Item 1. Business
CNL Income Fund XVII, Ltd. (the "Registrant" or the "Partnership") is a limited partnership which was organized pursuant to the laws of the State of Florida on February 10, 1995. The general partners of the Partnership are Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation (the "General Partners"). Beginning on September 2, 1995, the Partnership offered for sale up to $30,000,000 of limited partnership interests (the "Units") (3,000,000 Units at $10 per Unit) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended, effective August 11, 1995. The offering terminated on September 19, 1996, at which date the maximum offering proceeds of $30,000,000 had been received from investors who were admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed (the "Properties"), which are leased primarily to operators of national and regional fast-food, family-style and casual dining restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership from its offering of Units, after deduction of organizational and offering expenses, totalled $26,400,000 and were used as of December 31, 1998, to acquire 29 Properties, pay acquisition fees totalling $1,350,000 and to establish a working capital reserve for Partnership purposes. The 29 Properties included four Properties owned by joint ventures in which the Partnership is a co-venturer and three Properties owned with affiliates of the General Partners as tenants-in-common.
As of December 31, 2000, the Partnership owned 28 Properties, either directly or indirectly through joint venture or tenancy in common arrangements. During the year ended December 31, 2001, the Partnership reinvested the net sales proceeds from the 2000 sale of the Properties in Warner Robins, Georgia, and Long Beach, California along with a portion of the net sales proceeds received from the 2001 sale of the Property in Houston, Texas, into a joint venture arrangement, CNL VII & XVII Lincoln Joint Venture, with an affiliate of the General Partners to purchase and hold one property in Lincoln, Nebraska. In addition, during 2001, the Partnership sold its Properties in Kentwood, Missouri and El Dorado, California, and reinvested a portion of these net sales proceeds in a Property in Austin, Texas, and in a Property in Waldorf, Maryland, as tenants-in-common, with affiliates of the General Partners. During 2001, the Partnership distributed to the Limited Partners, a portion of the net sales proceeds received from the sale of the Property in Inglewood, California and a portion of the net sales proceeds received from the sale of the Property in Houston, Texas. During 2002, the Partnership sold its Properties in Mesquite, Nevada; Knoxville, Tennessee; and Wilmette, Illinois, and reinvested the majority of the sales proceeds in a Property in Houston Texas; a joint venture arrangement, Katy Joint Venture, with an affiliate of the General Partners, which holds one Property in Katy, Texas; and in a Property in Kenosha, Wisconsin, as tenants-in-common, with an affiliate of the General Partners. Also during 2002, Mansfield Joint Venture, in which the Partnership owns a 21% interest, sold its Property in Mansfield, Texas and reinvested the proceeds in a Property in Arlington, Texas. During 2003, the Partnership and its joint venture partner liquidated CNL Ocean Shores Joint Venture and the Partnership received its pro rata share of the liquidation proceeds. The Partnership intends to reinvest the liquidation proceeds in an additional Property and also pay liabilities of the Partnership.
As of December 31, 2003, the Partnership owned 26 Properties. The 26 Properties include four Properties owned by joint ventures in which the Partnership is a co-venturer and six Properties owned with affiliates as tenants-in-common. The Partnership generally leases the Properties on a triple-net basis with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities.
The Partnership holds 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 consider factors such as potential capital appreciation, net cash flow and federal income taxes. Certain lessees also have been granted options to purchase Properties, generally at the Property's then fair market value after a specified portion of the lease term has elapsed. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under property purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Partnership's leases. The leases of the Properties provide for initial terms ranging from 10 to 20 years (the average being 18 years) and expire between 2011 and 2020. The majority of the leases are on a triple-net basis, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $63,000 to $246,400. The majority of the leases provide for percentage rent, based on sales in excess of a specified amount. In addition, the majority of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase.
Generally, the leases of the Properties provide for two to four successive five-year renewal options subject to the same terms and conditions as the initial lease. Lessees of 21 of the Partnership's 26 Properties also have been granted options to purchase Properties at the Property's then fair market value after a specified portion of the lease term has elapsed. Fair market value will be determined through an appraisal by an independent appraisal firm. Under the terms of certain leases, the option purchase price may equal the Partnership's original cost to purchase the Property (including acquisition costs), plus a specified percentage from the date of the lease or a specified percentage of the Partnership's purchase price, if that amount is greater than the Property's fair market value at the time the purchase option is exercised.
The leases generally provide that, in the event the Partnership wishes to sell the Property subject to the terms of the lease, the Partnership first must offer the lessee the right to purchase the Property on the same terms and conditions, and for the same price, as any offer which the Partnership has received for the sale of the Property.
In December 2002, AmeriKing Corporation, the parent company to National Restaurant Enterprises, Inc., which was the tenant of the Properties in Harvey, Lyons, and Chicago Ridge Illinois, filed for bankruptcy protection. As a result of the bankruptcy, the leases relating to the Properties in Harvey and Chicago Ridge, Illinois were amended during 2003 to provide for a reduction in rents. In December 2003, the leases relating to all three Properties were assigned to and assumed by a new tenant. As a result of the assignment and assumption, the rents due under the leases were reduced. The Partnership does not believe these reduced rents will have a material adverse effect on the operating results of the Partnership.
Major Tenants
During the year ended December 31, 2003, four lessees of the Partnership, Golden Corral Corporation, National Restaurant Enterprises, Inc., Taco Cabana, LP and Carrols Corporation (which are affiliated entities under common control) (hereinafter referred to as "Carrols Corporation") and RTM Indianapolis, Inc. and RTM Southwest Texas, Inc. (which are affiliated entities under common control) (hereinafter referred to as "RTM, Inc."), each contributed more than ten percent of the Partnership's total rental revenues (including total rental revenues form the Partnership's share of rental income from Properties owned by joint ventures and Properties owned with separate affiliates of the General Partners as tenants-in-common). As of December 31, 2003, Golden Corral Corporation and Carrols Corporation were each the lessee under leases relating to four restaurants, and RTM, Inc. was the lessee under leases relating to three restaurants. It is anticipated that based on the minimum rental payments required by the leases, Golden Corral Corporation, Carrols Corporation and RTM, Inc. each will continue to contribute more than ten percent of the Partnership's total rental revenues in 2004. In addition, four Restaurant Chains, Golden Corral Buffet and Grill ("Golden Corral"), Burger King, Taco Cabana and Arby's, each accounted for more than ten percent of the Partnership's total rental revenues during the year ended December 31, 2003 (including total rental revenues from the Partnership's share of rental income from Properties owned by joint ventures and Properties owned with separate affiliates of the General Partners as tenants-in-common). In 2004, it is anticipated that each of these four Restaurant Chains will continue to contribute more than ten percent of the Partnership's total rental revenues to which the Partnership is entitled under the terms of the leases. Any failure of these lessees or Restaurant Chains will materially affect the Partnership's operating results if the Partnership is not able to re-lease the Properties in a timely manner. As of December 31, 2003, Golden Corral Corporation leased Properties with an aggregate carrying value in excess of 20% of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The partnership has entered into the following joint venture and tenancy in common arrangements as of December 31, 2003:
Each joint venture or tenancy in common was formed to hold one Property. Each CNL Income Fund is an affiliate of the General Partners and is a limited partnership organized pursuant to the laws of the state of Florida. The Partnership shares management control equally with the affiliates of the General Partners.
The joint venture and tenancy in common arrangements provide for the Partnership and its joint venture and tenancy in common partners to share in all costs and benefits in proportion to each partner's percentage interest in the entity or Property. The Partnership and its partners are also jointly and severally liable for all debts, obligations and other liabilities of the joint venture or tenancy in common. Net cash flow from operations is distributed to each joint venture or tenancy in common partner in accordance with its respective percentage interest in the entity or Property.
CNL VII and XVII Lincoln Joint Venture and Katy Joint Venture, each has an initial term of 30 years, and each of the other joint ventures has an initial term of 20 years. After the expiration the initial term, each continues in existence from year to year unless terminated at the option of either joint venturer or by an event of dissolution. Events of dissolution include the bankruptcy, insolvency or termination of any joint venturer, sale of the Property owned by the joint venture and mutual agreement of the Partnership and its joint venture partners to dissolve the joint venture. Any liquidation proceeds, after paying joint venture debts and liabilities and funding reserves for contingent liabilities, will be distributed first to the joint venture partners with positive capital account balances in proportion to such balances until such balances equal zero, and thereafter in proportion to each joint venture partner's percentage interest in the joint venture.
The joint venture and tenancy in common agreements restrict each party's ability to sell, transfer or assign its interest without first offering it for sale to its partners, either upon such terms and conditions as to which the parties may agree or, in the event the parties cannot agree, on the same terms and conditions as any offer from a third party to purchase such joint venture or tenancy in common interest.
During 2003, CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, sold its Property in Ocean Shores, Washington to a third party and the joint venture was liquidated. The Partnership received its pro rata share of the liquidation proceeds.
The use of joint venture and tenancy in common arrangements allows the Partnership to fully invest its available funds at times at which it would not have sufficient funds to purchase an additional property, or at times when a suitable opportunity to purchase an additional property is not available. The use of joint venture and tenancy in common arrangements also provides the Partnership with increased diversification of its portfolio among a greater number of properties. In addition, tenancy in common arrangements may allow the Partnership to defer the gain for federal income tax purposes upon the sale of the property if the proceeds are reinvested in an additional property.
Certain Management Services
RAI Restaurants, Inc. (the "Advisor"), an affiliate of the General Partners, provides certain services relating to management of the Partnership and its Properties pursuant to a management agreement with the Partnership. Under this agreement, the Advisor is responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices, and providing information to the Partnership about the status of the leases and the Properties. The Advisor also assists the General Partners in negotiating the leases. For these services, the Partnership has agreed to pay the Advisor an annual fee of one percent of the sum of gross rental revenues from Properties wholly owned by the Partnership plus the Partnership's allocable share of gross revenues of joint ventures in which the Partnership is a co-venturer, but not in excess of competitive fees for comparable services.
