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, 2003
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 0-19140
CNL INCOME FUND VII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2963871
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(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 ($1 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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes____ No X
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 30,000,000 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 $1 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund VII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 18, 1989. 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 January 30, 1990, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 1, 1990, as of which date the maximum offering
proceeds of $30,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes.
As of December 31, 2000, the Partnership owned 20 Properties directly
and held interests in 15 Properties through joint venture or tenancy in common
arrangements. During the year ended December 31, 2001, the Partnership purchased
an additional interest in TGIF Pittsburgh Joint Venture from CNL Income Fund
XVIII, Ltd., an affiliate of the General Partners. During 2001, the Partnership
reinvested the net sales proceeds from the sale of three of its Properties (two
in Jacksonville, Florida and one in Lake City, Florida) in a Property in Baton
Rouge, Louisiana that was acquired from CNL Funding 2001-A, LP, an affiliate of
the General Partners. The Partnership also used the proceeds from the sale of
the Property in Friendswood, Texas and the proceeds from the promissory note
related to the 1995 sale of the Property in Florence, South Carolina to invest
in CNL VII & XVII Lincoln Joint Venture with an affiliate of the General
Partners to purchase and hold one restaurant Property and used the remaining
proceeds from the promissory note to invest in CNL VII, XV Columbus Joint
Venture with an affiliate of the General Partners to construct and hold one
restaurant Property. In addition, during 2001, the Partnership sold its
Properties in Daytona Beach, Gainesville, and Saddlebrook, Florida. In
connection with the sale of the Property in Daytona Beach, Florida, the
Partnership accepted a promissory note in the principal sum of $103,581. During
2002, the Partnership collected the outstanding principal balance in full.
During the year ended December 31, 2002, CNL Restaurant Investments II,
in which the Partnership owns an 18% interest, sold its Property in Columbus,
Ohio and used the proceeds from the sale to acquire a Property in Dallas, Texas.
In addition, during 2002, CNL Restaurant Investments II sold its property in
Pontiac, Michigan and the Partnership used a portion of the return of capital
from its pro-rata share of the net sales proceeds relating to this Property to
make an additional contribution of approximately $63,900 to CNL Mansfield Joint
Venture. In 2002, the Partnership also used a portion of the net sales proceeds
from the 2001 sale of its properties in Saddlebrook, Gainesville and Daytona
Beach, Florida to enter into a joint venture arrangement, Arlington Joint
Venture, with an affiliate of the General Partners, to hold one restaurant
property. Also during 2002, CNL Mansfield Joint Venture, in which the
Partnership owns a 79% interest, sold its Property in Mansfield, Texas and
reinvested the proceeds in a Property in Arlington, Texas.
As of December 31, 2003, the Partnership owned 18 Properties directly
and held interests in 17 Properties indirectly through joint venture or tenancy
in common arrangements. The Properties are, in general, leased on a triple-net
basis with the lessees responsible for all repairs and maintenance, property
taxes, insurance and utilities.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income taxes. Certain lessees also have
been granted options to purchase Properties, generally at the Property's then
fair market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property purchase options
granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from six to 20 years (the average being 16 years), and expire
between 2004 and 2022. Generally, the leases are on a triple-net basis, with the
lessee responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$30,000 to $259,900. The majority of the leases provide for percentage rent,
based on sales in excess of a specified amount. In addition, some of the leases
provide that, commencing in specified lease years (generally ranging from the
sixth to the eleventh lease year), the annual base rent required under the terms
of the lease will increase.
Generally, the leases of the Properties provide for two to five
successive five-year renewal options subject to the same terms and conditions as
the initial lease. Lessees of 26 of the Partnership's 35 Properties also have
been granted options to purchase Properties at the Property's then fair market
value after a specified portion of the lease term has elapsed. Fair market value
will be determined through an appraisal by an independent appraisal firm. Under
the terms of certain leases, the option purchase price may equal the
Partnership's original cost to purchase the Property (including acquisition
costs), plus a specified percentage from the date of the lease or a specified
percentage of the Partnership's purchase price, if that amount is greater than
the Property's fair market value at the time the purchase option is exercised.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
offer the lessee the right to purchase that 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.
Major Tenants
During 2003, two lessees (or groups of affiliated tenants) of the
Partnership and its consolidated joint venture, (i) Golden Corral Corporation,
and (ii) Jack in the Box Inc. and Jack in the Box Eastern Division, L.P. (which
are affiliated entities under common control of Jack in the Box Inc.)
