UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16850
CNL INCOME FUND III, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801-3336
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on June 1, 1987. 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 August 10, 1987, the Partnership offered
for sale up to $25,000,000 in limited partnership interests (the "Units")
(50,000 Units at $500 per Unit) pursuant to a registration statement on Form
S-11 under the Securities Act of 1933, as amended. The offering terminated on
April 29, 1988, as of which date the maximum offering proceeds of $25,000,000
had been received from investors who were admitted to the Partnership as limited
partners (the "Limited Partners").
The Partnership was organized primarily 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 selected national and regional fast-food restaurant
chains (the "Restaurant Chains"). Net proceeds to the Partnership from its
offering of Units, after deduction of organizational and offering expenses,
totalled $22,125,102, and were used to acquire 32 Properties, including
interests in two Properties owned by joint ventures in which the Partnership is
a co-venturer.
During 1997, the Partnership sold its Properties in Chicago, Illinois;
Bradenton, Florida; Kissimmee, Florida; Roswell, Georgia and Mason City, Iowa.
The Partnership reinvested a portion of these net sales proceeds in a Property
in Fayetteville, North Carolina. In addition, the Partnership reinvested a
portion of these net sales proceeds in three Properties, one each in Englewood,
Colorado; Miami, Florida; and Overland Park, Kansas, as tenants-in-common, with
affiliates of the General Partners during 1997 and 1998. During 1998, the
Partnership sold its Properties in Daytona Beach, Fernandina Beach, and Punta
Gorda, Florida; Hazard, Kentucky; and a Po Folks Property in Hagerstown,
Maryland. The Partnership reinvested a portion of the net sales proceeds in a
joint venture arrangement, RTO Joint Venture, with an affiliate of the General
Partners to purchase, construct and hold one Property. During 1999, the
Partnership sold its Perkins Property in Flagstaff, Arizona and its Denny's
Property in Hagerstown, Maryland. The Partnership reinvested the majority of the
remaining net sales proceeds from the 1998 and 1999 sales in a Property in
Baytown, Texas as tenants-in common, with affiliates of the General Partners,
and in Properties in Montgomery, Alabama; and a Property in Auburn, Alabama.
During 2000, the Partnership sold its Property in Plant City, Florida. During
2001, the Partnership sold its Properties in Schererville, Indiana and
Washington, Illinois. As a result of the above transactions, as of December 31,
2001, the Partnership owned 25 Properties. The 25 Properties include interests
in three Properties owned by joint ventures in which the Partnership is a
co-venturer and four Properties owned with affiliates of the General Partners as
tenants-in-common. In January 2002, Titusville Joint Venture sold its Property
and the Partnership and the joint venture partner liquidated the joint venture.
Generally, the Properties are leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees 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 or
joint venture purchase options granted to certain lessees.
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant Properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. Under the Agreement and Plan of Merger,
APF was to issue shares of its common stock as consideration for the Merger. On
March 1, 2000, the General Partners and APF announced that they had mutually
agreed to terminate the Agreement and Plan of Merger. The agreement to terminate
the Agreement and Plan of Merger was based, in large part, on the General
Partners' concern that, in light of market conditions relating to publicly
traded real estate investment trusts, the value of the transaction had
diminished. As a result of such diminishment, the General Partners' ability to
unequivocally recommend voting for the transaction, in the exercise of their
fiduciary duties, had become questionable. The General Partners are continuing
to evaluate strategic alternatives for the Partnership including alternatives to
provide liquidity to the Limited Partners.
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 owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from 11 to 20 years (the average being 18 years), and expire
between 2002 and 2019. Generally, 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 generally provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $36,100 to $191,900. The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount, to be paid
annually. In addition, some leases provide for increases in the annual base rent
during the lease term.
Generally, the leases of the Properties provide for two to five
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 19 of the Partnership's 25 Properties also have been
granted options to purchase Properties at each Property's then fair market
value, or pursuant to a formula based on the original cost of the Property, if
greater, after a specified portion of the lease term has elapsed. Fair market
value will be determined through an appraisal by an independent firm.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership must first
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 January 2002, Houlihan's Restaurant, Inc., filed for bankruptcy and
rejected the one lease it has with the Partnership. The lost revenues resulting
from the rejected lease could have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease the
Property in a timely manner. The General Partners are currently seeking a
replacement tenant or purchaser for this Property.
In addition, in January 2002, Paragon of Michigan, Inc. filed for
bankruptcy and in February 2002, rejected the one lease it has with the
Partnership. The lost revenues resulting from the rejected lease could have an
adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease the Property in a timely manner. The General
Partners are currently seeking a replacement tenant or purchaser for this
Property.
Major Tenants
During 2001, three lessees of the Partnership, Golden Corral
Corporation, Winston's GC No. 1, Inc., and IHOP Properties, Inc., each
contributed more than 10% of the Partnership's total rental and earned income
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of rental and earned income from Properties owned by
unconsolidated joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). As of December 31, 2001, Golden Corral
Corporation was the lessee under leases relating to three restaurants, Winston's
GC No. 1, Inc. was the lessee under a lease relating to one restaurant, and IHOP
Properties Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
Winston's GC No. 1, Inc. and IHOP Properties, Inc. will each continue to
contribute more than 10% of the Partnership's total rental and earned income in
2002. In addition, three Restaurant Chains, Golden Corral Family Steakhouse
Restaurants ("Golden Corral"), IHOP, and KFC, each accounted for more than 10%
of the Partnership's total rental and earned income in 2001 (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of the rental and earned income from Properties owned by unconsolidated
joint ventures and Properties owned with affiliates of the General Partners as
tenants-in-common). In 2002, it is anticipated that these three Restaurant
Chains each will continue to account for more than 10% of total rental and
income to which the Partnership is entitled under the terms of the leases. Any
failure of these lessees or any of these Restaurant Chains could materially
affect the Partnership's income, if the Partnership is not able to re-lease
these Properties in a timely manner. As of December 31, 2001, no single tenant
or group of affiliated tenants 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 a joint venture arrangement, Tuscawilla Joint
Venture, with three unaffiliated entities which holds one Property. In addition,
the Partnership has two separate joint venture arrangements: Titusville Joint
Venture with CNL Income Fund IV, Ltd., an affiliate of the General Partners,
which holds one Property; and RTO Joint Venture with CNL Income Fund V, Ltd., an
affiliate of the General Partners, which holds another Property. The affiliates
are limited partnerships organized pursuant to the laws of the state of Florida.