The management agreement continues until the Partnership no longer owns an interest in any Properties unless terminated at an earlier date upon 60 days' prior notice by either party.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned subsidiary of CNL Financial Group, Inc., began providing certain strategic advisory services to the General Partners relative to the Partnership's business. CCM is not reimbursed for these services by the Partnership. CCM also began providing some accounting and portfolio management services to the Partnership during 2003, through a subcontract with the Advisor.
Competition
The fast-food and family-style restaurant business is characterized by intense competition. The restaurants on the Partnership's Properties compete with independently owned restaurants, restaurants which are part of local or regional chains, and restaurants in other well-known national chains, including those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty Corporation, the officers and employees of CNL Restaurant Properties, Inc. (formerly CNL American Properties Fund, Inc.), the parent company of the Advisor, and the officers and employees of CCM perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Financial Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership.
Item 2.
Item 2. Properties
As of December 31, 2003, the Partnership owned 26 Properties. Of the 26 Properties, 16 are owned by the Partnership in fee simple, four are owned through joint venture arrangements and six are owned through tenancy in common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement.
Description of Properties
Land. The Partnership's Property sites, owned directly and indirectly, range from approximately 23,500 to 115,100 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Partnership, directly and indirectly, as of December 31, 2003 by state.
State Number of Properties
California 1 Florida 3 Georgia 1 Illinois 3 Indiana 2 Maryland 1 Nebraska 1 North Carolina 1 Ohio 1 South Carolina 1 Tennessee 2 Texas 8 Wisconsin 1 -------------- TOTAL PROPERTIES 26 ==============
Buildings. Each of the Properties includes a building that is one of a Restaurant Chain's approved designs. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. The sizes of the buildings owned by the Partnership ranged from approximately 2,100 to 11,300 square feet. All buildings on Properties acquired by the Partnership are freestanding and surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. As of December 31, 2003, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using a depreciable life of 40 years for federal income tax purposes.
As of December 31, 2003, the aggregate cost of the Properties owned by the Partnership and joint ventures (including Properties owned through tenancy in common arrangements) for federal income tax purposes was $17,341,796 and $12,245,448, respectively.
The following table lists the Properties owned by the Partnership, directly and indirectly, as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 4 Bennigan's 1 Black-eyed Pea 1 Boston Market 1 Burger King 4 Denny's 1 Fazoli's 1 Golden Corral 4 Jack in the Box 3 Taco Bell 1 Taco Cabana 3 Texas Roadhouse 1 Wendy's 1 -------------- TOTAL PROPERTIES 26 ==============
The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of Restaurant Chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance.
The following is a schedule of the average rent per Property and occupancy rate for the years ended December 31:
(1) Rental revenues include the Partnership's share of rental revenues from the Properties owned through joint venture and tenancy in common arrangements.
(2) Excludes Properties that were vacant at December 31, and did not generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as of December 31, 2003 for each year for the next ten years and thereafter.
Leases with Major Tenants. The terms of each of the leases with the Partnership's major tenants as of December 31, 2003 (see Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business - Leases.
Golden Corral Corporation leases four Golden Corral restaurants. The initial term of each lease is 15 years (three leases expiring in 2011 and one lease in 2015) and the average minimum base annual rent is approximately $156,200 (ranging from approximately $107,600 to $190,000).
National Restaurant Enterprises, Inc. leased three Burger King restaurants. The initial term of each lease was 20 years (expiring between 2016 and 2017) and the average minimum base annual rent was approximately $140,400 (ranging from approximately $123,200 to $153,600). In December 2003, these leases were assigned to and assumed by Heartland Illinois Food Corp.
Carrols Corporation leases three Taco Cabana restaurants and one Burger King restaurant. The initial term of each lease is either 19 or 20 years (expiring between 2016 and 2020) and the average minimum base annual rent is approximately $114,400 (ranging from $94,200 to $140,300).
RTM, Inc. leases three Arby's restaurants. The initial term of each lease is 20 years (expiring in 2016) and the average minimum base annual rent is approximately $89,300 (ranging from approximately $86,100 to $91,900).
Item 3.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of the Partnership, nor any of their respective Properties, is party to, or subject to, any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 12, 2004, there were 1,640 holders of record of the Units. There is no public trading market for the Units, and it is not anticipated that a public market for the Units will develop. During 2003, Limited Partners who wished to sell their Units may have offered the Units for sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners who wished to have their distributions used to acquire additional Units (to the extent Units were available for purchase), may have done so pursuant to such Plan. The General Partners have the right to prohibit transfers of Units. From inception through December 31, 2003, the price paid for any Unit transferred pursuant to the Plan ranged from $9.14 to $9.50 per Unit. The price paid for any Unit transferred other than pursuant to the Plan was subject to negotiation by the purchaser and the selling Limited Partner. The Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low and average sales prices for transfers of Units during 2003 and 2002, other than pursuant to the Plan, net of commissions.
(1) A total of 10,400 and 11,400 Units were transferred other than pursuant to the Plan for the years ended December 31, 2003 and 2002, respectively.
(2) No transfer of Units took place during the quarter other than pursuant to the Plan.
The capital contribution per Unit was $10. All cash available for distribution will be distributed to the partners pursuant to the provisions of the Partnership Agreement.
For each of the years ended December 31, 2003 and 2002, the Partnership declared cash distributions of $2,400,000 to the Limited Partners. Distributions of $600,000 were declared at the close of each of the Partnership's calendar quarters during 2003 and 2002 to the Limited Partners. These amounts include monthly distributions made in arrears for the Limited Partners electing to receive such distributions on this basis. No amounts distributed to partners for the years ended December 31, 2003 and 2002, are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. No distributions have been made to the General Partners to date.
The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis, although some Limited Partners, in accordance with their election, receive monthly distributions for an annual fee.
(b) Not applicable.
Item 6.
Item 6. Selected Financial Data
(1) Income from continuing operation for the years ended December 31, 2002, 2001, 2000 and 1999 includes $456,000, $39,576, $1,079,275 and $232,140 from provisions for write-down of assets, respectively, and for the years ended December 31, 2001 and 2000, it includes $310,979 and $17,447 from gain on sale of assets, respectively. Income from continuing operations for the year ended December 31, 1999 includes $82,914 from loss on dissolution of joint venture.
(2) Certain items in the prior years' financial statements have been reclassified to conform to 2003 presentation. These reclassifications had no effect on net income. The results of operations relating to Properties that were either identified for sale and disposed of subsequent to January 1, 2002 or were classified as held for sale as of December 31, 2003 are reported as discontinued operations. The results of operations relating to properties that were identified for sale as of December 31, 2001 but sold subsequently are reported as continuing operations.
(3) Income (loss) from and gain on disposal of discontinued operations for the years ended December 31, 2003, 2001 and 2000 includes $213,000, $465,915 and $28,644 from provisions for write-down of assets, respectively, and for the year ended December 31, 2002, it includes $285,677 from gain on disposal of discontinued operations.
The above selected financial data should be read in conjunction with the financial statements and related notes contained in Item 8 hereof.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Partnership was organized on February 10, 1995, to acquire for cash, either directly or through joint venture arrangements, both newly constructed and existing restaurant Properties, as well as land upon which restaurant Properties were to be constructed, which are leased primarily to operators of Restaurant Chains. The leases are generally triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases provide for minimum base annual rental amounts (payable in monthly installments) ranging from approximately $63,000 to $246,400. The majority of the leases provide for percentage rent, based on sales in excess of a specified amount. In addition, some of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase.
As of December 31, 2003, 2002, and 2001, the Partnership owned 16, 16, and 18 Properties directly, respectively. In addition, the Partnership owned ten, eleven, and nine Properties indirectly through joint venture or tenancy in common arrangements as of December 31, 2003, 2002, and 2001, respectively.
Capital Resources
For the years ended December 31, 2003, 2002, and 2001, cash from operating activities was $2,143,557, $2,259,664 and $1,784,443, respectively. The decrease in cash from operating activities during the year ended December 31, 2003, as compared to 2002, and the increase in cash from operating activities during 2002, as compared to 2001, was a result of changes in the Partnership's working capital, such as the timing of transactions relating to the collection of receivables and the payment of expenses, and changes in income and expenses, such as changes in rental revenues and changes in operating and Property related expenses.
Other sources and uses of cash included the following during the years ended December 31, 2003, 2002, and 2001.
In January 2001, the Partnership sold its Property in Houston, Texas to a third party and received net sales proceeds of approximately $782,700, resulting in a gain of $4,284. The Partnership used the net sales proceeds to acquire an interest in CNL VII and XVII Lincoln Joint Venture, and to make distributions to the Limited Partners. CNL VII and XVII Lincoln Joint Venture, is a joint venture with CNL Income Fund VII, Ltd., an affiliate of the General Partners. The joint venture holds one Property. The Property was acquired from CNL BB Corp., an affiliate of the General Partners, who had purchased and temporarily held title to the Property in order to facilitate the acquisition of the Property by the joint venture. In April 2001, the Partnership contributed approximately $1,496,700 to the joint venture, which included the net sales proceeds from the sales of Properties in Warner Robins, Georgia, Long Beach, California, and Houston, Texas. The Partnership owns an 86% interest in the profits and losses of the joint venture.
In June 2001, the Partnership sold the Property in Kentwood, Michigan, received net sales proceeds of approximately $681,200 and recorded a loss of $38,877. In July 2001, the Partnership used a portion of these net sales proceeds to acquire an interest in a Property in Waldorf, Maryland, as tenants-in-common with CNL Income Fund VI, Ltd. and CNL Income Fund IX, Ltd., each of which is an affiliate of the General Partners. The Partnership contributed approximately $570,100 for a 25% interest in the profits and losses of the Property.