(hereinafter referred to as "Jack in the Box Inc."), each contributed more than
10% of the Partnership's total rental revenues (including total rental revenues
from the Partnership's consolidated joint venture and the Partnership's share of
total rental revenues from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
As of December 31, 2003, Golden Corral Corporation was the lessee under leases
relating to six restaurants and Jack in the Box Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, these two lessees each will continue to
contribute more than 10% of the Partnership's total rental revenues in 2004. In
addition, three Restaurant Chains, Golden Corral Buffet and Grill ("Golden
Corral"), Hardee's, and Jack in the Box, each accounted for more than 10% of the
Partnership's total rental revenues in 2003 (including rental revenues from the
Partnership's consolidated joint venture and the Partnership's share of total
rental revenues from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
In 2004, it is anticipated that these three Restaurant Chains each will continue
to account for more than 10% of the Partnership's total rental revenues to which
the Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains will materially affect the Partnership's operating
results if the Partnership is not able to re-lease the Properties in a timely
manner. As of December 31, 2003, Golden Corral Corporation leased Properties
with an aggregate carrying value in excess of 20% of the total assets of the
Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
San Antonio #849 Joint 1990 83.30% Various third party partners San Antonio, TX
Venture
CNL Restaurant Investments II 1991 18.00% CNL Income Fund VIII, Ltd. Dallas, TX
CNL Income Fund IX, Ltd. Hastings, MN
New Castle, IN
Raceland, LA
San Antonio, TX
Des Moines Real Estate Joint 1992 4.79% CNL Income Fund XI, Ltd. Des Moines, WA
Venture CNL Income Fund XII, Ltd.
CNL Mansfield Joint Venture 1997 79.00% CNL Income Fund XVII, Ltd. Arlington, TX
CNL Income Fund II, Ltd. and 1997 53.00% CNL Income Fund II, Ltd. Smithfield, NC
CNL Income Fund VII,
Ltd., Tenants in Common
CNL Income Fund III, Ltd., 1997 35.64% CNL Income Fund III, Ltd. Miami, FL
CNL Income Fund VII, CNL Income Fund X, Ltd.
Ltd., CNL Income Fund X, CNL Income Fund XIII, Ltd.
Ltd. and CNL Income Fund
XIII, Ltd., Tenants in
Common
CNL Income Fund VII, Ltd., 1999 71.00% CNL Income Fund IX, Ltd. Montgomery, AL
and CNL Income Fund IX,
Ltd., Tenants in Common
Duluth Joint Venture 1999 56.00% CNL Income Fund XIV, Ltd. Duluth, GA
TGIF Pittsburgh Joint Venture 2000 36.88% CNL Income Fund XV, Ltd. Homestead, PA
CNL Income Fund XVI, Ltd.
CNL Income Fund XVIII, Ltd.
CNL Income Fund VII, Ltd. and 2000 43.00% CNL Income Fund XII, Ltd. Colorado Springs, CO
CNL Income Fund XII,
Ltd., Tenants in Common
CNL VII & XVII Lincoln Joint 2001 14.00% CNL Income Fund XVII, Ltd. Lincoln, NE
Venture
CNL VII, XV Columbus Joint 2001 68.75% CNL Income Fund XV, Ltd. Columbus, GA
Venture
Arlington Joint Venture 2002 79.00% CNL Income Fund XVI, Ltd. Arlington, TX
CNL Restaurant Investments II was formed to hold six Properties,
however, all other joint ventures or tenancies in common were formed to hold one
Property. Currently, CNL Restaurant Investments II owns five Properties because
during 2002 the joint venture sold a Property and distributed the net sales
proceeds to the Partnership and the other co-venturers. Each CNL Income Fund is
an affiliate of the General Partners and is a limited partnership organized
pursuant to the laws of the state of Florida. The Partnership has management
control of San Antonio #849 Joint Venture and shares management control equally
with the affiliates of the General Partners for the other joint ventures.
The joint venture and tenancy in common arrangements provide for the
Partnership and its partners to share in all costs and benefits in proportion to
each partner's percentage interest in the entity or Property. The Partnership
and its partners are also jointly and severally liable for all debts,
obligations and other liabilities of the joint venture or tenancy in common. Net
cash flow from operations is distributed to each joint venture or tenancy in
common partner in accordance with its respective percentage interest in the
entity or Property.
San Antonio #849 Joint Venture, Des Moines Real Estate Joint Venture,
CNL Mansfield Joint Venture and Duluth Joint Venture each have an initial term
of 20 years and, after the expiration of the initial term, continues in
existence from year to year unless terminated at the option of either joint
venturer or by an event of dissolution. Events of dissolution include the
bankruptcy, insolvency or termination of any joint venturer, sale of the
Property owned by the joint venture and mutual agreement of the Partnership and
its joint venture partner to dissolve the joint venture. Any liquidation
proceeds, after paying joint venture debts and liabilities and funding reserves
for contingent liabilities, will be distributed first to the joint venture
partners with positive capital account balances in proportion to such balances
until such balances equal zero, and thereafter in proportion to each joint
venture partner's percentage interest in the joint venture. CNL VII & XVII
Lincoln Joint Venture, CNL VII, XV Columbus Joint Venture, TGIF Pittsburgh Joint
Venture and Arlington Joint Venture each have an initial term of 30 years. CNL
Restaurant Investment II's joint venture agreement does not provide a fixed
term, but continues in existence until terminated by any of the joint venturers.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partner, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
RAI Restaurants, Inc. (the "Advisor"), an affiliate of the General
Partners, provided certain services relating to management of the Partnership
and its Properties pursuant to a management agreement with the Partnership.
