired in 1993. The Champps Americana restaurant in Troy, Michigan was constructed and acquired in 1998. The land for the Champps Americana restaurant in Utica, Michigan was acquired in 2001 and construction of the restaurant was completed in 2002. The Biaggi's restaurant was constructed in 2001 and acquired in 2003. The Winn-Dixie store was constructed in 1997 and acquired in 2003. The Advance Auto Parts store was constructed in 2005 and acquired in 2006. 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, 2010 are as follows: Buildings and Accumulated Property Land Equipment Total Depreciation
HomeTown Buffet, Tucson, AZ $ 15,314 $ 13,104 $ 28,418 $ 7,664 Champps Americana, Troy, MI 256 532 788 221 Champps Americana, Utica, MI 346,554 617,320 963,874 190,812 Biaggi's, Ft. Wayne, IN 503,205 876,142 1,379,347 219,037 Advance Auto Parts, Harlingen, TX 486,588 1,113,415 1,600,003 180,931 ---------- ---------- ---------- --------- $1,351,917 $2,620,513 $3,972,430 $ 598,665 ========== ========== ========== =========
In September 2009, Champps Operating Corporation, the tenant of the Champps Americana restaurant in Utica, Michigan, approached the Partnership with a request to adjust the rent on the property to a market rental rate based on the restaurant's performance and the current conditions in the market. In December 2009, after reviewing the financial statements for the restaurant and Champps, the Partnership agreed to amend the Lease to reduce the annual rent for the property by 45% to $68,749 for the next three years. On January 1, 2013, the rent will revert to the original amount due under the Lease. During the three-year period, the amendment provides for additional rental payments if the restaurant's sales exceed certain stated amounts.
The Partnership owns a 2.2074% interest in a HomeTown Buffet restaurant and a .016% interest in a Champps Americana restaurant in Troy, Michigan. The remaining interests in these properties are owned by unrelated third parties, who own the properties with the Partnership as tenants-in- common.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(4) Investments in Real Estate - (Continued)
For properties owned as of December 31, 2010, the minimum future rent payments required by the leases are as follows:
2011 $ 385,078 2012 394,333 2013 447,022 2014 447,022 2015 452,403 Thereafter 1,493,307 --------- $3,619,165 =========
There were no contingent rents recognized in 2010 and 2009.
(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 2010 2009
Biaggi's Ristorante Italiano, LLC Restaurant $ 130,540 $ 130,540 Advance Stores Company, Inc. Retail 111,210 111,210 Winn-Dixie Stores Leasing, LLC Retail 92,042 131,615 Champps Operating Corporation Restaurant 68,817 121,506 --------- --------- Aggregate rent revenue of major tenants $ 402,609 $ 494,871 ========= ========= Aggregate rent revenue of major tenants as a percentage of total rent revenue 90% 78% ========= =========
(6) Discontinued Operations -
In February 2009, the Partnership entered into an agreement to sell the Taco Cabana restaurant in San Antonio, Texas to an unrelated third party. On March 13, 2009, the sale closed with the Partnership receiving net proceeds of $1,259,658, which resulted in a net gain of $419,943. At the time of sale, the cost and related accumulated depreciation was $1,147,274 and $307,559, respectively.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(6) Discontinued Operations - (Continued)
In May 2009, the Partnership entered into an agreement to sell the Tractor Supply Company retail store in Mesquite, Texas to an unrelated third party. On July 2, 2009, the sale closed with the Partnership receiving net proceeds of $1,332,125, which resulted in a net gain of $192,222. At the time of sale, the cost and related accumulated depreciation was $1,231,625 and $91,722, respectively.
On June 3, 2009, the Partnership sold its remaining 2.5775% interest in the Marie Callender's restaurant in Henderson, Nevada to an unrelated third party. The Partnership received net sale proceeds of $45,359, which resulted in a net gain of $9,570. The cost and related accumulated depreciation of the interest sold was $44,142 and $8,353, respectively.
On September 3, 2009, the Partnership sold 5.5187% of the Winn-Dixie store in Panama City, Florida to an unrelated third party. The Partnership received net sale proceeds of $275,122, which resulted in a net gain of $55,795. The cost and related accumulated depreciation of the interest sold was $255,475 and $36,148, respectively.
During 2010, the Partnership sold an additional 13.3262% of the Winn-Dixie store in Panama City, Florida, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $637,586, which resulted in a net gain of $107,969. The cost and related accumulated depreciation of the interests sold was $616,905 and $87,288, respectively. The Partnership is attempting to sell its remaining 18.1551% interest in the property. At December 31, 2010 and 2009, the property was classified as Real Estate Held for Sale with a carrying value of $721,532 and $1,251,149, respectively.