In September 2001, the Partnership sold the Property in Inglewood, California to a third party for $300,000 and received net sales proceeds of approximately $298,300. Since the Partnership had recorded a provision for write-down of this Property in 2001, no additional gain or loss was recognized on the sale. The Partnership used the majority of the net sales proceeds to pay liabilities of the Partnership.
In September 2001, the Partnership also sold its Property in El Dorado, California to a third party and received net sales proceeds of approximately $1,510,500, resulting in a gain of $345,572. In December 2001, the Partnership reinvested the majority of net sales proceeds received in a Property in Austin, Texas. The Partnership acquired the Property from an affiliate of the General Partners. The affiliate had purchased and temporarily held title to the Property in order to facilitate the acquisition of the Property by the Partnership. The purchase price paid by the Partnership of approximately $1,216,600 represented the costs incurred by the affiliate to acquire the Property. The transaction, or a portion thereof, relating to the sale of the Property and the reinvestment of the proceeds qualified as a like-kind exchange transaction for federal income tax purposes. The Partnership used the remaining net sales proceeds to pay liabilities of the Partnership.
In March 2002, the Partnership sold its Denny's Property in Mesquite, Nevada, to a third party and received net sales proceeds of approximately $771,800. Since the Partnership had recorded provisions for write-down of assets in prior years for this Property, no gain or loss was recognized in 2002 relating to the sale. The provision represented the difference between the carrying value of the Property and its estimated fair value.
In May and June 2002, the Partnership sold its Properties in Knoxville, Tennessee and Wilmette, Illinois to third parties and received total net sales proceeds of approximately $2,727,800 resulting in a total gain of approximately $285,700.
In June 2002, the Partnership reinvested the majority of the net sales proceeds, it received from the sale of the Properties in Mesquite, Nevada and Knoxville, Tennessee, in a Taco Cabana Property located in Houston, Texas, at an approximate cost of approximately $1,364,200.
In addition in June 2002, the Partnership reinvested a portion of the net sales proceeds from the sale of the Property in Mesquite, Nevada in a joint venture arrangement, Katy Joint Venture, with CNL Income Fund IX, Ltd., a Florida limited partnership and an affiliate of the General Partners. The joint venture acquired a Property in Katy, Texas. The Partnership contributed approximately $416,700 for a 40% interest in the profits and losses of the joint venture.
The Partnership and Katy Joint Venture acquired the Properties in Houston and Katy, Texas from CNL Funding 2001-A, LP, and an affiliate of the General Partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the Properties in order to facilitate the acquisition of the Properties by the Partnership and the joint venture. The purchase prices paid by the Partnership and the joint venture represented the costs incurred by CNL Funding 2001-A, LP to acquire and carry the Properties.
In August 2002, the Partnership reinvested the net sales proceeds from the sale of the Property in Wilmette, Illinois in a Property in Kenosha, Wisconsin as tenants-in-common with CNL Income Fund VIII, Ltd. ("CNL VIII"), and an affiliate of the General Partners, at an approximate cost of $1,883,000. The Partnership contributed approximately $1,694,700 for a 90% interest in this Property. The General Partners believe that the transactions, or portion thereof, relating to the sale of the Property and the reinvestment of the net sales proceeds, or a portion thereof, will qualify as a like-kind exchange transaction for federal income tax purposes.
In August 2002, Mansfield Joint Venture, in which the Partnership owns a 21% interest, sold its Property in Mansfield, Texas to the tenant and received net sales proceeds of approximately $1,011,500 resulting in a gain of approximately $269,800. The joint venture used the proceeds from the sale of the Property and additional contributions from the Partnership and CNL Income Fund VII, Ltd., who are the general partners of the joint venture, of approximately $17,000 and $63,900, respectively, to acquire a Property in Arlington, Texas from CNL Net Lease Investors, L.P. ("NLI"), at an approximate cost of $1,089,900. During 2002, and prior to the joint venture's acquisition of this Property, CNL Financial LP Holding, LP ("CFN"), a Delaware limited partnership, and CNL Net Lease Investors GP Corp. ("GP Corp"), a Delaware corporation, purchased the limited partner's interest and general partner's interest, respectively, of NLI. Prior to this transaction, an affiliate of the Partnership's General Partners owned a 0.1% interest in NLI and served as a general partner of NLI. The original general partners of NLI waived their rights to benefit from this transaction. The acquisition price paid by CFN for the limited partner's interest was based on the portfolio acquisition price. The joint venture acquired the Property in Arlington, Texas at CFN's cost and did not pay any additional compensation to CFN for the acquisition of the Property. Each CNL entity is an affiliate of the Partnership's General Partners.
In September 2003, CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, sold its property to a third party for $824,600 resulting in a gain of approximately $413,700. As a result, the Partnership received approximately $242,800 representing its pro-rata share of the liquidation proceeds. CNL Ocean Shores Joint Venture was dissolved in accordance with the joint venture agreement and no gain or loss was recognized on the dissolution. The General Partners intend to reinvest the liquidation proceeds in an additional property and pay liabilities of the Partnership.
None of the Properties owned by the Partnership, or the joint ventures or tenancy in common arrangements in which the Partnership owns an interest, is or may be encumbered. Subject to certain restrictions on borrowing, however, the Partnership may borrow funds but will not encumber any of the Properties in connection with any such borrowing. The Partnership will not borrow for the purpose of returning capital to the Limited Partners. The Partnership will not borrow under arrangements that would make the Limited Partners liable to creditors of the Partnership. The General Partners further have represented that they will use their reasonable efforts to structure any borrowing so that it will not constitute "acquisition indebtedness" for federal income tax purposes and also will limit the Partnership's outstanding indebtedness to three percent of the aggregate adjusted tax basis of its Properties. In addition, the Partnership will not borrow unless it first obtains an opinion of counsel that such borrowing will not constitute acquisition indebtedness. Affiliates of the General Partners from time to time incur certain operating expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest.
At December 31, 2003, the Partnership had $816,092 invested in cash and cash equivalents as compared to $829,739 at December 31, 2002. At December 31, 2003, these funds were held in demand deposit and money market accounts at commercial banks. As of December 31, 2003, the average interest rate earned on rental income held in demand deposit and money market accounts at commercial banks was less than one percent annually. The funds remaining at December 31, 2003, after payment of distributions and other liabilities, will be used to invest in an additional property and to meet the Partnership's working capital needs.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash and leasing them under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The General Partners believe that the leases will continue to generate net cash flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership.
The General Partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General Partners do not believe that working capital reserves are necessary at this time. In addition, because generally all leases of the Partnership's Properties are on a triple-net basis, it is not anticipated that a permanent reserve for maintenance and repairs is necessary at this time. To the extent, however, that the Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. The General Partners have the right to cause the Partnership to maintain reserves if, in their discretion, they determine such reserves are required to meet the Partnership's working capital needs.
The Partnership generally distributes cash from operations remaining after the payment of the operating expenses of the Partnership, to the extent that the General Partners determine that such funds are available for distribution. Based on current and future cash from operating activities, the Partnership declared distributions to the Limited Partners of $2,400,000 for each of the years. This represents distributions of $0.80 per Unit for each of the years ended December 31, 2003, 2001 and 2001. No distributions were made to the General Partners for the years ended December 31, 2003, 2002 and 2001. No amounts distributed to the Limited Partners for the years ended December 31, 2003, 2002 and 2001 are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to Limited Partners on a quarterly basis.
During 2000, the General Partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the General Partners' capital account as of December 31, 1999. Accordingly, the General Partners were not allocated any net income and did not receive any distributions during the years ended December 31, 2003, 2002 and 2001.
As of December 31, 2003 and 2002, the Partnership owed $11,242 and $26,600, respectively, to affiliates of the General Partners for operating expenses, accounting and administrative services, and management fees. As of March 12, 2004, the Partnership had reimbursed the affiliates for these amounts. Other liabilities, including distributions payable, increased to $724,902 at December 31, 2003, from $698,859 at December 31, 2002. The General Partners believe that the Partnership has sufficient cash on hand to meet its current working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture and tenancy in common arrangements that are accounted for using the equity method. The General Partners do not believe that any such interest would constitute an off-balance sheet arrangement requiring any additional disclosures under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities, or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"), and have been accounted for using either the direct financing or the operating method. FAS 13 requires management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant. In addition, management assumes that all payments to be received under its leases are collectible. Changes in management's estimates or assumptions regarding collectibility of lease payments could result in a change in accounting for the lease.
The Partnership accounts for its unconsolidated joint ventures using the equity method of accounting. Under generally accepted accounting principles, the equity method of accounting is appropriate for entities that are partially owned by the Partnership, but for which operations of the investee are shared with other partners. The Partnership's joint venture agreements require the consent of all partners on all key decisions affecting the operations of the underlying Property.
Management reviews the Partnership's Properties and investments in unconsolidated entities periodically for impairment at least once a year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment is based on the carrying amount of the Property or investment at the date it is tested for recoverability compared to the sum of the estimated future cash flows expected to result from its operation and sale through the expected holding period. If an impairment is indicated, the asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the decision to sell or commits to a plan to sell a Property within one year, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31,
Rental revenues from continuing operations were $1,696,453 for the year ended December 31, 2003 as compared to $1,700,468 in the same period in 2002. While rental revenues from continuing operations remained constant during 2003 as compared to 2002, they were impacted by the following items. AmeriKing Corporation, the parent company to National Restaurant Enterprises, Inc., which was the tenant of the Properties in Harvey, Lyons and Chicago Ridge, Illinois, experienced financial difficulties and filed for bankruptcy protection in December 2002. The tenant has continued paying rent for each of these Properties; however, during 2003, the Partnership granted a rent reduction of approximately $24,800, for the period January through February 2003, to the tenant of these Properties, and a second temporary rent reduction of approximately $49,600 for the period September through December 2003. In December 2003, the leases relating to the Properties were assigned to and assumed by a new tenant. As a result of the assignment and assumption, the rents due under the leases have been reduced. The Partnership does not believe these reduced rents will have a material adverse effect on the operating results of the Partnership.