The joint venture arrangements provide for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint venture in accordance with their respective percentage interests in the
joint venture. The Partnership has a 69.07%, 73.4%, and 46.88% interest in
Tuscawilla Joint Venture, Titusville Joint Venture, and RTO Joint Venture,
respectively. The Partnership and its joint venture partners are also jointly
and severally liable for all debts, obligations and other liabilities of the
joint venture.
Each joint venture has an initial term of approximately 20 years
(generally the same term as the initial term of the lease for the Property in
which the joint venture invested) and, after the expiration of the initial term,
continues in existence from year to year unless terminated at the option of any
joint venture partner 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 partner to dissolve the joint venture.
The Partnership has management control of Tuscawilla Joint Venture and
shares management control equally with affiliates of the General Partners for
Titusville Joint Venture and RTO Joint Venture. The joint venture agreements
restrict each venturer's ability to sell, transfer or assign its joint venture
interest without first offering it for sale to its joint venture partners,
either upon such terms and conditions as to which the ventures may agree or, in
the event the ventures cannot agree, on the same terms and conditions as any
offer from a third party to purchase such joint venture interest.
Net cash flow from operations of Tuscawilla Joint Venture, Titusville
Joint Venture and RTO Joint Venture is distributed 69.07%, 73.4% and 46.88%,
respectively, to the Partnership and the balance is distributed to each other
joint venture partner in accordance with its respective percentage interest in
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.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.4% interest, sold its Property to an unrelated third party for
approximately $180,000 and received net sales proceeds of approximately
$165,600, resulting in a gain of $4,900 to the joint venture. In addition, in
January 2002, the Partnership and the joint venture partner liquidated
Titusville Joint Venture and the Partnership received its pro rata share of the
liquidation proceeds. No gain or loss was recorded relating to the liquidation.
In addition to the above joint venture arrangements, the Partnership
has entered into four agreements to hold a Property as tenants-in-common: one in
Englewood, Colorado, with CNL Income Fund IX, Ltd.; one in Overland Park,
Kansas, with CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.; one in
Miami, Florida, with CNL Income Fund VII, Ltd., CNL Income Fund X, Ltd., and CNL
Income Fund XIII, Ltd.; and one in Baytown, Texas, with CNL Income Fund VI, Ltd.
Each of the CNL Income Funds is an affiliate of the General Partners. The
agreements provide for the Partnership and the affiliates to share in the
profits and losses of the Properties in proportion to each party's percentage
interest. The Partnership owns a 33%, 25.87%, 9.84% and 20% interest in the
Properties, respectively.
Each of the affiliates is a limited Partnership organized pursuant to
the laws of the state of Florida. The tenancy in common agreement restricts each
party's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining party to
the agreement.
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.
Property Management
CNL APF Partners, LP, an affiliate of the General Partners, acts as
manager of the Partnership's Properties pursuant to a property management
agreement with the Partnership. Under this agreement, CNL APF Partners, LP (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-half of one
percent of Partnership assets (valued at cost) under management, not to exceed
the lesser of one percent of gross rental revenues or competitive fees for
comparable services. Under the management agreement, the property management fee
is subordinated to receipt by the Limited Partners of an aggregate, 10%,
noncumulative, noncompounded annual return on their adjusted capital
contributions (the "10% Preferred Return"), calculated in accordance with the
Partnership's limited partnership agreement (the "Partnership Agreement"). In
any year in which the Limited Partners have not received the 10% Preferred
Return, no property management fee will be paid.
During 2000, CNL Fund Advisors, Inc. assigned its rights in, and its
obligations under, the management agreement with the Partnership to CNL APF
Partners, LP. All of the terms and conditions of the management agreement,
including the payment of fees, as described above, remain unchanged.
The property 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.
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 and the officers and employees of APF, the parent Company of the
Advisor, 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. Properties
As of December 31, 2001, the Partnership owned 25 Properties. Of the 25
Properties, 18 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and four 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. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,800
to 74,600 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 as of
December 31, 2001 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed for the year ended December 31, 2001.
State Number of Properties
----- --------------------
Alabama 2
Arizona 1
California 1
Colorado 1
Florida 5
Georgia 1
Kansas 2
Michigan 1
Minnesota 1
Missouri 1
Nebraska 1
North Carolina 1
Oklahoma 1
Texas 6
--------------
TOTAL PROPERTIES 25
==============
Buildings. Each of the Properties owned by the Partnership 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. Building sizes range from approximately
1,900 to 7,900 square feet. Generally, 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, 2001, the Partnership had no plans for renovation of the
Properties. Depreciation expense is computed for buildings and improvements
using the straight line method using depreciable lives of 31.5 and 39 years for
federal income tax purposes.
As of December 31, 2001, the aggregate cost of the Properties owned by
the Partnership and its consolidated joint venture, and the unconsolidated joint
ventures (including the Properties owned through tenancy in common arrangements)
for federal income tax purposes was $13,149,575 and $8,880,658, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Burger King 2
Chevy's Fresh Mex 1
Darryl's 1
Golden Corral 4
IHOP 4
KFC 4
Pizza Hut 4
Po Folks 1
Red Oak Steakhouse 1
Ruby Tuesday 1
Taco Bell 2
--------------
TOTAL PROPERTIES 25
==============
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 selected
national and regional fast-food 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. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 2001, 2000, 1999, 1998, and 1997, the Properties were
96%, 96%, 98%, 98%, and 93%, occupied, respectively. The following is a schedule
of the average rent per Property for each of the years ended December 31:
2001 2000 1999 1998 1997
------------- ------------- --------------- -------------- --------------
Rental Revenues (1)(2) $ 1,869,205 $1,947,948 $ 1,939,767 $ 1,798,973 $2,116,623
Properties (2) 24 26 27 27 28
Average Rent per
Property $ 77,884 $ 74,921 $ 71,843 $ 66,629 $ 75,594
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements. Rental
revenues have been adjusted, as applicable, for any amounts for which
the Partnership has established an allowance for doubtful accounts.
(2) Excludes Properties that were vacant at December 31, and that 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, 2001, for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
of Leases Revenues Rental Income
----------------- ---------------- ----------------- -----------------
2002 3 $ 169,732 11.60%
2003 -- -- --
2004 -- -- --
2005 -- -- --
2006 1 87,849 6.00%
2007 4 190,856 13.04%
2008 5 370,481 25.31%
2009 -- -- --
2010 1 46,651 3.19%
2011 -- -- --
Thereafter 8 598,169 40.86%
---------- ---------------- -------------
Total (1) 22 $ 1,463,738 100.00%
========== ================ =============
(1) Excludes one Property which was vacant at December 31, 2001 and
two Properties with leases that were rejected in 2002.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2001 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases three Golden Corral restaurants
pursuant to leases, each with an initial term of 15 years (expiring in 2002) and
an average minimum base annual rent of approximately $56,600 (ranging from
approximately $48,000 to $61,400).