Under this agreement, the Advisor is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices, and providing
information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor an
annual fee of one percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer and the
Property held as tenants-in-common with an affiliate, but not in excess of
competitive fees for comparable services. Under the property management
agreement, the property management fee is subordinated to receipt by the Limited
Partners of an aggregate, ten percent, cumulative, 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.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM perform certain services for the
Partnership. In addition, the General Partners have available to them the
resources and expertise of the officers and employees of CNL Financial Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 2003, the Partnership owned 35 Properties. Of the 35
Properties, 18 are owned by the Partnership in fee simple, 13 are owned
indirectly through joint venture arrangements and four are owned indirectly
through tenancy in common arrangements. See Item 1. Business - Joint Venture and
Tenancy in Common Arrangements. The Partnership is not permitted to encumber its
Properties under the terms of its partnership agreement.
Description of Properties
Land. The Partnership's Property sites range from approximately 20,600
to 110,200 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, either directly or
indirectly, by the Partnership as of December 31, 2003 by state.
State Number of Properties
Alabama 1
Arizona 1
Colorado 1
Florida 3
Georgia 3
Indiana 1
Louisiana 2
Michigan 1
Minnesota 1
Nebraska 1
North Carolina 1
Ohio 6
Pennsylvania 1
Tennessee 2
Texas 9
Washington 1
-------
TOTAL PROPERTIES 35
=======
Buildings. Generally, each of the Properties includes a building that
is one of a Restaurant Chain's approved designs. However, the building located
on the Checkers Property is owned by the tenant, while the land parcel is owned
by the Partnership. The Partnership's buildings generally are rectangular and
are constructed from various combinations of stucco, steel, wood, brick and
tile. The sizes of the buildings owned by the Partnership range from
approximately 700 to 10,600 square feet. All buildings on Properties are
freestanding and surrounded by paved parking areas. Buildings are suitable for
conversion to various uses, although modifications may be required prior to use
for other than restaurant operations. As of December 31, 2003, the Partnership
had no plans for renovation of the Properties. Depreciation expense is computed
for buildings and improvements using the straight-line method using depreciable
lives of 40 years for federal income tax purposes.
As of December 31, 2003, the aggregate cost of the Properties owned by
the Partnership (including its consolidated joint venture) and the
unconsolidated joint ventures (including the Properties owned through tenancy in
common arrangements), for federal income tax purposes was $16,104,595 and
$22,548,895, respectively.
The following table lists the Properties owned, either directly or
indirectly, by the Partnership as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Bennigan's 1
Burger King 6
Checkers 1
Chevy's Fresh Mex 1
Golden Corral 6
Hardee's 6
IHOP 1
Jack in the Box 4
KFC 1
Mama Fu's Noodle House 1
Rally's 1
Roadhouse Grill 1
Sonny's Bar-B-Q 1
Taco Bell 1
Taco Cabana 2
TGI Friday's 1
-------
TOTAL PROPERTIES 35
=======
The General Partners consider the Properties to be well maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of
Restaurant Chains. The leases are generally on a long-term "triple net" basis,
meaning that the tenant is responsible for repairs, maintenance, property taxes,
utilities and insurance.
The following is a schedule of the average rent per Property and
occupancy rates for each of the years ended December 31:
2003 2002 2001 2000 1999
------------- ------------- --------------- -------------- --------------
Rental Revenues (1) $ 2,887,017 $ 2,832,401 $ 2,686,849 $ 2,801,210 $ 2,902,968
Properties 35 35 35 35 40
Average Rent per
Property $ 82,486 $ 80,926 $ 76,767 $ 80,035 $ 72,574
Occupancy Rate 100% 100% 100% 100% 100%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned indirectly through joint venture and tenancy in
common arrangements.
The following is a schedule of lease expirations for leases in place as
of December 31, 2003 for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
of Leases Revenues Rental Income
----------------- ---------------- ----------------- --------------------------
2004 1 $ 137,061 4.69%
2005 7 522,156 17.85%
2006 1 60,826 2.08%
2007 -- -- --
2008 2 124,884 4.27%
2009 -- -- --
2010 9 730,546 24.97%
2011 -- -- --
2012 4 328,339 11.22%
2013 -- -- --
Thereafter 11 1,021,645 34.92%
---------- ------------------ -------------
Total 35 $ 2,925,457 100.00%
========== ================== =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2003 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases six Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2015) and the
average minimum base annual rent is approximately $155,000 (ranging from
approximately $137,100 to $186,600).