The decrease in rental revenues from continuing operations during 2003 as discussed above, was offset by the acquisition of a Property in Houston, Texas in June 2002 with the majority of the net sales proceeds received from the 2002 sales of the Properties in Mesquite, Nevada and Knoxville, Tennessee.
During the years ended December 31, 2003 and 2002, the Partnership recognized income of $645,804 and $543,978, respectively, attributable to the net operating results reported by unconsolidated joint ventures. The increase in net income earned by unconsolidated joint ventures during 2003, was partially due to the Partnership reinvesting the majority of the net proceeds from the sales of the Properties in Mesquite, Nevada and Wilmette, Illinois during 2002 in Katy Joint Venture and a tenancy in common arrangement for a Property in Kenosha, Wisconsin, with affiliates of the General Partners. Also, CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, sold its vacant Property in Ocean Shores, Washington to a third party in September 2003 and recorded a gain of approximately $413,700 for which the Partnership received a liquidating distribution of approximately $242,800.
The increase in net income earned by unconsolidated joint ventures was partially offset by the fact that during the year ended December 31, 2002, the Partnership and an affiliate of the General Partners, as tenants-in-common, collected and recognized as revenues approximately $309,700 in past due rents. Phoenix Restaurant Group, Inc., the former tenant of the Property in Corpus Christi, Texas, in which the Partnership owns an approximate 27% interest, ceased paying rent and filed for bankruptcy in 2001. During April 2002, the bankruptcy court assigned the lease to a new tenant, an affiliate of the General Partners, and as a result, the tenancy in common collected the past due rents from the new tenant. All other lease terms remained unchanged and are substantially the same as the Partnership's other leases. In addition, in August 2002, Mansfield Joint Venture, in which the Partnership owns a 21% interest, sold the Property in Mansfield, Texas resulting in a gain of approximately $269,800. The Partnership recorded its pro-rata share of the gain as equity in earnings. The joint venture reinvested the net sales proceeds in a Property in Arlington, Texas.
During the year ended December 31, 2003, four lessees of the Partnership, Golden Corral Corporation, National Restaurant Enterprises, Inc., Carrols Corporation, and RTM, Inc., each contributed more than ten percent of the Partnership's total rental revenues (including rental revenues from the Partnership's share of rental income from Properties owned by joint ventures and Properties owned with separate affiliates of the General Partners as tenants-in-common). As of December 31, 2003, Golden Corral Corporation and Taco Cabana, LP were each the lessee under leases relating to four restaurants, and RTM, Inc., was the lessee under leases relating to three restaurants. It is anticipated that based on the minimum rental payments required by the leases, Golden Corral Corporation, Carrols Corporation and RTM, Inc. each will continue to contribute more than ten percent of the Partnership's total rental revenues in 2004. In addition, four Restaurant Chains, Golden Corral, Burger King, Taco Cabana, and Arby's, each accounted for more than ten percent of the Partnership's total rental revenues during the year ended December 31, 2003 (including rental revenues from the Partnership's share of rental income from Properties owned by joint ventures and Properties owned with separate affiliates of the General Partners as tenants-in-common). In 2004, it is anticipated that each of these four Restaurant Chains will continue to contribute more than ten percent of the total rental revenues to which the Partnership is entitled under the terms of the leases. Any failure of these lessees or Restaurant Chains will have a material adverse affect on the Partnership's income if the Partnership is not able to re-lease or sell the Properties in a timely manner.
During the years ended December 31, 2003 and 2002, the Partnership also earned $902 and $16,269, respectively, in interest and other income. During 2002, interest and other income was higher as compared to 2003 because the Partnership recognized as other income the reimbursement of property expenditures of approximately $11,200, which were incurred in previous years related to vacant Properties. Interest and other income was lower during 2003 due to a decline in interest rates and a decrease in the average cash balance.
Operating expenses, including depreciation and amortization expense and provision for write-down of assets, were $551,485 and $1,004,659 for the years ended December 31, 2003 and 2002, respectively. The decrease in operating expenses during 2003, was due to the recording of provisions for write-down of assets, during 2002, in the amount of $456,000 relating to the Properties in Harvey and Chicago Ridge, Illinois, as a result of AmeriKing Corporation, the parent company to National Restaurant Enterprises, Inc. which was the tenant of these Properties, filing for bankruptcy protection, as described above. The provision represented the difference between the carrying value of the Properties and their estimated fair value.
The decrease in operating expenses during the year ended December 31, 2003 was also partially due to a decrease in the costs incurred for administrative expenses for servicing the Partnership and its Properties during 2003. The decrease in operating expenses during the year ended December 31, 2003 was partially offset by an increase in depreciation expense as a result of a Property acquisition in 2002, and the reclassification of the lease relating to the Property in Muncie, Indiana from direct financing leases to operating leases due to an amendment to the lease. Also, there was an increase in state tax expense relating to several states in which the Partnership conducts business.
During 2002, the Partnership identified and sold the Properties located in Mesquite, Nevada; Knoxville, Tennessee; and Wilmette, Illinois, which were classified as discontinued operations in the accompanying financial statements. In October 2001, Phoenix Restaurant Group, Inc. and its subsidiaries, a tenant of the Partnership, filed for bankruptcy protection and rejected the lease relating to the property in Mesquite, Nevada. In March 2002, the Partnership sold the Property to a third party. Since the Partnership had recorded provisions for write-down of assets of $465,915 and $28,644 during the years 2001 and 2000, respectively. No gain or loss was recognized in 2002 relating to the sale. In May and June 2002, the Partnership sold its Properties in Knoxville, Tennessee and Wilmette, Illinois to third parties resulting in a total gain of approximately $285,700. The majority of the net sales proceeds from the sales of these Properties were reinvested in three Properties, one owned directly by the Partnership and the other two owned indirectly through a tenancy in common and a joint venture.
During 2003, the Partnership identified one Property for sale located in Warner Robins, Georgia. In June 2003, the Partnership recorded a provision for write-down of assets of $213,000 relating to the Property, after the tenant who was experiencing financial difficulties surrendered the premises. The provision represented the difference between the carrying value of the Property and its estimated fair value. The Property was classified as discontinued operations in the accompanying financial statements and was reclassified to real estate held for sale. The Partnership recognized a net rental loss (Property related expenses and provision for write-down of assets in excess of rental revenues) of $184,260 and net rental income (rental revenues less Property related expenses and provision for write-down of assets) of $184,379 during the years ended December 31, 2003 and 2002, respectively, relating to these Properties.
During the year ended December 31, 2003, CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, sold its vacant Property in Ocean Shores, Washington, as described above. The financial results relating to the Property in Ocean Shores, Washington and a Property sold in August 2002 by Mansfield Joint Venture, in which the Partnership owns a 21% interest, were classified as discontinued operations in the combined, condensed financial information reported in the footnotes to the accompanying financial statements for the joint ventures and the tenancies in common with affiliates of the General Partners. The Partnership's pro-rata share of these amounts is included in equity in earnings of joint ventures in the accompanying financial statements.
Comparison of the year ended December 31, 2002 to the year ended December 31,
Rental revenues from continuing operations were $1,700,468 for the year ended December 31, 2002 as compared to $1,640,597 in the same period in 2001. The slight increase in rental revenues from continuing operations during 2002, was due to the fact the Partnership reinvested the majority of the net sales proceeds from the 2001 and 2002 sale of the Properties.
During the years ended December 31, 2002 and 2001, the Partnership recognized income of $543,978 and a loss of $136,021, respectively, attributable to the net operating results reported by unconsolidated joint ventures. Results were lower during 2001 because PRG, the tenant of the Property in Corpus Christi, Texas, experienced financial difficulties and ceased paying rent in 2001. As a result, the Partnership and an affiliate of the General Partners, as tenants-in-common, in which the Partnership owns an approximate 27% interest, stopped recording rental revenues. Property related expenses such as, legal fees, insurance and real estate taxes relating to this Property were also incurred and a provision for write-down of assets of approximately $356,700 was recorded. The provision represented the difference between the carrying value of the Property and its estimated fair value. In October 2001, PRG filed for Chapter 11 bankruptcy protection. Since the bankruptcy filing, the tenant resumed paying rent. The Partnership and the affiliate, as tenants-in-common, received from PRG the rent payments relating to this Property from the bankruptcy date through April 2002. During April 2002, the bankruptcy court assigned its lease to a new tenant, an affiliate of the General Partners which has continued to pay rent pursuant to the lease. All other lease terms remained unchanged and are substantially the same as the Partnership's other leases. As a result of the assignment relating to this Property, the Partnership collected from the new tenant $309,700 in rents not collected in 2001 from the previous tenant.
In addition, the operating results reported by unconsolidated joint ventures were lower during 2001, as compared to the same period in 2002, because CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, recorded a provision for write down of assets of approximately $781,700 in 2001. The provision represented the difference between the carrying value of the Property and its estimated fair value. The tenant of the Property owned by this joint venture experienced financial difficulties and vacated the Property in April 2001. During 2002, the joint venture has not recorded rental revenues relating to this Property. In September 2003, CNL Ocean Shores Joint Venture sold its property to a third party, and dissolved the joint venture as described above.
The increase in net operating results reported by unconsolidated joint ventures during 2002, as compared to the same period in 2001, was also the result of the Partnership investing during 2001 and 2002 the majority of the net proceeds from the sales of Properties in Warner Robins, Georgia; Long Beach, California; Kentwood, Michigan; Mesquite, Nevada; and Wilmette, Illinois; in two joint ventures and two additional Properties, each as a separate tenancy in common with affiliates of the General Partners.