IHOP Properties, Inc. leases four IHOP restaurants. The initial term of
each lease is 20 years (expiring between 2017 and 2019) and the average minimum
base annual rent is approximately $143,800 (ranging from approximately $120,200
to $163,200).
Winston's GC No. 1, Inc. leases one Golden Corral restaurant. The
initial term of the lease is 15 years (expiring in 2013) and a minimum base
annual rent of approximately $110,000.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective Properties, is party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 15, 2002, there were 2,046 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 2001, 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, 2001, the price paid for any Unit transferred
pursuant to the Plan ranged from $382.50 to $475 per Unit. The price paid for
any Units 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 2001 and 2000 other than
pursuant to the Plan, net of commissions.
2001 (1) 2000 (1)
------------------------------------- ------------------------------------
High Low Average High Low Average
-------- --------- ---------- -------- --------- -----------
First Quarter $297 $297 $297 $324 $324 $324
Second Quarter 340 286 313 404 316 360
Third Quarter 301 263 288 320 283 306
Fourth Quarter 264 264 264 300 267 297
(1) A total of 204 and 215 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2001 and 2000, respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31, 2001 and 2000, the Partnership
declared cash distributions of $2,400,000 and $2,475,000, respectively, to the
Limited Partners. Distributions during 2001 and 2000 included $650,000 and
$600,000, respectively, in special distributions, as a result of the
distribution of net sale proceeds from the 2001 sale of the Property in
Schererville, Indiana and the 2000 sale of the Property in Plant City, Florida.
This amount was applied toward the Limited Partners' cumulative 10% Preferred
Return. No distributions have been made to the General Partners to date. This
special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Partnership agreement, it
was applied to the Limited Partners' unpaid cumulative preferred return. The
reduced number of Properties for which the Partnership receives rental payments,
as well as ongoing operations, reduced the Partnership's revenues. The decrease
in Partnership revenues, combined with the fact that a significant portion of
the Partnership's expenses are fixed in nature, resulted in a decrease in cash
distributions to the Limited Partners commencing during the quarter ended
September 30, 2000. No amounts distributed to the Limited Partners for the years
ended December 31, 2001 and 2000, 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. As indicated in the chart below,
these distributions were declared at the close of each of the Partnership's
calendar quarters. These amounts include monthly distributions made in arrears
for the Limited Partners electing to receive such distributions on this basis.
2001 2000
------------- --------------
First Quarter $ 437,500 $ 500,000
Second Quarter 437,500 500,000
Third Quarter 1,087,500 1,037,500
Fourth Quarter 437,500 437,500
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
(b) Not applicable.
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
-------------- ------------- ------------- -------------- -------------
Year ended December 31:
Revenues (1) $ 1,996,071 $ 1,770,380 $ 1,994,242 $ 1,786,254 $ 2,023,495
Net income (2) 918,047 1,313,432 1,730,671 1,736,883 2,391,835
Cash distributions
declared (3) 2,400,000 2,475,000 2,000,000 3,477,747 2,376,000
Net income per Unit (2) 23.05 26.27 34.28 34.44 47.47
Cash distributions
declared per Unit
(2)(3) 48.00 49.50 40.00 69.55 47.52
At December 31:
Total assets $ 13,680,116 $ 15,157,134 $ 16,472,518 $ 16,701,732 $ 18,479,002
Partners' capital 12,957,422 14,439,375 15,600,943 15,870,272 17,611,136
(1) Revenues include equity in earnings of the unconsolidated joint
ventures, minority interest in income of the consolidated joint
venture.
(2) Net income for the years ended December 31, 2001, 2000, 1999, 1998 and
1997, includes gains on sale of assets of $297,741, $16,855, $293,512,
$497,321, and $1,027,590, respectively. In addition, net income for the
years ended December 31, 2001, 1998 and 1997, includes provision for
write-down of assets of $884,977, $25,821 and $32,819, respectively.
(3) Distributions for the year ended December 31, 2001, 2000 and 1998,
include a special distribution to the Limited Partners of $650,000,
$600,000 and $1,477,747, respectively, as a result of the distribution
of the net sales proceeds from Properties sold.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on June 1, 1987, 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, to be leased primarily to operators of
selected national and regional fast-food Restaurant Chains. The leases generally
are triple-net leases, with the lessees generally responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of December 31,
2001, the Partnership owned 25 Properties, either directly or indirectly through
joint venture or tenancy in common arrangements.
Capital Resources
During the years ended December 31, 2001, 2000 and 1999, the
Partnership generated cash from operations (which includes cash received from
tenants, distributions from joint ventures and interest received, less cash paid
for expenses) of $1,747,573, $1,617,213, and $1,825,724, respectively. The
decrease in cash from operations during 2001, as compared to 2000, was primarily
a result of changes in the Partnership's working capital and changes in income
and expenses as described in "Results of Operations," below and the decrease in
cash from operations during 2000 as compared to 1999, was primarily a result of
changes in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the
years ended December 31, 2001, 2000 and 1999.
During 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance of $678,730, relating to the 1997
sale of the Property in Roswell, Georgia. In January 1999, the Partnership
reinvested a portion of the net sales proceeds in a Burger King Property in
Montgomery, Alabama, at an approximate cost of $939,900. The Partnership used
the remaining net sales proceeds for other Partnership purposes. The Partnership
distributed amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any (at a level reasonably assumed by the General
Partners), resulting from the sale.
In January 1999, the Partnership reinvested the majority of the net
sales proceeds from the 1998 sale of the Partnership's Property in Hagerstown,
Maryland in a Property in Montgomery, Alabama. The Partnership used the
remaining net sales proceeds to pay distributions to the Limited Partners and
for other Partnership purposes. The Partnership distributed amounts sufficient
to enable the Limited Partners to pay federal and state income taxes, if any (at
a level reasonably assumed by the General Partners), resulting from these sales.
In April 1999, the Partnership sold its Property in Flagstaff, Arizona,
to the tenant for $1,103,127 and received net sales proceeds of $1,091,192,
resulting in a gain of $285,350. In October 1999, the Partnership reinvested a
portion of the net sales proceeds it received from the sale of this Property, in
an IHOP Property located in Auburn, Alabama, at an approximate cost of
$1,440,200. A portion of the transaction, relating to the sale of the Property
in Flagstaff, Arizona, and the reinvestment of the net sales proceeds in a
Property in Auburn, Alabama, qualified as a like-kind exchange transaction for
federal income tax purposes. The Partnership distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any, (at a
level reasonably assumed by the General Partners), resulting from the sale.