Jack in the Box Inc. leases four Jack in the Box restaurants. The
initial term of each lease is 10 to 20 years (expiring between 2010 and 2018)
and the average minimum base annual rent is approximately $121,400 (ranging from
approximately $101,100 to $140,900).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of
the Partnership, nor any of their respective properties, is a 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 12, 2004, there were 3,120 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. During 2003, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. From
inception through December 31, 2003, the price paid for any Unit transferred
pursuant to the Plan was $.95 per Unit. The price paid for any Unit transferred
other than pursuant to the Plan was subject to negotiation by the purchaser and
the selling Limited Partner. The Partnership will not redeem or repurchase
Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
-------------------------------- -------------------------------
High Low Average High Low Average
--------- --------- ---------- -------- ------- ----------
First Quarter $ .95 $ .60 $ .89 $ .79 $ .60 $ .66
Second Quarter 2.38 .69 1.05 (2 ) (2 ) (2 )
Third Quarter .79 .79 .79 .95 .95 .95
Fourth Quarter .95 .83 .92 1.00 .60 .83
(1) A total of 415,931 and 118,320 Units were transferred other than
pursuant to the Plan for the years ended December 31, 2003 and 2002,
respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the plan.
The capital contribution per Unit was $1. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 2003 and 2002, the Partnership
declared cash distributions of $2,700,000 to the Limited Partners. Distributions
of $675,000 were declared to the Limited Partners at the close of each of the
Partnership's calendar quarters during 2003 and 2002. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive distributions on this basis. No amounts distributed to partners for the
years ended December 31, 2003 and 2002, are required to be or have been treated
by the Partnership as a return of capital for purposes of calculating the
Limited Partners' return on their adjusted capital contributions. No
distributions have been made to the General Partners to date.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
(b) Not applicable.
Item 6. Selected Financial Data
Year ended December 31: 2003 2002 2001 2000 1999
-------------- -------------- --------------- -------------- --------------
Continuing Operations:
Revenues $ 1,890,982 $ 1,886,389 $ 2,043,814 $ 2,404,733 $ 2,581,576
Equity in earnings of
unconsolidated joint ventures 863,472 1,027,311 717,096 456,050 429,997
Net income (1) 2,228,667 2,343,522 2,215,570 3,221,515 2,545,690
Income per Unit:
Continuing operations 0.074 0.078 0.074 0.107 0.085
Cash distributions declared 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000
Cash distributions declared per
Unit 0.090 0.090 0.090 0.090 0.090
At December 31:
Total assets $24,270,530 $ 24,712,885 $ 25,073,220 $ 25,607,914 $ 25,146,133
Total partners' capital 23,368,760 23,840,093 24,196,571 24,681,001 24,159,486
(1) Net income for the years ended December 31, 2001, 2000, and 1999,
includes $382,122, $878,347, and $189,826, respectively, from gains on
sale of assets.
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 August 18, 1989, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
Restaurant Chains. The leases are generally triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases provide for minimum base annual rental amounts
(payable in monthly installments) ranging from approximately $30,000 to
$259,900. The majority of the leases provide for percentage rent based on sales
in excess of a specified amount. In addition, the majority of the leases provide
that, commencing in specified lease years (generally the sixth lease year), the
annual base rent required under the terms of the lease will increase. As of
December 31, 2001, 2002 and 2003, the Partnership owned 18 Properties directly
and held interest in 17 Properties indirectly through joint venture or tenancy
in common arrangements.
Capital Resources
Cash from operating activities was $2,731,994, $2,648,131, and
$2,479,263, for the years ended December 31, 2003, 2002, and 2001, respectively.
The increase in cash from operating activities during 2003 and 2002, each as
compared to the previous year, was a result of changes in the Partnership's
working capital, such as the timing of transactions relating to the collection
of receivables and the payment of expenses, and changes in income and expenses,
such as changes in rental revenues and changes in operating and Property related
expenses.
Other significant sources and uses of cash included the following
during the years ended December 31, 2003, 2002, and 2001.
In January 2001, the Partnership reinvested the net sales proceeds
received from the 2000 sales of two Properties in Jacksonville, Florida and the
Property in Lake City, Florida in a Jack in the Box Property in Baton Rouge,
Louisiana for a purchase price of approximately $1,495,700. The Partnership
acquired the Property from CNL Funding 2001-A, LP, a Delaware limited
partnership and an affiliate of the General Partners. The Partnership reinvested
the remaining net sales proceeds in additional joint venture Properties. A
portion of the transaction relating to the sales of these Properties and the
reinvestment of the net sales proceeds in additional Properties qualified as a
like-kind exchange transaction for federal income tax purposes.