In August 2002, Mansfield Joint Venture, in which the Partnership owns a 21% interest, sold the Property in Mansfield, Texas, and reinvested the net sales proceeds in a Property in Arlington, Texas.
During the years ended December 31, 2002 and 2001, the Partnership earned $16,269 and $56,643, respectively, in interest and other income. During 2001, interest and other income were higher as compared to the same period in 2002 due to the Partnership recognizing as income the remainder of the security deposit from a former tenant. In addition, higher average cash balances existed during 2001 pending reinvestment in an additional income producing Property.
Operating expenses, including depreciation and amortization expense and provision for write-down of assets, were $1,004,659 and $683,552 for the years ended December 31, 2002 and 2001, respectively. The increase in operating expenses during 2002, as compared to the same period in 2001, was due to the recording of provisions for write-down of assets in the amount of $456,000 relating to the Properties in Harvey and Chicago Ridge, Illinois, as a result of the AmeriKing Corporation's bankruptcy.
The increase in operating expenses during 2002 was also partially due to an increase in depreciation expense as a result of Property acquisitions and the reclassification of the lease relating to the Property in Muncie, Indiana from direct financial leases to operating leases due to an amendment to the lease.
The increase in operating expenses during 2002, as compared to the same period in 2001, was partially offset by a decrease in the costs incurred for administrative expenses for servicing the Partnership and its Properties, a decrease in Property expenses such as legal fees and real estate taxes relating to several Properties with tenants that experienced financial difficulties in 2001, and a decrease in state taxes.
During 2001, the Partnership recorded provisions for write-down of assets in the amount of $39,576 relating to the Property in Inglewood, California, which was sold at no additional gain or loss during 2001.
During 2001, the Partnership sold a Property in Houston, Texas resulting in a gain of $4,284, a Property in El Dorado, California resulting in a gain of $345,572 and a Property in Kentwood, Michigan resulting in a loss of $38,877.
During 2002, the Partnership identified and sold the Properties located in Mesquite, Nevada; Knoxville, Tennessee; and Wilmette, Illinois, which were classified as discontinued operations in the accompanying financial statements. In October 2001, Phoenix Restaurant Group, Inc. and its subsidiaries, a tenant of the Partnership, filed for bankruptcy protection and rejected the lease relating to the property in Mesquite, Nevada. In March 2002, the Partnership sold the Property to a third party. Since the Partnership had recorded provisions for write-down of assets of $465,915 and $28,644 during the years 2001 and 2000, respectively. No gain or loss was recognized in 2002 relating to the sale. In May and June 2002, the Partnership sold its properties in Knoxville, Tennessee and Wilmette, Illinois to third parties resulting in a total gain of approximately $285,700. During 2003, the Partnership identified one property for sale located in Warner Robins, Georgia. The property was classified as discontinued operations in the accompanying financial statements and was reclassified to real estate held for sale. The Partnership recognized net rental income (rental revenues less Property related expenses and provision for write-down of assets) of $184,379 and a net rental loss (Property related expenses and provision for write-down of assets in excess of rental revenues) of $220,561 during the years ended December 31, 2002 and 2001, respectively, relating to these Properties.
The General Partners continuously evaluate strategic alternatives for the Partnership, including alternatives to provide liquidity to the Limited Partners.
The Partnership's leases as of December 31, 2003, are generally triple-net leases and contain provisions that the General Partners believe mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Inflation, overall, has had a minimal effect on results of operations of the Partnership. Continued inflation may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" to expand upon and strengthen existing accounting guidance that addresses when a company should include the assets, liabilities and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities, FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special effective date provisions apply to entities that have fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. The Partnership did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also, the Partnership does not have interests in structures commonly referred to as special-purpose entities. Therefore, application of FIN 46R is required in the Partnership's financial statements for periods ending after March 15, 2004. The General Partners believe adoption of this standard may result in either consolidation or additional disclosure requirements of the Partnership's unconsolidated joint ventures, which are currently accounted for under the equity method. However, such consolidation is not expected to significantly impact the Partnership's results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 20
Financial Statements:
Balance Sheets 21
Statements of Income 22
Statements of Partners' Capital 23
Statements of Cash Flows 24-25
Notes to Financial Statements 26-39
Report of Independent Certified Public Accountants
To the Partners CNL Income Fund XVII, Ltd.
In our opinion, the accompanying balance sheets and the related statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of CNL Income Fund XVII, Ltd. (a Florida limited partnership) at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial statement schedules are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and the financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida March 24, 2004
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
BALANCE SHEETS
See accompanying notes to financial statements.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
STATEMENTS OF INCOME
See accompanying notes to financial statements.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
See accompanying notes to financial statements.
Syndication Costs Total -------------- --------------
$ (3,590,000 ) $23,942,768
-- (2,400,000 ) -- 969,196 -------------- --------------
(3,590,000 ) 22,511,964
-- (2,400,000 ) -- 1,726,112 -------------- --------------
(3,590,000 ) 21,838,076
-- (2,400,000 ) -- 1,607,414 -------------- --------------
$ (3,590,000 ) $21,045,490 ============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
See accompanying notes to financial statements.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Organization and Nature of Business - CNL Income Fund XVII, Ltd. (the "Partnership") is a Florida limited partnership that was organized for the purpose of acquiring both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed, which are leased primarily to operators of national and regional fast-food, family-style and casual dining restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the Corporate General Partner. The general partners have responsibility for managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the real estate property acquisitions at cost. The properties are leased to third parties generally on a triple-net basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. During the years ended December 31, 2003, 2002 and 2001, the tenants paid, or are expected to pay, directly to real estate taxing authorities approximately $374,500, $312,800, and $321,200, respectively, in estimated real estate taxes in accordance with the terms of their leases..
The leases of the Partnership provide for base minimum annual rental payments payable in monthly installments. In addition, certain leases provide for contingent rental revenues based on the tenants' gross sales in excess of a specified threshold. The Partnership defers recognition of the contingent rental revenues until the defined thresholds are met. The leases are accounted for using either the operating or the direct financing method.
Operating method - Real estate property leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and depreciation is charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives of 30 years. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the lease term commencing on the date the property is placed in service.
Direct financing method - Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the asset). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's investment in the leases. For property leases classified as direct financing leases, the building portions of the majority of property leases are accounted for as direct financing leases while the land portions of these leases are accounted for as operating leases.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. In contrast, deferred rental income represents the aggregate amount of scheduled rental payments to date (including rental payments due during construction and prior to the property being placed in service) in excess of income recognized on a straight-line basis over the lease term commencing on the date the property is placed in service.
Leases are generally for 15 to 20 years and provide for minimum and contingent rentals. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to the same terms and conditions of the initial lease. Most leases also allow the tenant to purchase the property at fair market value after a specified portion of the lease has elapsed.
When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, or deferred rental income, are removed from the accounts and gains or losses from sales are reflected in income. The general partners of the Partnership review properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. The general partners determine whether an impairment in value has occurred by comparing the estimated future undiscounted cash flows, including the residual value of the property, with the carrying cost of the individual property.
When the collection of amounts recorded as rental or other income is considered to be doubtful, a provision is recorded to increase the allowance for doubtful accounts. If amounts are subsequently determined to be uncollectible, the corresponding receivable and allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its interests in CNL Kingston Joint Venture; CNL Mansfield Joint Venture; CNL VII & XVII Lincoln Joint Venture; and Katy Joint Venture; and the properties in Corpus Christi, Texas; Akron, Ohio; Fayetteville, North Carolina; Zephyrhills, Florida; Waldorf, Maryland; and Kenosha, Wisconsin, for which each property is held as tenants-in-common, are accounted for using the equity method since each joint venture agreement requires the consent of all partners on all key decisions affecting the operations of the underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds. Cash equivalents are stated at cost plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Partnership has not experienced any losses in such accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income, expenses and tax credit items flow through to the partners for tax purposes. Therefore, no provision for federal income taxes is provided in the accompanying financial statements. The Partnership is subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in Partnership equity and in the basis of each partner's investment. For financial reporting purposes, syndication costs represent a reduction of Partnership equity and a reduction in the basis of each partner's investment.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Rents Paid in Advance - Rents paid in advance by lessees for future periods are deferred upon receipt and are recognized as revenues during the period in which the rental income is earned.
Use of Estimates - The general partners of the Partnership have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. The more significant areas requiring the use of management estimates relate to the allowance for doubtful accounts and future cash flows associated with long-lived assets. Actual results could differ from those estimates.
Reclassification - Certain items in the prior year's financial statements have been reclassified to conform to 2003 presentation. These reclassifications had no effect on partner's capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 ("FAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its estimated fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The statement also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported as a discontinued operation if the disposal activity was initiated subsequent to the adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" to expand upon and strengthen existing accounting guidance that addresses when a company should include the assets, liabilities and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities, FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special effective date provisions apply to entities that have fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. The Partnership did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also, the Partnership does not have interests in structures commonly referred to as special-purpose entities. Therefore, application of FIN 46R is required in the Partnership's financial statements for periods ending after March 15, 2004. The General Partners believe adoption of this standard may result in either consolidation or additional disclosure requirements of the Partnership's unconsolidated joint ventures, which are currently accounted for under the equity method. However, such consolidation is not expected to significantly impact the Partnership's results of operations.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following at December 31:
In June 2002, the Partnership reinvested the majority of the net sales proceeds it received from the sale of the properties in Mesquite, Nevada and Knoxville, Tennessee, in a Taco Cabana property located in Houston, Texas, at a cost of approximately $1,364,200 from CNL Funding 2001-A, LP, an affiliate of the general partners.