In June 1999, the Partnership sold its Denny's Property in Hagerstown,
Maryland, to the tenant for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162. In October 1999, the Partnership
invested a portion of the net sales proceeds it received from the sale in a
Property in Baytown, Texas, with an affiliate of the General Partners as
tenants-in-common for a 20% interest in the Property. In addition, in October
1999, the Partnership reinvested the remaining net sales proceeds in an IHOP
Property in Auburn, Alabama, as described above. The Partnership distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any (at a level reasonably assumed by the General Partners),
resulting from the sale.
In September 2000, the Partnership sold its Property in Plant City,
Florida, to the tenant, for $509,865 and received net sales proceeds of $492,069
resulting in a gain of $16,855. In connection with the sale of this Property,
the Partnership incurred deferred, subordinated, real estate disposition fees of
$15,296. The Partnership distributed these net sales proceeds as a special
distribution to the Limited Partners. The Partnership distributed amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any (at a level reasonably assumed by the General Partners), resulting from
this sale.
In September 2001, the Partnership sold its Golden Corral Property in
Schererville, Indiana for $775,000 and received net sales proceeds of $750,550,
resulting in a gain of $229,029. In connection with the sale, the Partnership
incurred a deferred, subordinated, real estate disposition fee of $23,250, and
received $60,000 from the former tenant of this Property in consideration of the
Partnership releasing the tenant from its obligation under the terms of its
lease. The Partnership distributed the net sales proceeds as a special
distribution to the Limited Partners, as described below. The Partnership will
distribute amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any (at a level reasonably assumed by the General
Partners), resulting from the sale.
In addition, in November 2001, the Partnership sold its Golden Corral
Property in Washington, Illinois for approximately $589,300 and received net
sales proceeds of approximately $586,100, resulting in a gain of $68,712. In
connection with the sale, the Partnership incurred a deferred, subordinated,
real estate disposition fee of $17,678. The Partnership intends to distribute
the net sales proceeds as a special distribution to the Limited Partners in
2002. The Partnership will distribute amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any (at a level reasonably
assumed by the General Partners), resulting from the sale.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.4% interest, sold its Property to an unrelated third party for
approximately $180,000 and received net sales proceeds of approximately
$165,600, resulting in a gain of $4,900 to the joint venture. In addition, in
January 2002, the Partnership and the joint venture partner liquidated
Titusville Joint Venture and the Partnership received its pro rata share of the
liquidation proceeds. No gain or loss was recorded relating to the liquidation.
The Partnership intends to use the liquidation proceeds to 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 borrowings from the
General Partners, however, the Partnership may borrow, in the discretion of the
General Partners, for the purpose of maintaining the operations of the
Partnership. The Partnership will not encumber any of the Properties in
connection with any borrowings or advances. The Partnership also will not borrow
under circumstances which would make the Limited Partners liable to creditors of
the Partnership. 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.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, money market accounts and
certificates of deposit with less than a 90-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At December 31, 2001, the Partnership had
$1,242,931 invested in such short-term investments as compared to $578,746 at
December 31, 2000. The increase in cash and cash equivalents at December 31,
2001, as compared to December 31, 2000, was partially a result of the
Partnership holding the net sales proceeds from the sale of the Property in
Washington, Illinois, as described above. As of December 31, 2001, the average
interest rate earned on the rental income deposited in demand deposit accounts
at commercial banks was approximately 2.10% annually. The funds remaining at
December 31, 2001, after payment of distributions and other liabilities will be
used to meet the Partnership's working capital needs.
In January 2002, Houlihan's Restaurant, Inc., filed for bankruptcy and
rejected the one lease it has with the Partnership. The lost revenues resulting
from the rejected lease could have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease the
Property in a timely manner. The General Partners are currently seeking a
replacement tenant or purchaser for this Property.
In addition, in January 2002, Paragon of Michigan, Inc. filed for
bankruptcy and in February 2002, rejected the one lease it has with the
Partnership. The lost revenues resulting from the rejected lease could have an
adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease the Property in a timely manner. The General
Partners are currently seeking a replacement tenant or purchaser for this
Property.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and generally 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
cash flow in excess of operating expenses.
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 the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established 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, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations to the
extent that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations and, for the years ended December 31, 2001 and 2000, a portion of the
sales proceeds received from the sales of Properties, the Partnership declared
distributions to the Limited Partners of $2,400,000, $2,475,000, and $2,000,000,
for the years ended December 31, 2001, 2000 and 1999, respectively. This
represents distributions of $48.00, $49.50, and $40.00 per Unit for the years
ended December 31, 2001, 2000, and 1999, respectively. Distributions for 2001
included $650,000 as a result of the distribution of the net sales proceeds from
the sale of the Property in Schererville, Indiana and distributions for 2000
included $600,000 as a result of the distribution of the net sales proceeds from
the sale of the Property is Plant City, Florida. These special distributions
were effectively a return of a portion of the Limited Partners' investment,
although, in accordance with the Partnership agreement, it was applied to the
Limited Partner's unpaid cumulative 10% Preferred Return. The reduced number of
Properties for which the Partnership receives rental payments, as well as
ongoing operations, reduced the Partnership's revenues. The decrease in
Partnership revenues, combined with the fact that a significant portion of the
Partnership's expenses are fixed in nature, resulted in a decrease in cash
distributions to the Limited Partners during 2001 and 2000. No amounts
distributed to the Limited Partners for the years ended December 31, 2001, 2000,
or 1999 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 the 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, 2001 or 2000.
At December 31, 2001 and 2000, the Partnership owed $4,211, and $8,707,
respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 15, 2002, all such amounts had been
reimbursed to affiliates. In addition, during the years ended December 31, 2001,
and 2000 the Partnership incurred $40,928 and $15,296, respectively, in real
estate disposition fees due to an affiliate as a result of services provided in
connection with the sale of the Properties in Schererville, Indiana; Washington,
Illinois; and Plant City, Florida. The payment of such fees is deferred until
the Limited Partners have received the sum of their cumulative 10% Preferred
Return and their adjusted capital contributions. Other liabilities, including
distributions payable, decreased to $466,279 at December 31, 2001, as compared
to $494,987 at December 31, 2000. The decrease at December 31, 2001, as compared
to December 31, 2000, was primarily a result of a decrease in rents paid in
advance at December 31, 2001. The General Partners believe that the Partnership
has sufficient cash on hand to meet its current working capital needs.