In March 2009, Tumbleweed, Inc., the tenant of the Tumbleweed restaurant in Chillicothe, Ohio filed for Chapter 11 bankruptcy reorganization. In July 2009, the tenant contacted the Partnership and offered to assume the Lease and extend the Lease term five years in exchange for a 15% rent reduction for a five-year period beginning on September 1, 2009. The Partnership accepted this offer and agreed to a Lease Amendment, which was subject to court approval of the tenant's Plan of Reorganization. In December 2009, the bankruptcy court approved the Plan of Reorganization. Under the Plan, Tumbleweed assumed the Lease for this property and the Lease amendment became effective. On September 1, 2014, the rent would have reverted to the original amount due under the Lease. As of the date of sale, Tumbleweed had complied with all Lease terms.
In April 2010, the Partnership signed a non-binding letter of intent to sell the Tumbleweed restaurant in Chillicothe, Ohio to an unrelated third party. In August 2010, the parties entered into a written purchase agreement. On October 28, 2010, the sale closed with the Partnership receiving net proceeds of $438,083, which resulted in a net gain of $52,496. At the time of sale, the cost and related accumulated depreciation was $505,224 and $119,637, respectively.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(6) Discontinued Operations - (Continued)
During 2010 and 2009, the Partnership distributed net sale proceeds of $1,334,220 and $2,358,847 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $65.49 and $115.81 per Limited Partnership Unit, respectively.
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:
2010 2009
Rental Income $ 135,464 $ 265,775 Property Management Expenses (7,219) (8,603) Depreciation (2,401) (17,502) Gain on Disposal of Real Estate 160,465 677,530 --------- --------- Income from Discontinued Operations $ 286,309 $ 917,200 ========= =========
(7) Partners' Capital -
For the years ended December 31, 2010 and 2009, the Partnership declared distributions of $1,649,680 and $2,836,457, respectively. The Limited Partners received distributions of $1,633,183 and $2,808,092 and the General Partners received distributions of $16,497 and $28,365 for the years, respectively. The Limited Partners' distributions represent $80.99 and $139.25 per Limited Partnership Unit outstanding in 2010 and 2009, respectively, using 20,166 weighted average Units for both years. The distributions represent $18.54 and $50.58 per Unit of Net Income and $62.45 and $88.67 per Unit of return of capital in 2010 and 2009, respectively.
As part of the Limited Partner distributions discussed above, the Partnership distributed net sale proceeds of $1,320,878 and $2,335,259 in 2010 and 2009, respectively. The distributions reduced the Limited Partners' Adjusted Capital Contributions.
After the effect of redemptions and the return of capital from the sale of property, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $154.29 per original $1,000 invested.
AEI NET LEASE INCOME & GROWTH FUND XIX LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(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:
2010 2009
Net Income for Financial Reporting Purposes $ 385,251 $1,049,364
Depreciation for Tax Purposes Over Depreciation for Financial Reporting Purposes (7,390) (20,782)
Income Accrued for Tax Purposes Over (Under) Income for Financial Reporting Purposes (1,670) 3,105
Property Expenses for Tax Purposes Under Expenses for Financial Reporting Purposes 854 0
Gain on Sale of Real Estate for Tax Purposes Over (Under) Gain for Financial Reporting Purposes (15,739) 22,679 ---------- ---------- Taxable Income to Partners $ 361,306 $1,054,366 ========== ==========
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: 2010 2009
Partners'Capital for Financial Reporting Purposes $4,557,745 $5,822,174
Adjusted Tax Basis of Investments in Real Estate Over Net Investments in Real Estate for Financial Reporting Purposes 118,061 141,190
Income Accrued for Tax Purposes Over Income for Financial Reporting Purposes 1,435 3,105
Property Expenses for Tax Purposes Under Expenses for Financial Reporting Purposes 854 0
Syndication Costs Treated as Reduction of Capital For Financial Reporting Purposes 3,012,278 3,012,278 ---------- ---------- Partners' Capital for Tax Reporting Purposes $7,690,373 $8,978,747 ========== ==========
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, 2010. 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, 2010 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, 2010 based on the criteria in Internal Control-Integrated Framework issued by the COSO.
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 XIX, 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:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. (Continued)
Robert P. Johnson, age 66, is Chief Executive Officer, President and sole director and has held these positions since the formation of AFM in September, 1990, and has been elected to continue in these positions until December 2011. 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 51, 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 2011. 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 Peat Marwick 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, 2010. 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 2010 fiscal year.
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 28, 2011:
Name and Address Number of Percent of Beneficial Owner Units Held of Class
AEI Fund Management XIX, Inc. 0 0.00% Robert P. Johnson 5.12 0.03% Patrick W. Keene 0 0.00%
Address for all: 1300 Wells Fargo Place 30 East 7th Street, St. Paul, Minnesota 55101
The persons set forth in the preceding table hold sole voting power and power of disposition with respect to all of the Units set forth opposite their names. 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, 2010 and 2009.