In 2002, the Partnership recorded provisions for write-down of assets in the amount of $456,000 relating to the Properties in Harvey and Chicago Ridge, Illinois. In December 2002, AmeriKing Corporation, the parent company of National Restaurant Enterprises, Inc., the former tenant of these Properties, filed for bankruptcy protection. The provision represented the difference between the carrying value of the Properties and their estimated fair value.
The following is a schedule of the future minimum lease payments to be received on noncancellable operating leases at December 31, 2003:
2004 $ 1,558,333 2005 1,560,116 2006 1,577,989 2007 1,598,241 2008 1,600,093 Thereafter 10,922,009 ---------------
$ 18,816,781 ===============
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct financing leases at December 31:
The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 2003:
2004 $ 53,666 2005 53,666 2006 53,666 2007 53,666 2008 53,666 Thereafter 398,643 --------------
$ 666,973 ==============
4. Investment in Joint Ventures
The Partnership has interests of 21%, 60.06% and 86% in the profits and losses of CNL Mansfield Joint Venture, CNL Kingston Joint Venture and CNL VII & XVII Lincoln Joint Venture, respectively. The remaining interests in these joint ventures are held by affiliates of the Partnership which have the same general partners.
The Partnership owns properties in Fayetteville, North Carolina; Corpus Christi, Texas; Akron, Ohio; Zephyrhills, Florida, and Waldorf, Maryland, as tenants-in-common with affiliates of the general partners. The Partnership owns interests in these properties of 19.56%, 27.42%, 36.91%, 24% and 25%, respectively.
In June 2002, the Partnership reinvested a portion of the net sales proceeds from the sale of the property in Mesquite, Nevada, in a joint venture arrangement, Katy Joint Venture, with CNL Income Fund IX, Ltd., a Florida limited partnership and an affiliate of the general partners. The joint venture acquired a property in Katy, Texas from CNL Funding 2001-A, LP. The Partnership and CNL Income Fund IX, Ltd. entered into an agreement whereby each co-venturer will share in the profits and losses of the property in proportion to its applicable percentage interest. The Partnership contributed approximately $416,700 for a 40% interest in this joint venture.
In August 2002, the Partnership reinvested the net sales proceeds from the sale of the Property in Wilmette, Illinois in a Property in Kenosha, Wisconsin as tenants-in-common with CNL Income Fund VIII, Ltd. ("CNL VIII"), a Florida limited partnership and an affiliate of the general partners, at an approximate cost of $1,883,000. The Partnership and CNL VIII entered into an agreement whereby each co-tenant will share in the profits and losses of each property in proportion to its applicable percentage interest. The Partnership contributed approximately $1,694,700 for a 90% interest in this property.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
In August 2002, Mansfield Joint Venture, in which the Partnership owns a 21% interest, sold the property in Mansfield, Texas to the tenant and received net sales proceeds of approximately $1,011,500 resulting in a gain of approximately $269,800. The joint venture used the proceeds from the sale of the property and additional contributions from the Partnership and CNL Income Fund VII, Ltd., who are the general partners of the joint venture, of approximately $17,000 and $63,900, respectively, to acquire a property in Arlington, Texas from CNL Net Lease Investors, L.P., at an approximate cost of $1,089,900. CNL Income Fund VII, Ltd. and CNL Net Lease Investors, L.P. are affiliates of the general partners. The financial results for the property in Mansfield, Texas are reflected as discontinued operations in the combined condensed financial information presented below.
In September 2003, CNL Ocean Shores Joint Venture, in which the Partnership owned a 30.94% interest, sold its property to a third party for $824,600 resulting in a gain of approximately $413,700. The joint venture recorded provisions for write-down of assets in previous years relating to this Property. The Partnership and the joint venture partner dissolved the joint venture in accordance with the joint venture agreement and did not recognize a gain or loss on the dissolution. The Partnership received approximately $242,800 representing its pro rata share of the liquidation proceeds. The general partners intend to reinvest a portion of the liquidation proceeds in an additional property and also pay the liabilities of the Partnership, including distributions to the limited partners. The financial results relating to this property are reflected as discontinued operations in the combined, condensed financial information below.
CNL Mansfield Joint Venture, CNL Kingston Joint Venture, CNL VII & XVII Lincoln Joint Venture, Katy Joint Venture and the Partnership and affiliates, as tenants-in-common in six separate tenancy-in-common arrangements, each own one property.
The following presents the combined, condensed financial information for the joint ventures and the properties held as tenants-in-common with affiliates at:
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
The Partnership recognized income totaling $645,804 and $543,978 for the years ended December 31, 2003 and 2002, and a loss totaling $136,021 for the year ended December 31, 2001, from these joint ventures and the properties held as tenants-in-common with affiliates.
5. Discontinued Operations
In October 2001, Phoenix Restaurant Group, Inc. and its subsidiaries, a tenant of the Partnership, filed for bankruptcy protection and rejected the lease relating to the property in Mesquite, Nevada. In March 2002, the Partnership sold the property to a third party and received net sales proceeds of approximately $771,800. The Partnership had recorded provisions for write-down of assets of $465,915 and $28,644 during the years 2001 and 2000, respectively. No gain or loss was recognized in 2002 relating to the sale.
In May and June 2002, the Partnership sold its properties in Knoxville, Tennessee and Wilmette, Illinois to third parties and received total net sales proceeds of approximately $2,727,800 resulting in a total gain of approximately $285,700.
During November 2003, the Partnership identified for sale its property in Warner Robins, Georgia. As a result, the property was reclassified from real estate properties with operating leases to real estate held for sale. The reclassified assets were recorded at the lower of their carrying amounts or fair value, less cost to sell. During June 2003, subsequent to the tenant vacating the property, the Partnership recorded a provision for write-down of assets of $213,000. The provision represented the difference between the carrying value of the property and its estimated fair value.
The financial results for these properties are reflected as discontinued operations in the accompanying financial statements. The operating results of discontinued operations are as follows:
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
5. Discontinued Operations - Continued
6. Allocations and Distributions
From inception through December 31, 1999, distributions of net cash flow, as defined in the limited partnership agreement of the Partnership, were made 95% to the limited partners and five percent to the general partners; provided, however, that for any particular year, the five percent of net cash flow to be distributed to the general partners was subordinated to receipt by the limited partners in that year of an eight percent cumulative, noncompounded return on their aggregate invested capital contributions (the "Limited Partners" 8% Return").
From inception through December 31, 1999, generally, net income (determined without regard to any depreciation and amortization deductions and gains and losses from the sale of properties) was allocated between the limited partners and the general partners first, in an amount not to exceed the net cash flow distributed to the partners attributable to such year in the same proportions as such net cash flow is distributed; and thereafter, 99% to the limited partners and one percent to the general partners. All deductions for depreciation and amortization were allocated 99% to the limited partners and one percent to the general partners.
From inception through December 31, 1999, net sales proceeds from the sale of a property not in liquidation of the Partnership generally were distributed first to the limited partners in an amount sufficient to provide them with the return of their invested capital contributions, plus their cumulative Limited Partners' 8% Return. The general partners then received a return of their capital contributions and, to the extent previously subordinated and unpaid, a five percent interest in all net cash flow distributions. Any remaining net sales proceeds were distributed 95% to the limited partners and five percent to the general partners.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
6. Allocations and Distributions - Continued
Any gain from the sale of a property, not in liquidation of the Partnership, was in general, allocated in the same manner as net sales proceeds are distributable. Any loss was, in general, allocated first, on a pro rata basis to the partners with positive balances in their capital accounts; and thereafter, 95 percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be used in the following order: (i) first to pay and discharge all of the Partnership's liabilities to creditors, (ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, (iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, (iv) fourth, after allocations of net income, gains and/or losses, to distribute to the partners with positive capital accounts balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and (v) thereafter, any funds remaining shall then be distributed 95% to the limited partners and five percent to the general partners.
Effective January 1, 2000, the general partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the general partners' capital account as of December 31, 1999. Accordingly, for years commencing January 1, 2000 and after, the Partnership's net income will be allocated entirely among the limited partners. However, if losses are allocated to the general partners in a year, an amount of income equal to the sum of such losses may be allocated to the general partners in succeeding years. Accordingly, the general partners were not allocated any net income and did not receive any distributions during the years ended December 31, 2003, 2001 and 2001.
During each of the years ended December 31, 2003, 2001, and 2001, the Partnership declared distributions to the limited partners of $2,400,000. No distributions have been made to the general partners to date.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
7. Income Taxes
The following is a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes for the years ended December 31:
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Holdings, Inc. The other individual general partner, Robert A. Bourne, serves as President and Treasurer of CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL Restaurant Properties, Inc. (formerly known as CNL American Properties Fund, Inc.) served as the Partnership's advisor until January 1, 2002, when it assigned its rights and obligations under a management agreement to RAI Restaurants, Inc. (the "Advisor") The Advisor is a wholly owned subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP"). The individual general partners are stockholders and directors of CNL-RP.
The Advisor provides services pursuant to a management agreement with the partnership. In connection therewith, the Partnership agreed to pay certain Advisor management fees of one percent of the sum of gross revenues from properties wholly owned by the Partnership and the Partnership's allocable share of gross revenues from joint ventures. Any portion of the Management fee not paid is deferred without interest. The Partnership incurred management fees of $23,448, $24,452, and $21,315, for the years ended December 31, 2003, 2002, and 2001, respectively.
The Advisor is also entitled to receive a deferred, subordinated real estate disposition fee, payable upon the sale of one or more properties based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Advisor provides a substantial amount of services in connection with the sale. However, if the sales proceeds are reinvested in a replacement property, no such real estate disposition fees will be incurred until such replacement property is sold and the net sales proceeds are distributed. The payment of the real estate disposition fee is subordinated to the receipt by the limited partners of their aggregate 8% Preferred Return, plus their adjusted capital contributions. No deferred, subordinated real estate disposition fees have been incurred since inception.