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 Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and
have been accounted for using either the direct financing or the operating
methods. 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 assumption regarding collectibility of
lease payments could result in a change in accounting for the lease at the
inception of 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 its Properties and investments in unconsolidated
entities periodically (no less than once per year) for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through operations. Management determines whether
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. If an impairment is indicated, the assets are
adjusted to their fair value.
Results of Operations
During the year ended December 31, 1999, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 24 wholly
owned Properties (including two Properties which were sold during 1999). During
the year ended December 31, 2000, the Partnership owned and leased 22 wholly
owned Properties (including one Property which was sold during 2000). During the
year ended December 31, 2001, the Partnership owned and leased 21 wholly owned
Properties (including two Properties which were sold during 2001). In addition,
during the years ended December 31, 1999, 2000 and 2001, the Partnership was a
co-venturer in two joint ventures that each owned and leased one Property.
During 1999, 2000 and 2001, the Partnership also owned and leased four
Properties, with affiliates of the General Partners, as tenants-in-common. As of
December 31, 2001, the Partnership owned, either directly or through joint
venture arrangements, 25 Properties which are, in general, subject to long-term,
triple-net leases. The leases of the Properties provide for minimum base annual
rental amounts (payable in monthly installments) ranging from approximately
$36,100 to $191,900. The majority of the leases provide for percentage rent
based on sales in excess of a specified amount. In addition, some leases provide
for increases in the annual base rent during the lease term. For a further
description of the Partnership's leases and Properties, see Item 1. Business -
Leases and Item 2. Properties, respectively.
During the years ended December 31, 2001, 2000, and 1999, the
Partnership and its consolidated joint venture, earned $1,572,810, $1,655,696,
and $1,620,310, respectively, in rental income from operating leases and earned
income from direct financing leases. Rental and earned income decreased by
approximately $53,800 during 2001, as compared to 2000, as a result of the 2001
sales of the Properties in Schererville, Indiana, Washington, Illinois, and the
2000 sale of the Property in Plant City, Florida, as described above in "Capital
Resources."
In addition, the decrease in rental and earned income during 2001, as
compared to 2000, was partially attributable to the fact that the tenant of the
Property in Montgomery, Alabama experienced financial difficulties. As of March
15, 2002, the Partnership has continued receiving a portion of the rental
payments relating to this lease. The General Partners will continue to pursue
collection of past due rental amounts relating to this Property.
The increase in rental and earned income during 2000, as compared to
1999, was partially attributable to an increase of approximately $132,000 due to
the reinvestment of the net sales proceeds received from Property sales during
1999 in additional Properties as described above in "Capital Resources." The
increase in rental income during 2000, compared to 1999, was partially offset by
a decrease of approximately $95,400, as a result of Property sales during 2000
and 1999, as described above in "Capital Resources."
During the years ended December 31, 2001, 2000, and 1999, the
Partnership also earned $195,533, $67,909, and $116,872, respectively, in
contingent rental income. The increase in contingent rental income during 2001,
as compared to 2000, was primarily attributable to an increase in gross sales of
certain restaurant Properties requiring the payment of contingent rental income.
The decrease in contingent rental income during 2000, as compared to 1999, was
primarily attributable to the sales of Properties during 2000 and 1999, for
which the leases required the payment of contingent rental income.
The Partnership recognized income of $139,219, $23,956, and $170,966
for the years ended December 31, 2001, 2000 and 1999, respectively, attributable
to net income by unconsolidated joint ventures in which the Partnership is a
co-venturer. During 1998, the operator of the Property owned by Titusville Joint
Venture, in which the Partnership owns a 73.4% interest, vacated the Property
and ceased operations. During 2001 and 2000, Titusville Joint Venture recorded a
provision for write-down of assets for its Property of approximately $73,600 and
$227,100, respectively. The total provision represented the difference between
the Property's carrying value at December 31, 2001 and 2000, and the General
Partners' estimated net realizable value for the Property. In January 2002,
Titusville Joint Venture sold its Property to an unrelated third party for
approximately $180,000 and received net sales proceeds of approximately
$165,600, resulting in a gain of $4,900 to the joint venture. In addition, in
January 2002, the Partnership and the joint venture partner liquidated
Titusville Joint Venture and the Partnership received its pro rata share of the
liquidation proceeds. No gain or loss was recorded relating to the liquidation.
The Partnership intends to use these liquidation proceeds to pay liabilities of
the Partnership. The increase in income earned from joint ventures during 1999,
was primarily attributable to the fact that the Partnership reinvested a portion
of the net sales proceeds it received from Property sales during 1998 and 1999,
in four Properties with affiliates of the General Partners as tenants-in-common
and one Property through a joint venture arrangement with an affiliate of the
General Partners in 1998 and 1999.
During 2001, three lessees of the Partnership, Golden Corral
Corporation, Winston's GC No. 1, Inc., and IHOP Properties, Inc., each
contributed more than 10% of the Partnership's total rental and earned income
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of rental and earned income from Properties owned by
unconsolidated joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). As of December 31, 2001, Golden Corral
Corporation was the lessee under leases relating to three restaurants, Winston's
GC No. 1, Inc. was the lessee under a lease relating to one restaurant, and IHOP
Properties Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
Winston's GC No. 1, Inc. and IHOP Properties, Inc. will each continue to
contribute more than 10% of the Partnership's total rental and earned income in
2002. In addition, three Restaurant Chains, Golden Corral Family Steakhouse
Restaurants ("Golden Corral"), IHOP, and KFC, each accounted for more than 10%
of the Partnership's total rental and earned income in 2001, (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of the rental and earned income from Properties owned by unconsolidated
joint ventures and Properties owned with affiliates of the General Partners as
tenants-in-common). In 2002, it is anticipated that these three Restaurant
Chains each will continue to account for more than 10% of total rental and
income to which the Partnership is entitled under the terms of the leases. Any
failure of these lessees or any of these Restaurant Chains could materially
affect the Partnership's income, if the Partnership is not able to re-lease
these Properties in a timely manner.
In June 2001, the lease for the Property in Washington, Illinois, which
was scheduled to expire in November 2002, was terminated by the Partnership and
the tenant. In connection therewith, the Partnership received approximately
$20,000 in lease termination income in consideration for the Partnership
releasing the tenant from its obligations under the lease. The Partnership
re-leased this Property to a new tenant with terms substantially the same as the
Partnership's other leases. The Partnership sold this Property in November 2001,
as described above in "Capital Resources." In addition, in connection with the
sale of the Property in Schererville, Indiana, the Partnership received $60,000
from the former tenant of this Property in consideration of the Partnership
releasing the tenant from its obligation under the terms of its lease. No such
amounts were received in 2000 or 1999.