The Partnership had a mortgage note receivable relating to a sale in
1995 of a Property in Florence, South Carolina. In February 2001, the
Partnership received a balloon payment of $1,115,301 which included the
outstanding principal balance and $14,419 of accrued interest. The Partnership
used the majority of the net sales proceeds to acquire a Property in Lincoln,
Nebraska, and a Property in Columbus, Georgia, each of which is held with
affiliates of the General Partners as tenants-in-common.
In April 2001, the Partnership used a portion of the proceeds from the
2000 sale of the Property in Friendswood, Texas and a portion of the amount
collected from the promissory note accepted in connection with the 1995 sale of
a Property in Florence, South Carolina, to invest in a joint venture
arrangement, CNL VII & XVII Lincoln Joint Venture, with CNL Income Fund XVII,
Ltd., a Florida limited partnership and affiliate of the General Partners, to
purchase and hold a Property in Lincoln, Nebraska for a total purchase price of
$1,740,374. The joint venture acquired the Property from CNL BB Corp., an
affiliate of the General Partners, who had purchased and temporarily held title
to the Property in order to facilitate the acquisition of the Property by the
joint venture. The purchase price paid represents the costs incurred by CNL BB
Corp. to acquire and carry the Property. The Partnership owns a 14% interest in
the profits and losses of the joint venture.
In August 2001, the Partnership used the other portion of the amount
collected from the promissory note to invest in a joint venture arrangement, CNL
VII, XV Columbus Joint Venture, with CNL Income Fund XV, Ltd., a Florida limited
partnership and affiliate of the General Partners, to purchase and construct one
restaurant Property in Columbus, Georgia. During 2001, the Partnership
contributed approximately $1,025,500 to purchase land and pay for construction
costs relating to the joint venture and contributed $76,700 during 2002 to
complete the construction. The Partnership owns a 68.75% interest in the profits
and losses of this joint venture.
In November 2001, the Partnership sold its Properties in Daytona Beach
and Gainesville, Florida to the tenant in accordance with the purchase option
under the lease agreements and received aggregate net sales proceeds of
$499,813, resulting in a gain of $184,894. In connection with the sales of the
Properties, the Partnership received $396,232 in cash and accepted an
uncollateralized promissory note in the amount of $103,581 related to the
Property in Daytona Beach, Florida. In October 2002, the Partnership received a
payment of $114,304 which included the outstanding principal balance and $10,723
of accrued interest.
In December 2001, the Partnership sold its Property in Saddlebrook,
Florida to a third party and received net sales proceeds of $698,050, resulting
in a gain of $74,232. The Partnership used the net sales proceeds to invest in
additional joint venture Properties.
During 2002, the Partnership used the proceeds from the sale of several
of its Properties in 2001 to enter into a joint venture arrangement, Arlington
Joint Venture, with CNL Income Fund XVI, Ltd., a Florida limited partnership and
an affiliate of the General Partners. The joint venture acquired a Property in
Arlington, Texas at an approximate cost of $1,003,600. In addition, in June
2002, CNL Restaurant Investments II, in which the Partnership owns an 18%
interest, sold its Property in Columbus, Ohio to the tenant for a sales price of
approximately $1,219,600 and received net sales proceeds of approximately
$1,215,700, resulting in a gain of $448,300. The joint venture used the proceeds
from this sale to acquire a Property in Dallas, Texas at an approximate cost of
$1,147,400. The joint ventures acquired these Properties from CNL Funding
2001-A, LP, a Delaware limited partnership and an affiliate of the General
Partners. The purchase price paid by the joint ventures represented the costs
incurred by CNL Funding 2001-A, LP to acquire and carry the Properties. The
transaction relating to the sale of the Property in Columbus, Ohio and the
reinvestment of the net sales proceeds was structured to qualify as a like-kind
exchange transaction for federal income tax purposes.
In June 2002, CNL Restaurant Investments II also sold its Property in
Pontiac, Michigan to the tenant for a sales price of $725,000 and received net
sales proceeds of approximately $722,600. The sale resulted in a loss to the
joint venture of approximately $189,800. The tenant exercised its option to
purchase the Property under the terms of the lease. As of December 31, 2002 the
Partnership received $129,888, representing its pro rata share of the net sales
proceeds as a return of capital.
In August 2002, CNL Mansfield Joint Venture sold its property in
Mansfield, Texas to the tenant for a sales price of $1,045,000 and received net
sales proceeds of approximately $1,011,500, resulting in a gain of approximately
$269,800. In September 2002, CNL Mansfield Joint Venture used the proceeds from
the sale of the Property and an additional contribution of approximately $63,900
received from the Partnership to acquire a Property in Arlington, Texas from CNL
Net Lease Investors, L.P. ("NLI"), a California limited partnership, at an
approximate cost of $1,089,900. The sale of the Property and the reinvestment of
the net sales proceeds was structured to qualify as a like-kind exchange
transaction for federal income tax purposes. During 2002, and prior to the joint
venture's acquisition of this Property, CNL Financial LP Holding, LP ("CFN"), a
Delaware limited partnership, and CNL Net Lease Investors GP Corp. ("GP Corp"),
a Delaware corporation, purchased the limited partner's interest and general
partner's interest, respectively, of NLI. Prior to this transaction, an
affiliate of the Partnership's general partners owned a 0.1% interest in NLI and
served as a general partner of NLI. The original general partners of NLI waived
their rights to benefit from this transaction. The acquisition price paid by CFN
for the limited partner's interest was based on the portfolio acquisition price.