During 2001, Phoenix Restaurant Group, Inc. ("PRG") filed for bankruptcy and rejected one of the two leases it had with the Partnership. The other lease was held with an affiliate of the general partners, as tenants-in-common. The Partnership owns a 27.42% interest in the tenancy in common. In May 2002, the bankruptcy court assigned this lease, relating to the property in Corpus Christi, Texas to RAI, LLC, an affiliate of the general partners. All other lease terms remained the same. In connection with this lease, the tenancy in common recognized rental revenues of approximately $190,600 and $127,800 during the years ended December 31, 2003 and 2002, respectively. The Partnership recognized its pro-rata share of this amount in equity in earnings of joint ventures in the accompanying financial statements.
In June 2002, the Partnership acquired a property in Houston, Texas, from CNL Funding 2001-A, LP, for approximately $1,364,200. In addition, in June 2002, Katy Joint Venture acquired a property in Katy, Texas from CNL Funding 2001-A, LP. CNL Funding 2001-A, LP had purchased and temporarily held title to the properties in order to facilitate the acquisition of the properties by the Partnership and the Joint Venture. The purchase price paid by the Partnership and the Joint Venture represented the costs incurred by CNL Funding 2001-A, LP to acquire and carry the properties.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions - Continued
In September 2002, CNL Mansfield Joint Venture acquired a property in Arlington, Texas from CNL Net Lease Investors, L.P. ("NLI"), at an approximate cost of $1,089,900. During 2002, and prior to the joint venture's acquisition of this property, CNL Financial LP Holding, LP ("CFN") and CNL Net Lease Investors GP Corp. ("GP Corp") purchased the limited partner's interest and general partner's interest, respectively, of NLI. Prior to this transaction, an affiliate of the Partnership's general partners owned a 0.1% interest in NLI and served as a general partner of NLI. The original general partners of NLI waived their rights to benefit from this transaction. The acquisition price paid by CFN for the limited partner's interest was based on the portfolio acquisition price. The joint venture acquired the property in Arlington, Texas at CFN's cost and did not pay any additional compensation to CFN for the acquisition of the property. Each CNL entity is an affiliate of the Partnership's general partners.
During the years ended December 31, 2003, 2002, and 2001, the Advisor and its affiliates provided accounting and administrative services. The Partnership incurred $114,200, $149,801, and $189,320, for the years ended December 31, 2003, 2002, and 2001, respectively, for such services.
The amount due related parties at December 31, 2003 and 2002 totaled $11,242 and $26,600, respectively.
9. Concentration of Credit Risk
The following schedule presents total rental revenues from individual lessees, each representing more than ten percent of total rental revenues (including the Partnership's share of total rental revenues from the joint ventures and the properties held as tenants-in-common with affiliates of the general partners), for each of the years ended December 31:
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
9. Concentration of Credit Risk - Continued
In addition, the following schedule presents total rental revenues from individual restaurant chains, each representing more than ten percent of total rental revenues (including the Partnership's share of total rental revenues from the joint ventures and the properties held as tenants-in-common with affiliates of the General Partners), for each of the years ended December 31:
The information denoted by N/A indicates that for each period presented, the tenant or group of affiliated tenants, and the chain did not represent more than ten percent of the Partnership's total rental revenues.
Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any of these lessees or restaurant chains will significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner.
10. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial data for each full quarter during the years ended December 31, 2003 and 2002:
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
(1) Certain items in the quarterly financial data have been reclassified to conform to the 2003 presentation. These reclassifications had no effect on net income. The results of operations relating to properties that were either identified for sale and disposed of subsequent to January 1, 2002 or were classified as held for sale as of December 31, 2003 are reported as discontinued operations for all periods presented. The results operations relating to properties that were identified for sale as of December 31, 2001 but sold subsequently are reported as continuing operations.
(2) In December 2002, the Partnership recorded provisions for write-down of assets in the amount of $456,000 relating to the Properties in Harvey and Chicago Ridge, Illinois, as a result of the AmeriKing Corporation bankruptcy.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The General Partners maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Partnership's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the corporate general partner have evaluated the Partnership's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K and have determined that such disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, a Florida corporation. 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 Partnership has available to it the services, personnel and experience of CNL-RP, CCM, CNL Financial Group, Inc. and their affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. Since 1971, Mr. Seneff has been active in the acquisition, development, and management of real estate projects and, directly or through an affiliated entity, has served as a general partner or co-venturer in over 100 real estate ventures. These ventures have involved the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has served as Director and Chairman of the Board of CNL-RP, a public, unlisted real estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from December 2000 through September 2003. Mr. Seneff served as Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the Partnership's advisor, from its inception in 1990 until it merged with a wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors, Inc., formerly CNL Institutional Advisors, Inc., is a registered investment advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial Group, Inc., a diversified real estate company, and has served as a Director, Chairman of the Board and Chief Executive Officer of CNL Financial Group, Inc. since 1973. CNL Financial Group, Inc. is and is the parent company, either directly or indirectly through subsidiaries, of CNL Real Estate Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL Securities Corp., all of which are engaged in the business of real estate finance. Mr. Seneff also serves as a Director and Chairman of the Board of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust; and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from its inception in 1997 until 2003 and served as Co-Chief Executive Officer from February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since its inception in 1997. Mr. Seneff also served as Chief Executive Officer from its inception in 1997 through February 2003, and currently serves as Co-Chief Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real estate investment trust. Mr. Seneff has also served as Director and Chairman of the Board of Commercial Net Lease Realty, Inc., a public real estate investment trust that is listed on the New York Stock Exchange, since 1992 and served as Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through February 2004. Mr. Seneff has served as a Director, Chairman of the Board, and Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL Investment Company since 1990; and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans, since 1990. Mr. Seneff has served as Chairman of the Board and Chief Executive Officer of CNL Commercial Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of CNLBank, an independent, state-chartered commercial bank. Mr. Seneff previously served on the Florida State Commission on Ethics and is a former member and past Chairman of the State of Florida Investment Advisory Council, which recommends to the Florida Board of Administration investments for various Florida employee retirement funds. The Florida Board of Administration, Florida's principal investment advisory and money management agency, oversees the investment of the Florida state retirement plan. Mr. Seneff received his degree in Business Administration from Florida State University in 1968.
Robert A. Bourne, age 56. Mr. Bourne has participated as a general partner or co-venturer in over 100 real estate ventures involved in the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Bourne has served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr. Bourne also served as President of CNL-RP from 1994 through February 1999 and served as Treasurer from February 1999 through August 1999 and from May 1994 through December 1994. Mr. Bourne served in various executive positions with CNL Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP including, President from 1994 through September 1997, and Director from 1994 through August 1999. Mr. Bourne serves as President and Treasurer of CNL Financial Group, Inc. Mr. Bourne serves as Director, Vice Chairman of the Board and Treasurer and from 1997 until June 2002 served as President of CNL Hospitality Properties, Inc. and as Director, President and Treasurer of CNL Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also served as a Director since 1992, Vice Chairman of the Board since February 1996, Secretary and Treasurer from February 1996 through 1997, and President from July 1992 through February 1996, of Commercial Net Lease Realty, Inc. Mr. Bourne serves as Director, President and Treasurer for various affiliates of CNL Financial Group, Inc. including, CNL Investment Company, CNL Securities Corp. and CNL Institutional Advisors, Inc. Mr. Bourne began his career as a certified public accountant employed by Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where he attained the position of Tax Manager in 1975. Mr. Bourne graduated from Florida State University in 1970 where he received a B.A. in Accounting, with honors.
Curtis B. McWilliams, age 48. Mr. McWilliams has served as President of CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September 2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from December 2000 through September 2003 and served as Chief Executive Officer from September 1999 through December 2000. Mr. McWilliams also served as President and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from February 1999 until September 1999 and as Executive Vice President of CNL-RP from 1997 through February 1999. Mr. McWilliams served as an Executive Vice President of CNL Financial Group, Inc. from the time he joined the company in April 1997 until September 1999. Mr. McWilliams served as President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the business of real estate financing, from April 1997 until the acquisition of such entities by wholly owned subsidiaries of CNL-RP in September 1999. From September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co. The majority of his career at Merrill Lynch & Co. was in the Investment Banking division where he served as a Managing Director. Mr. McWilliams received a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master of Business Administration degree with a concentration in finance from the University of Chicago in 1983.
Steven D. Shackelford, age 40. Mr. Shackelford was promoted to Executive Vice President and Chief Operating Officer of CNL-RP in September 2003. Mr. Shackelford has also served as Chief Financial Officer since January 1997. He served as Senior Vice President of CNL-RP from January 1997 through July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has also served as Secretary and Treasurer of CNL-RP since September 1999. He also served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996 to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the national office of Price Waterhouse LLP where he was responsible for advising foreign clients seeking to raise capital and a public listing in the United States. From August 1992 to March 1995, he was a manager in the Paris, France office of Price Waterhouse, serving several multi-national clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor of Arts degree in Accounting, with honors, and a Master of Business Administration degree from Florida State University and is a certified public accountant.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it was formed in July 2003 to provide strategic advisory services to the General Partners. He has served in various consulting capacities to CNL Hospitality Corp and other CNL affiliates since January 2003. Since November 2001 he has been an independent consultant working for a variety of operating and investment companies in the hospitality industry. Until October 2001, Mr. Arasi was President & Chief Executive Officer, and a member of the Board of Directors of Lodgian, Inc., a New York Stock Exchange traded company, one of the largest independent hotel owner/operators in North America, with hotel properties under most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997 through November 2000, Mr. Arasi was a member of the Management Committee and held several top operating positions with Bass Hotels & Resorts, one of the leading international owners, operators and franchisors of hotels, most recently serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly President of Tishman Hotel Corporation, Vice President of Salomon Brothers, Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton, Westin and HVS International. Mr. Arasi graduated from Cornell University in January 1981, where he received a Bachelor's degree in Hotel and Restaurant Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the officers of the corporate General Partner, and persons who own more than ten percent of a registered class of the Partnership's equity securities (collectively, the "Reporting Persons"), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are required by SEC regulation to furnish the Partnership with copies of all Forms 3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such forms the Partnership has received and written representations from certain Reporting Persons that they were not required to file Forms 5 for the last fiscal year, the General Partners believe that all Reporting Persons complied with all filing requirements applicable to them with respect to transactions during fiscal 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not adopted a code of business conduct applicable exclusively to the Partnership. However, employees of the General Partners or their affiliates, including the individual General Partners, are bound by the Code of Business Conduct adopted November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor are bound by the similar Code of Business Conduct adopted by CNL Restaurant Properties, Inc. Each of these codes of business conduct will be made available to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does not have an audit committee that is responsible for supervising the Partnership's relationship with its independent auditors. For the Partnership, this role is performed by the General Partners. Based on his previous service as the principal financial officer of companies with businesses similar to that of the Partnership, Robert A. Bourne, one of the General Partners, has the requisite experience to be considered an "audit committee financial expert" as defined in the rules under the Securities Exchange Act of 1934, if the Partnership had an audit committee. As a General Partner, Mr. Bourne is not independent of the Partnership.