In addition, during 2001, 2000, and 1999, the Partnership earned
$25,789, $40,193, and $103,380, respectively, in interest and other income. The
decrease in interest and other income during 2001 and 2000, each as compared to
the previous year, was partially due to a decrease in interest income that the
Partnership earned on sales proceeds pending reinvestment in additional
Properties.
Operating expenses, including depreciation expense and provision
for write-down of assets, were $1,375,765, $473,803, and $557,083, for the years
ended December 31, 2001, 2000, and 1999, respectively. The increase in operating
expenses during 2001, as compared to 2000, was partially due to the fact that
during 2001, the Partnership recorded a provision for write-down of assets of
$553,673 relating to the Property in Montgomery, Alabama. The tenant of this
Property experienced financial difficulties and vacated the Property, as
described above. The provision represented the difference between the carrying
value of the Property at December 31, 2001 and the General Partners' estimated
net realizable value for the Property. In addition, during 2001, the Partnership
recorded a provision for write-down of assets of $331,304 relating to the
Property in Fayetteville, North Carolina. The tenant of this Property,
Houlihan's Restaurant, Inc., filed for bankruptcy and rejected the lease
relating to this Property, as described above. The provision represented the
difference between the carrying value of the Property, including the accumulated
accrued rental income balance, and the General Partners' estimated net
realizable value of the Property. The lost revenues resulting from the rejected
lease could have an adverse effect on the results of operations of the
Partnership if the Partnership is unable to re-lease the Property in a timely
manner. The General Partners are currently seeking a replacement tenant or
purchaser for this Property.
The increase in operating expenses during 2001 was also partially due
to an increase in the costs incurred for administrative expenses for servicing
the Partnership and its Properties, as permitted by the Partnership agreement.
In addition, the increase in operating expenses during 2001 was partially due to
the fact that the Partnership incurred additional state taxes due to changes in
the tax laws of a state in which the Partnership conducts business. The increase
in operating expenses during 2001 was partially offset by the fact that during
2000 and 1999, the Partnership incurred $27,320 and $118,655 in transaction
costs related to the General Partners retaining financial and legal advisors to
assist them in evaluating and negotiating the proposed merger with APF. On March
1, 2000, the General Partners and APF mutually agreed to terminate the merger.
No such expenses were incurred during 2001. In addition, the increase in
operating expenses during 2001 was partially offset by a decrease in
depreciation expense due to the sale of several Properties during 2001, 2000,
and 1999. The decrease in operating expenses during 2000, as compared to 1999,
was partially offset by an increase in depreciation expense due to the fact that
the Partnership acquired two Properties at the end of the year in 1999, as
described above in "Capital Resources".
As a result of the Properties sales during 2001, 2000 and 1999, as
described above in "Capital Resources," the Partnership recognized gains on sale
of assets totaling $297,741, $16,855, and $293,512, during the years ended
December 31, 2001, 2000 and 1999, respectively.
The restaurant industry, as a whole, has been one of the many
industries affected by the general slowdown in the economy. While the
Partnership has experienced some losses due to the financial difficulties of a
limited number of restaurant operators, the General Partners remain confident in
the overall performance of the fast-food and family style restaurants, the
concepts that comprise the Partnership's portfolio. Industry data shows that
these restaurant concepts continue to outperform and remain more stable than
higher-end restaurants, which have been more adversely affected by the slowing
economy.
The Partnership's leases as of December 31, 2001 are generally
triple-net leases and, in general, 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 the 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 December 1999, the Securities and Exchange Commission released SAB
101, which provides the staff's view in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 requires the
Partnership to defer recognition of certain percentage rental income until
certain defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material impact on the
Partnership results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). The Partnership has reviewed both statements and
has determined that both FAS 141 and FAS 142 do not apply to the Partnership as
of December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). 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 fair
value. If an impairment is recognized, the adjusted carrying amount of a
long-lived asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this Statement
retained the fundamental provisions of FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Termination of Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to
issue shares of its common stock as consideration for the Merger. On March 1,
2000, the General Partners and APF announced that they had mutually agreed to
terminate the Agreement and Plan of Merger. The agreement to terminate the
Agreement and Plan of Merger was based, in large part, on the General Partners'
concern that, in light of market conditions relating to publicly traded real
estate investment trusts, the value of the transaction had diminished. As a
result of such diminishment, the General Partners' ability to unequivocally
recommend voting for the transaction, in the exercise of their fiduciary duties,
had become questionable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
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Report of Independent Certified Public Accountants 18
Financial Statements:
Balance Sheets 19
Statements of Income 20
Statements of Partners' Capital 21
Statements of Cash Flows 22-23
Notes to Financial Statements 24-40
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund III, 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 III, Ltd. (a Florida limited
partnership) at December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under item 14(a)(2) presents 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 schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and 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.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 8, 2002, except for Note 11, as to which the date is February 27, 2002.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2001 2000
------------------ ----------------
ASSETS
Land and buildings on operating leases, net $ 9,324,746 $11,030,461
Net investment in direct financing leases 772,309 1,101,738
Investment in joint ventures 2,196,170 2,235,081
Cash and cash equivalents 1,242,931 578,746
Receivables, less allowance for doubtful
accounts of $28,216 in 2001 27,528 5,780
Due from related parties 9,754 16,710
Accrued rental income 74,755 155,142
Other assets 31,923 33,476
------------------ ----------------
$ 13,680,116 $15,157,134
================== ================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 12,786 $ 20,260
Escrowed real estate taxes payable 12,050 4,718
Distributions payable 437,500 437,500
Due to related parties 128,985 92,553
Rents paid in advance and deposits 3,943 32,509
------------------ ----------------
Total liabilities 595,264 587,540
Minority interest 127,430 130,219
Partners' capital 12,957,422 14,439,375
------------------ ----------------
$ 13,680,116 $15,157,134
================== ================
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
Revenues:
Rental income from operating leases $ 1,466,482 $ 1,529,714 $ 1,402,127
Earned income from direct financing leases 106,328 125,982 218,183
Contingent rental income 195,533 67,909 116,872
Lease termination income 80,000 -- --
Interest and other income 25,789 40,193 103,380
-------------- -------------- --------------
1,874,132 1,763,798 1,840,562
-------------- -------------- --------------
Expenses:
General operating and administrative 178,017 125,570 129,447
Professional services 29,021 22,647 26,642