The joint venture acquired the Property in Arlington, Texas at CFN's cost and
did not pay any additional compensation to CFN for the acquisition of the
Property. Each CNL entity is an affiliate of the Partnership's General Partners.
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. Under its partnership agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf 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.
At December 31, 2003, the Partnership had $979,093 invested in cash and
cash equivalents as compared to $972,797 at December 31, 2002. At December 31,
2003, these funds were held in demand deposit and money market accounts at
commercial banks. As of December 31, 2003, the average interest rate earned on
rental income held in demand deposit and money market accounts at commercial
banks was less than one percent annually. The funds remaining at December 31,
2003, after payment of distributions and other liabilities, will be used to
invest in additional Properties and to meet the Partnership's working capital
needs.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all leases of the Partnership's Properties are
on a triple-net basis, it is not anticipated that a permanent reserve for
maintenance and repairs 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 Partnership generally distributes cash from operating activities
remaining after the payment of the operating expenses of the Partnership, to the
extent that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, the Partnership declared distributions to the Limited Partners of
$2,700,000 for each of the years ended December 31, 2003, 2002, and 2001. This
represents distributions of $0.090 per Unit for each of the years ended December
31, 2003, 2002, and 2001. No amounts distributed to the Limited Partners for the
years ended December 31, 2003, 2002, and 2001 are required to be or have been
treated by the Partnership as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. The
Partnership intends to continue to make distributions of cash available for
distribution to 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, 2003, 2002 and 2001.
As of December 31, 2003 and 2002, the Partnership owed $11,333 and
$13,151, respectively, to affiliates for accounting and administrative services
and other amounts. As of March 12, 2004, the Partnership had reimbursed the
affiliates for these amounts. Other liabilities, including distributions
payable, of the Partnership were $754,240 at December 31, 2003, as compared to
$720,696 at December 31, 2002. The General Partners believe that the Partnership
has sufficient cash on hand to meet its current working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for using either the direct financing or the
operating 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.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the
decision to sell or commits to a plan to sell a Property within one year, its
operating results are reported as discontinued operations.
Results of Operations
Comparison of year ended December 31, 2003 to year ended December 31, 2002
Rental revenues from continuing operations for the Partnership and its
consolidated joint venture were $1,769,553 for the year ended December 31, 2003
as compared to $1,780,431 during the same period of 2002. Rental revenues from
continuing operations during the year ended December 31, 2003 remained constant,
as compared to the year ended December 31, 2002, since there was no change in
the leased property portfolio.
The Partnership also earned $91,566 in contingent rental income for the
year ended December 31, 2003 as compared to $74,165 for the same period of 2002.
The increase in contingent rental income during 2003 was attributable to an
increase in gross sales of certain restaurant Properties, the leases of which
require the payment of contingent rent.
During the year ended December 31, 2003 and 2002, the Partnership
earned $863,472 and $1,027,311, respectively, attributable to net income earned
by unconsolidated joint ventures. Net income earned by joint ventures was higher
during 2002 as compared to 2003 because in August 2002, Mansfield Joint Venture,
in which the Partnership owns a 79% interest, sold the Property in Mansfield,
Texas. The Partnership recorded its pro-rata share of the gain resulting from
the sale of this Property as equity in earnings. The net sales proceeds were
reinvested in a Property in Arlington, Texas. In addition, in June 2002, CNL
Restaurant Investments II Joint Venture, in which the Partnership owns an 18%
interest, sold its Properties in Columbus, Ohio and Pontiac, Michigan to the
tenant. The Partnership recorded its pro-rata share of the gains resulting from
the sales of these Properties as equity in earnings. The decrease in net income
earned by unconsolidated joint ventures during 2003 was partially offset by
earnings related to Arlington Joint Venture which the Partnership acquired in
June 2002. The decrease in net income earned by joint ventures during 2003 was
also partially offset by the fact that the tenant of the Property owned by
Duluth Joint Venture, in which the Partnership owns a 56% interest, resumed
making rental payments to the joint venture during the second quarter of 2002.
The tenant of the Property had previously experienced financial difficulties and
had ceased making rental payments to the joint venture. Duluth Joint Venture had
stopped recording rental revenues during the quarter ended March 31, 2002.