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.
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 administrative expenses not allowed under the NASAA Guidelines ("Guidelines") will not exceed the sum of (i) the front-end fees allowed by the Guidelines less the front-end fees paid by the Partnership, (ii) the cumulative property management fees allowed by the Guidelines but not paid, (iii) any real estate commission allowed by the Guidelines, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the General Partners. The administrative expenses not allowed under the Guidelines include a controlling person's salary and fringe benefits, rent and depreciation. As of December 31, 2010, the cumulative reimbursements to the General Partners and their affiliates did not exceed those amounts.
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, 2010.
Person or Entity Amount Incurred From Receiving Form and Method Inception (September 14, 1990) Compensation of Compensation To December 31, 2010
AEI Securities, Inc. Selling Commissions equal to 7% of $2,115,193 proceeds plus a 3% nonaccountable expense allowance, most of which was reallowed to Participating Dealers.
General Partners and Reimbursement at Cost for other $ 903,786 Affiliates Organization and Offering Costs.
General Partners and Reimbursement at Cost for all $ 793,888 Affiliates Acquisition Expenses.
General Partners and Reimbursement at Cost for providing $4,268,402 Affiliates administrative services to the Fund, including all expenses related to management of the Fund's properties and all other transfer agency, reporting, partner relations and other administrative functions.
General Partners and Reimbursement at Cost for providing $1,436,379 Affiliates services related to the disposition of the Fund's properties.
General Partners 1% of Net Cash Flow in any fiscal $ 260,775 year until the Limited Partners have received annual, non-cumulative distributions of Net Cash Flow equal to 10% of their Adjusted Capital Contributions and 10% of any remaining Net Cash Flow in such fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued)
Person or Entity Amount Incurred From Receiving Form and Method Inception (September 14, 1990) Compensation of Compensation To December 31, 2010
General Partners 1% of distributions of Net Proceeds $ 182,228 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.
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, 2010 and 2009:
Fee Category 2010 2009
Audit Fees $ 11,770 $ 11,725 Audit-Related Fees 0 0 Tax Fees 0 0 All Other Fees 0 0 --------- -------- Total Fees $ 11,770 $ 11,725 ========= ========
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. 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 S-11 filed on October 10, 1990 [File No. 33-37239]).
3.2 Limited Partnership Agreement (incorporated by reference to Exhibit 3.2 of the registrant's Registration Statement on Form S-11 filed on October 10, 1990 [File No. 33-37239]).
10.1 Net Lease Agreement dated April 27, 2001 between the Partnership, AEI Real Estate Fund XVII Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and Champps Entertainment, Inc. relating to the Property at 12515 Hall Road, Utica, Michigan (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed May 15, 2001).
10.2 First Amendment to Net Lease Agreement dated February 12, 2002 between the Partnership, AEI Real Estate Fund XVII Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and Champps Entertainment, Inc. relating to the Property at 12515 Hall Road, Utica, Michigan (incorporated by reference to Exhibit 10.77 of Form 10-KSB filed March 29, 2002).
10.3 Assignment and Assumption of Lease dated July 3, 2003, between the Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and NMA Fort Wayne, LLC relating to the Property at 4010 Jefferson Boulevard, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed August 14, 2003).
10.4 Assignment and Assumption of Lease Agreement dated September 19, 2003 between the Partnership, AEI Income & Growth Fund XXI 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).
10.5 Assignment and Assumption of Lease dated February 17, 2006 between the Partnership and Meyer-Lamph Development Group, LTD. relating to the Property at 621 South 77 Sunshine Strip, Harlingen, Texas (incorporated by reference to Exhibit 10.26 of Form 10-KSB filed March 30, 2006).
10.6 Purchase Agreement dated February 10, 2009 between the Partnership and the Thorsen Living Trust relating to the Property at 6040 Bandera Road, San Antonio, Texas (incorporated by reference to Exhibit 10.1 of Form 8-K filed March 19, 2009).
10.7 Amendment to Purchase Agreement dated July 1, 2009 between the Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and ZYL Investments, L.L.C. relating to the Property at 1740 North Beltline Road, Mesquite, Texas (incorporated by reference to Exhibit 10.1 of Form 8-K filed July 8, 2009).
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (Continued)
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.
32 Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
AEI NET LEASE INCOME & GROWTH FUND XIX Limited Partnership By: AEI Fund Management XIX, Inc. Its Managing General Partner
March 25, 2011 By: /s/ ROBERT P JOHNSON Robert P. Johnson, President and Director (Principal Executive Officer)
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 25, 2011 Robert P.Johnson and Sole Director of Managing General Partner
/s/PATRICK W KEENE Chief Financial Officer and Treasurer March 25, 2011 Patrick W.Keene (Principal Accounting Officer)