State and other taxes 14,395 11,645 13,541
Depreciation 269,355 286,621 268,798
Provisions for write-down of assets 884,977 -- --
Transaction costs -- 27,320 118,655
-------------- -------------- --------------
1,375,765 473,803 557,083
-------------- -------------- --------------
Income before Gain on Sale of Assets, Minority Interest in
Income of Consolidated Joint Venture, and Equity in
Earnings of Unconsolidated Joint Ventures 498,367 1,289,995 1,283,479
Gain on Sale of Assets 297,741 16,855 293,512
Minority Interest in Income of Consolidated Joint Venture (17,280 ) (17,374 ) (17,286 )
Equity in Earnings of Unconsolidated Joint Ventures 139,219 23,956 170,966
-------------- -------------- --------------
Net Income $ 918,047 $ 1,313,432 $ 1,730,671
============== ============== ==============
Allocation of Net Income:
General partners $ -- $ -- $ 16,733
Limited partners 918,047 1,313,432 1,713,938
-------------- -------------- --------------
Net Income $ 918,047 $ 1,313,432 $ 1,730,671
============== ============== ==============
Net Income Per Limited Partner Unit $ 18.36 $ 26.27 $ 34.28
============== ============== ==============
Weighted Average Number of Limited Partner Units
Outstanding 50,000 50,000 50,000
============== ============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2001, 2000, and 1999
General Partners Limited Partners
------------------------------------- ---------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 1998 $ 161,500 $ 193,138 $ 25,000,000 $ (26,627,387 ) $ 20,007,919
Distributions to limited
partners ($40.00 per
limited partner unit) -- -- -- (2,000,000 ) --
Net income -- 16,733 -- -- 1,713,938
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 1999 161,500 209,871 25,000,000 (28,627,387 ) 21,721,857
Distributions to limited
partners ($49.50 per
limited partner unit) -- -- -- (2,475,000 ) --
Net income -- -- -- -- 1,313,432
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2000 161,500 209,871 25,000,000 (31,102,387 ) 23,035,289
Distributions to limited
partners ($48.00 per
limited partner unit) -- -- -- (2,400,000 ) --
Net income -- -- -- -- 918,047
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2001 $ 161,500 $ 209,871 $ 25,000,000 $ (33,502,387 ) $ 23,953,336
================= ================== ================ ================ ==================
See accompanying notes to financial statements.
Limited Partners
- ------------------
Syndication
Costs Total
------------------ ---------------
$ (2,864,898 ) $ 15,870,272
-- (2,000,000 )
-- 1,730,671
------------------ ---------------
(2,864,898 ) 15,600,943
-- (2,475,000 )
-- 1,313,432
------------------ ---------------
(2,864,898 ) 14,439,375
-- (2,400,000 )
-- 918,047
------------------ ---------------
$ (2,864,898 ) $ 12,957,422
================== ===============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
--------------- --------------- ---------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants $ 1,710,860 $1,672,373 $1,829,906
Distributions from unconsolidated joint
ventures 178,130 206,911 169,140
Cash paid for expenses (234,240 ) (300,193 ) (246,333 )
Lease termination income 80,000 -- --
Interest received 12,823 38,122 73,011
--------------- --------------- ---------------
Net cash provided by operating activities 1,747,573 1,617,213 1,825,724
--------------- --------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of assets 1,336,681 507,365 1,792,169
Investment in direct financing leases -- -- (612,920 )
Additions to land and buildings -- -- (1,761,236 )
Investment in joint ventures -- -- (259,063 )
--------------- --------------- ---------------
Net cash provided by (used in) investing
activities 1,336,681 507,365 (841,050 )
--------------- --------------- ---------------
Cash Flows From Financing Activities:
Distributions to holder of minority interest (20,069 ) (20,065 ) (20,081 )
Distributions to limited partners (2,400,000 ) (2,537,500 ) (2,000,000 )
--------------- --------------- ---------------
Net cash used in financing activities (2,420,069 ) (2,557,565 ) (2,020,081 )
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents 664,185 (432,987 ) (1,035,407 )
Cash and Cash Equivalents at Beginning of Year 578,746 1,011,733 2,047,140
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 1,242,931 $ 578,746 $1,011,733
=============== =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2001 2000 1999
-------------- ------------- --------------
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Net income $ 918,047 $ 1,313,432 $ 1,730,671
-------------- ------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 269,355 286,621 268,798
Minority interest in income of consolidated
joint venture 17,280 17,374 17,286
Equity in earnings of unconsolidated joint
ventures, net of distributions 38,911 182,955 (1,826 )
Gain on sale of assets (297,741 ) (16,855 ) (293,512 )
Provision for write-down of assets 884,977 -- --
Decrease (increase) in receivables (21,748 ) (5,122 ) 88,861
Decrease (increase) in due from related parties 6,956 (14,410 ) (2,300 )
Decrease in net investment in direct
financing leases 20,457 18,870 19,234
Decrease (increase) in accrued rental income (57,270 ) (63,505 ) (45,253 )
Decrease in other assets 1,553 1,774 855
Increase (decrease) in accounts payable and
escrowed real estate taxes payable (142 ) (64,141 ) 71,830
Decrease in due to related parties (4,496 ) (44,524 ) (31,106 )
Increase (decrease) in rents paid in advance
and deposits (28,566 ) 4,744 2,186
-------------- ------------- --------------
Total adjustments 829,526 303,781 95,053
-------------- ------------- --------------
Net Cash Provided by Operating Activities $1,747,573 $ 1,617,213 $ 1,825,724
============== ============= ==============
Supplemental Schedule on Non-Cash Investing and
Financing Activities
Deferred real estate disposition fee incurred and
unpaid at end of year $ 40,928 $ 15,296 $ --
============== ============= ==============
Distributions declared and unpaid at end of year $ 437,500 $ 437,500 $ 500,000
============== ============= ==============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund III, 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 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
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
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. The leases are accounted for
using either the direct financing or the operating methods. Such
methods are described below:
Direct financing method - The 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) (Note 4). 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 net
investment in the leases.
Operating method - Land and building 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.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
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. Whenever a tenant defaults
under the terms of its lease, or events or changes in
circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership
either reserves or reverses the cumulative accrued rental
income balance.
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, 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. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made
their best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near term which
could adversely affect the general partners' estimate of net cash flows
expected to be generated from its properties and the need for asset
impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
although the Partnership continues to pursue collection of such
amounts. 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 69.07%
interest in Tuscawilla Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partners'
proportionate share of the equity in the Partnership's consolidated
joint venture. All significant intercompany accounts and transactions
have been eliminated.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
The Partnership's investments in Titusville Joint Venture, RTO Joint
Venture, and a property in each of Englewood, Colorado, Miami, Florida,
Overland Park, Kansas, and Baytown, Texas held as tenants-in-common
with affiliates of the general partners, are accounted for using the
equity method since the 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 (some of which are
backed by government securities). 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 are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment. See "Income Taxes"
footnote for a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes.