During the year ended December 31, 2003, two lessees (or groups of
affiliated tenants) of the Partnership and its consolidated joint venture, (i)
Golden Corral Corporation, and (ii) Jack in the Box Inc. and Jack in the Box
Eastern Division, L.P. (which are affiliated entities under common control of
Jack in the Box Inc.) (hereinafter referred to as "Jack in the Box Inc."), each
contributed more than 10% of the Partnership's total rental revenues (including
total rental revenues from the Partnership's consolidated joint venture and the
Partnership's share of total rental revenues from Properties owned by
unconsolidated joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). As of December 31, 2003, Golden Corral
Corporation was the lessee under leases relating to six restaurants, and Jack in
the Box Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
Golden Corral Corporation and Jack in the Box Inc., each will continue to
contribute more than 10% of the Partnership's total rental revenues during 2004.
In addition, during the year ended December 31, 2003, three Restaurant Chains,
Golden Corral, Hardee's and Jack in the Box, each accounted for more than 10% of
the Partnership's total rental revenues (including total rental revenues from
the Partnership's consolidated joint venture and the Partnership's share of
total rental revenues from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
In 2004, it is anticipated that these three Restaurant Chains each will continue
to account for more than 10% of the Partnership's total rental revenues to which
the Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains will materially affect the Partnership's operating
results if the Partnership is not able to re-lease the Properties in a timely
manner.
During the years ended December 31, 2003 and 2002, the Partnership also
earned $29,863 and $31,793, respectively, in interest and other income.
Operating expenses, including depreciation expense, were $502,837 for
the year ended December 31, 2003 as compared to $551,657 for the same period of
2002. Operating expenses were higher during 2002 due to the fact that the
Partnership elected to reimburse the tenant of the Properties in El Paso,
Harlingen, and Odessa, Texas for certain renovation costs.
In addition, the decrease in operating expenses during 2003, as
compared to the same period of 2002, was partially due to a decrease in the
costs incurred for administrative expenses for servicing the Partnership and its
Properties. In October 2003, CNL Restaurant Investments II entered into
negotiations with a third party to sell the Property in San Antonio, Texas.
The financial results of this Property are reflected as discontinued
operations in the combined condensed joint venture financial information
presented in the footnotes to the accompanying financial statements.
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Rental revenues from continuing operations for the Partnership and its
consolidated joint venture were $1,780,431 for the year ended December 31, 2002
as compared to $1,866,700 during the same period of 2001. The decrease in rental
revenues from continuing operations was primarily due to the sales of several of
the Partnership's Properties during 2001 and the reinvestment of the net sales
proceeds in a joint venture during 2002. As a result, net income earned by joint
ventures increased in 2002 while rental revenues from continuing operations
decreased. The decrease in rental revenues from continuing operations was
partially offset by the fact that in January 2001, the Partnership reinvested a
portion of these net sales proceeds in a Property in Baton Rouge, Louisiana.
The Partnership also earned $74,165 in contingent rental income for the
year ended December 31, 2002 as compared to $75,571 for the same period of 2001.
During the year ended December 31, 2002 and 2001, the Partnership
earned $1,027,311 and $717,096, respectively, attributable to net income earned
by unconsolidated joint ventures. The increase in net income earned by joint
ventures during the year ended December 31, 2002, as compared to the same period
of 2001, was primarily due to the fact that in June 2002, CNL Restaurant
Investments II, in which the Partnership owns an 18% interest, sold its
Properties in Columbus, Ohio and Pontiac, Michigan to the tenant. The
Partnership recorded its pro-rata share of the gains resulting from the sales of
these Properties as equity in earnings. The increase was also attributable to
earnings received from the new joint venture arrangements with affiliates of the
General Partners, CNL VII & XVII Lincoln Joint Venture and CNL VII, XV Columbus
Joint Venture acquired in April and August 2001, respectively, and Arlington
Joint Venture acquired in June 2002. The increase in net income earned by joint
ventures during the year ended December 31, 2002 was partially offset by the
fact that the tenant of the Property owned by Duluth Joint Venture, in which the
Partnership owns a 56% interest, experienced financial difficulties and ceased
making rental payments to the joint venture. As a result, Duluth Joint Venture
stopped recording rental revenues during the quarter ended March 31, 2002.
During the second quarter of 2002, the tenant began making rental payments to
the joint venture and the joint venture recognized these amounts as rental
revenues. In addition, during 2002, the joint venture recorded a provision for
write-down of assets of approximately $65,800. The provision represented the
difference between the Property's net carrying value and its estimated fair
value.
During the years ended December 31, 2002 and 2001, the Partnership also
earned $31,793 and $101,543, respectively, in interest and other income. The
decrease in interest and other income during 2002 was primarily due to a
decrease in the average cash balance as a result of the reinvestment of sales
proceeds in additional Properties through joint venture arrangements during
2002, the collection of the promissory note, as well as a decline in interest
rates.