Item 11.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and does not intend to pay any executive compensation to the General Partners or any of their affiliates. There are no compensatory plans or arrangements regarding termination of employment or change of control.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of March 12, 2004, no person was known to the Registrant to be a beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 12, 2004, the beneficial ownership interests of the General Partners in the Registrant.
Neither the General Partners, nor any of their affiliates, owns any interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of computation and amounts of compensation, fees and distributions paid or payable by the Partnership to the General Partners and their affiliates for the year ended December 31, 2003, exclusive of any distributions to which the General Partners or their affiliates may be entitled by reason of their purchase and ownership of Units.
During 2001, PRG filed for bankruptcy and rejected one of the two leases it had with the Partnership. The other lease was held with an affiliate of the General Partners, as tenants-in-common. The Partnership owns a 27.42% interest in the tenancy in common. In May 2002, the bankruptcy court assigned this lease, relating to the property in Corpus Christi, Texas to RAI, LLC, an affiliate of the General Partners. All other lease terms remained the same. In connection with this lease, the tenancy in common recognized rental revenues of approximately $190,600 and $127,800 during the years ended December 31, 2003 and 2002, respectively. The Partnership recognized its pro-rata share of this amount in equity in earnings of unconsolidated joint ventures in the accompanying financial statements.
Item 14.
Item 14. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the Partnership for the audit and other services provided by the Partnership's independent certified public accountants, PricewaterhouseCoopers LLP, for the years ended December 31:
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002 consisted of the examination of the financial statements of the Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the General Partners. Due to its organization as a limited partnership, the Partnership does not have an audit committee.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2003 and 2002
Statements of Income for the year ended December 31, 2003, 2002, and 2001
Statements of Partners' Capital for the year ended December 31, 2003, 2002 and 2001
Statements of Cash Flows for the year ended December 31, 2003, 2002, and 2001
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2003, 2002, and 2001
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2003
Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 2003
All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or notes thereto.
3. Exhibits
**3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVII, Ltd. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**3.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.)
**4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVII, Ltd. (Included as Exhibit 3.2 to Registration Statement No. 33-90998-01 on Form S-11 and incorporated herein by reference.)
**4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.)
**4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**8.3 Opinion of Baker & Hostetler regarding certain material issues relating to the Distribution Reinvestment Plan of CNL Income Fund XVII, Ltd. (Filed as Exhibit 8.3 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.1 Management Agreement between CNL Income Fund XVII, Ltd. and CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 20, 1997, and incorporated herein by reference.)
**10.2 Form of Joint Venture Agreement for Joint Ventures with Unaffiliated Entities (Filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.3 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Including as Exhibit 10.2 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2001, and incorporated herein by reference.)
**10.4 Form of Joint Venture Agreement for Joint Ventures with Affiliated Programs (Filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.5 Form of Development Agreement (Filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.6 Form of Indemnification and Put Agreement (Filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.7 Form of Unconditional Guarantee of Payment and Performance (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.8 Form of Lease Agreement for Existing Restaurant (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.9 Form of Lease Agreement for Restaurant to be Constructed (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.10 Form of Premises Lease for Golden Corral Restaurant (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.11 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.12 Form of Cotenancy Agreement with Unaffiliated Entity (Filed as Exhibit 10.12 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.13 Form of Cotenancy Agreement with Affiliated Entity (Filed as Exhibit 10.13 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.14 Form of Registered Investor Advisor Agreement (Filed as Exhibit 10.14 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.15 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.15 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein be reference.)
31.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period October 1, 2003 through December 31, 2003.
(c) Not applicable.
(d) Other Financial Information.
The Partnership is required to file audited financial information of one of its tenants (Golden Corral Corporation) as a result of this tenant leasing more than 20 percent of the Partnership's total assets for the year ended December 31, 2003. Golden Corral Corporation is a privately-held company, and its financial information is not available to the Partnership to include in this filing. The Partnership will file this financial information under cover of a Form 10-K/A as soon as it is available.
**previously filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 2004.
CNL INCOME FUND XVII, LTD.
By: CNL REALTY CORPORATION General Partner
/s/ Robert A. Bourne ------------------------- ROBERT A. BOURNE, President
By: ROBERT A. BOURNE General Partner
/s/ Robert A. Bourne ------------------------- ROBERT A. BOURNE
By: JAMES M. SENEFF, JR. General Partner
/s/ James M. Seneff, Jr. ------------------------- JAMES M. SENEFF, JR.
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.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001
(a) Deducted from receivables.
(b) Reduction of rental, earned and other income.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation structioAcquired Computed - ----------- ----------------- -----------
$36,280 1995 03/96 (g) 118,158 1996 06/96 (c) 133,614 1996 10/96 (c)
186,709 1996 03/96 (c) 172,860 1996 03/96 (c) 132,397 1997 11/96 (c)
165,589 1996 08/96 (c)
303,156 1996 03/96 (c) 217,240 1996 04/96 (c) 168,899 1996 03/96 (c)
124,927 1996 05/96 (c) 135,914 1996 07/96 (c)
48,099 1990 12/01 (c) 35,053 1990 06/02 (c)
(e) 1996 06/96 (e) - -----------
$1,978,895 ===========
(e) 1996 06/96 (e)
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation are summarized below. The balances in 2003, 2002, and 2001 have been adjusted to reflect the reclassification of properties accounted for as discontinued operations.
CNL INCOME FUND XVII, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2003
(b) As of December 31, 2003, the aggregate cost of the Partnership's wholly owned Properties was $17,341,796 for federal income tax purposes. All of the leases are treated as operating leases for federal income tax purposes.
(c) Depreciation expense is computed for buildings and improvements based upon estimated lives of 30 years.
(d) Certain components of the lease relating to land and building have been recorded as a direct financing lease. Accordingly, costs relating to these components of this lease are not shown.
(e) The portion of the lease relating to the building has been recorded as a direct financing lease. The cost of the building has been included in net investment in direct financing leases; therefore, depreciation is not applicable.
(f) During the year ended December 31, 1998, the Partnership received reimbursements from the developer of the property upon final reconciliation of total construction costs. In connection therewith, the land and building value was adjusted accordingly.
(g) Effective April 2002, the lease for this property was amended, resulting in the reclassification of the building portion of the lease to an operating lease. The building was recorded at net book value, and will be depreciated over its remaining estimated life of approximately 26 years.
(h) The undepreciated cost of the Property in Harvey, Illinois, was written down to it estimated fair value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $186,000 at December 31, 2002. The provision represented the difference between the Property's carrying value and the estimated fair value. The cost of the Property presented on this schedule is the net amount at which the Property is carried, including the provision for write-down of assets.
(i) The undepreciated cost of the Property in Chicago Ridge, Illinois, was written down to its estimated fair value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $270,000 at December 31, 2002. The provision represented the difference between the Property's carrying value and the estimated fair value. The cost of the Property presented on this schedule is the net amount at which the Property is carried, including the provision for write-down of assets.
(j) During 2002, the Partnership purchased a real estate property from CNL 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $ 1,364,200.
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
**3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVII, Ltd. (Filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**3.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.)
**4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVII, Ltd. (Filed as Exhibit 3.1 to Registration Statement No. 33-90998 on Form S-11 and incorporated herein by reference.)
**4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.)
**4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**8.3 Opinion of Baker & Hostetler regarding certain material issues relating to the Distribution Reinvestment Plan of CNL Income Fund XVII, Ltd. (Filed as Exhibit 8.3 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.1 Management Agreement between CNL Income Fund XVII, Ltd. and CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.)
**10.2 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Included as Exhibit 10.2 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2001, and incorporated herein by reference.)
**10.3 Form of Joint Venture Agreement for Joint Ventures with Unaffiliated Entities (Filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.4 Form of Joint Venture Agreement for Joint Ventures with Affiliated Programs (Filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.5 Form of Development Agreement (Filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.6 Form of Indemnification and Put Agreement (Filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.7 Form of Unconditional Guarantee of Payment and Performance (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.8 Form of Lease Agreement for Existing Restaurant (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.9 Form of Lease Agreement for Restaurant to be Constructed (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.10 Form of Premises Lease for Golden Corral Restaurant (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.11 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.12 Form of Cotenancy Agreement with Unaffiliated Entity (Filed as Exhibit 10.12 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.13 Form of Cotenancy Agreement with Affiliated Entity (Filed as Exhibit 10.13 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.14 Form of Registered Investor Advisor Agreement (Filed as Exhibit 10.14 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.)
**10.15 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.15 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein be reference.)
31.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
**previously filed
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2