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.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
1. Significant Accounting Policies - Continued:
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2001 presentation.
These reclassifications had no effect on partners' capital or net
income.
Staff Accounting Bulletin No. 101 ("SAB 101") - In December 1999, the
Securities and Exchange Commission released SAB 101, which provides the
staff's view in applying generally accepted accounting principles to
selected revenue recognition issues. SAB 101 requires the Partnership
to defer recognition of certain percentage rental income until certain
defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material
impact on the Partnership results of operations.
Statement of Financial Accounting Standards No. 141 ("FAS 141") and
Statement of Financial Accounting Standards No. 142 ("FAS 142") - In
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" (FAS
141) and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" (FAS 142). The Partnership has reviewed
both statements and has determined that both FAS 141 and FAS 142 do not
apply to the Partnership as of December 31, 2001.
Statement of Financial Accounting Standards No. 144 ("FAS 144") - In
October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 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 fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this
Statement retained the fundamental provisions of FAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of."
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
2. Leases:
-------
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The leases generally are classified as
operating leases; however, a few of the leases have been classified as
direct financing leases. For the leases classified as direct financing
leases, the building portions of the property leases are accounted for
as direct financing leases while the land portion of these leases are
operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant
generally pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage
for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two or
five successive five-year periods subject to the same terms and
conditions as 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.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
2001 2000
---------------- --------------
Land $ 4,897,799 $ 5,677,699
Buildings 7,118,461 8,261,795
---------------- --------------
12,016,260 13,939,494
Less accumulated depreciation (2,691,514 ) (2,909,033 )
---------------- --------------
$ 9,324,746 $ 11,030,461
================ ==============
In September 2000, the Partnership sold its property in Plant City,
Florida, for a total of $509,865 and received net sales proceeds of
$492,069, resulting in a total gain of $16,855. In connection with the
sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $15,296 (see Note 8). The Partnership distributed
these net sales proceeds as a special distribution to the limited
partners.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
3. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
In September 2001, the Partnership sold its Golden Corral property in
Schererville, Indiana for $775,000 and received net sales proceeds of
$750,550, resulting in a gain of $229,029. In connection with the sale,
the Partnership incurred a deferred, subordinated, real estate
disposition fee of $23,250 (see Note 8), and received $60,000 from the
former tenant of this property in consideration of the Partnership
releasing the tenant from its obligation under the terms of its lease.
In November 2001, the Partnership sold its Golden Corral property in
Washington, Illinois for approximately $589,300 and received net sales
proceeds of approximately $586,100, resulting in a gain of $68,712. In
connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $17,678 (see Note 8).
In addition, during the year ended December 31, 2001, the Partnership
recorded a provision for write-down of assets of $244,701 relating to
the property located in Montgomery, Alabama, the building portion of
which is classified as a direct financing lease (see Note 4). The
tenant of this property experienced financial difficulties and vacated
the property. The provision represented the difference between the
carrying value of the property at December 31, 2001 and the general
partners' estimated net realizable value for the property.
In addition, during the year ended December 31, 2001, the Partnership
recorded a provision for write-down of assets of $331,304 relating to
the property located in Fayetteville, North Carolina. The tenant of
this property, Houlihan's Restaurant, Inc., filed for bankruptcy and
rejected the lease relating to this property. The provision represented
the difference between the carrying value of the property, including
the accumulated accrued rental income balance, and the general
partners' estimated net realizable value of the property.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
3. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2001:
2002 $ 1,226,894
2003 1,087,117
2004 1,089,337
2005 1,100,439
2006 1,052,993
Thereafter 5,544,762
---------------------
$ 11,101,542
=====================
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease payments due
during the initial lease term. In addition, this table does not include
any amounts for future contingent rentals which may be received on the
lease based on a percentage of the tenants' gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct
financing leases at December 31:
2001 2000
------------- ------------
Minimum lease payments receivable $ 1,898,885 $ 2,198,752
Estimated residual value 139,124 292,354
Less unearned income (1,265,700 ) (1,389,368 )
------------- ------------
Net investment in direct financing leases $ 772,309 $ 1,101,738
============= ============
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
4. Net Investment in Direct Financing Leases - Continued:
------------------------------------------------------
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2001
2002 $ 144,852
2003 144,852
2004 144,852
2005 144,852
2006 144,852
Thereafter 1,174,625
------------------
$ 1,898,885
==================
The above table does not include future minimum lease payments for
renewal periods or contingent rental payments that may become due in
future periods (see Note 3).
During the year ended December 31, 2001 the Partnership recorded a
provision of $308,972 for impairment of the carrying value of the
property in Montgomery, Alabama, due to the fact that the tenant of
this property experienced financial difficulties and vacated the
property. The provision represented the difference between the carrying
value of the property at December 31, 2001 and the general partners'
estimated net realizable value for the property.
5. Investment in Joint Ventures:
As of December 31, 2001, the Partnership had a 73.4% and 46.88%
interest in the profits and losses of Titusville Joint Venture and RTO
joint Venture, respectively. The remaining interests in the Titusville
Joint Venture and the RTO Joint Venture, are held by affiliates of the
general partners. Also, the Partnership has a 33%, a 9.84%, a 25.87%,
and 20% interest in the profits and losses of a property in each of
Englewood, Colorado; Miami, Florida; Overland Park, Kansas; and
Baytown, Texas, respectively, held as tenants-in-common with affiliates
of the general partners.
In January 2002, Titusville Joint Venture sold its property and the
Partnership and the joint venture partner liquidated the joint venture
(see Note 11).
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, 1999
5. Investment in Joint Ventures - Continued:
As of December 31, 2001, Titusville Joint Venture, RTO Joint Venture,
and the Partnership and affiliates, as tenants-in-common in four
separate tenancy-in-common arrangements, each owned and leased one
property to operators of national fast-food or family-style
restaurants. The following presents the joint ventures' condensed
financial information at December 31:
2001 2000
-------------- ------------
Land and buildings on operating
leases, net $ 4,393,909 $ 4,535,402
Net investment in direct
financing leases 3,347,560 3,373,785
Cash 9,669 41,902
Receivables 67,370 14,588
Accrued rental income 316,362 228,003
Other assets 2,590 3,036
Liabilities 38,192 85,539
Partners' capital 8,099,268 8,111,177
Revenues 874,983 852,872
Provision for write-down of assets (73,570 ) (227,093 )
Net income 703,239 528,006
The Partnership recognized income of $139,219, $23,956, and $170