Operating expenses, including depreciation expense and provision for
write-down of assets, were $551,657 for the year ended December 31, 2002 as
compared to $909,120 for the same period of 2001. Operating expenses were higher
during 2001 due to the fact that the Partnership recorded a provision for
write-down of assets of $279,862 for the Property in Saddlebrook, Florida in
June 2001. The tenant ceased restaurant operations and vacated the Property. The
provision represented the difference between the carrying value of the Property
and its estimated fair value at June 30, 2001. In addition, the Partnership
incurred expenses such as repairs and maintenance and real estate taxes during
2001 in connection with this Property. The Partnership sold this Property in
December 2001.
In addition, the decrease in operating expenses during 2002, as
compared to the same period of 2001, was partially due to a decrease in the
costs incurred for administrative expenses for servicing the Partnership and its
Properties and due to the Partnership incurring less depreciation expense during
2002 as a result of the sale of several Properties in 2001.
The decrease in operating expenses during 2002, as compared to the same
period of 2001, was partially offset by the fact that during 2002, the
Partnership elected to reimburse the tenant of the Properties in El Paso,
Harlingen, and Odessa, Texas for certain renovation costs.
During 2001, the Partnership collected the outstanding balance of the
mortgage note relating to the 1995 sale of the Property in Florence, South
Carolina and recognized $122,996 of previously deferred gain related to the sale
of the Property. The Partnership recorded the sale using the installment method,
and as such, the gain was deferred and recognized as income proportionally as
payments under the mortgage note were collected.
As a result of the sales of several Properties during 2001, the
Partnership recognized gains totaling $382,122.
During the year ended December 31 2002, CNL Restaurant Investments II
and CNL Mansfield Joint Venture identified and sold three Properties that are
reflected as discontinued operations in the combined condensed joint venture
financial information presented in the footnotes to the accompanying financial
statements. During 2002, CNL Restaurant Investments II sold its Property in
Columbus, Ohio to the tenant and recognized a gain of approximately $448,300 and
sold its Property in Pontiac, Michigan to the tenant resulting in a loss of
approximately $189,800. CNL Mansfield Joint Venture sold its Property in
Mansfield, Texas and recognized a gain of approximately $269,800. The financial
results of these Properties are reflected as discontinued operations in the
condensed joint venture financial information presented in the footnotes to the
accompanying financial statements. The tenants exercised their option to
purchase the Properties under the terms of their respective leases and the
proceeds from the sales were reinvested in additional income producing
Properties.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003, are generally
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation also may cause
capital appreciation of the Partnership's Properties. Inflation and changing
prices, however, also may have an adverse impact on the sales of the restaurants
and on potential capital appreciation of the Properties.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 17
Financial Statements:
Balance Sheets 18
Statements of Income 19
Statements of Partners' Capital 20
Statements of Cash Flows 21-22
Notes to Financial Statements 23-34
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VII, 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 VII, Ltd. (a Florida limited
partnership) at December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 15(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules 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
March 24, 2004
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
---------------- -----------------
ASSETS
Real estate properties with operating leases, net $ 10,885,752 $ 11,109,588
Net investment in direct financing leases 2,221,535 2,344,317
Investment in joint ventures 8,985,452 9,083,991
Cash and cash equivalents 979,093 972,797
Receivables 94,390 68,597
Accrued rental income 1,018,973 1,042,794
Other assets 85,335 90,801
---------------- -----------------
$ 24,270,530 $ 24,712,885
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 6,203 $ 4,551
Distributions payable 675,000 675,000
Due to related parties 11,333 13,151
Rents paid in advance 73,037 41,145
---------------- -----------------
Total liabilities 765,573 733,847
Minority interest 136,197 138,945
Partners' capital 23,368,760 23,840,093
---------------- -----------------
$ 24,270,530 $ 24,712,885
================ =================
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
------------------ ------------------ ---------------
Revenues:
Rental income from operating leases $ 1,489,994 $ 1,486,761 $ 1,559,410
Earned income from direct financing leases 279,559 293,670 307,290
Contingent rental income 91,566 74,165 75,571
Interest and other income 29,863 31,793 101,543
------------------ ------------------ ---------------
1,890,982 1,886,389 2,043,814
------------------ ------------------ ---------------
Expenses:
General operating and administrative 231,555 237,355 273,351
Property related 12,116 61,025 75,250
State and other taxes 35,330 29,446 33,922
Depreciation 223,836 223,831 246,735
Provision for write-down of assets -- -- 279,862
------------------ ------------------ ---------------
502,837 551,657 909,120
------------------ ------------------ ---------------
Income before gain on sale of assets, minority interest
and equity in earnings of unconsolidated joint
ventures 1,388,145 1,334,732 1,134,694
Gain on sale of assets -- -- 382,122
Minority interest (22,950 ) (18,521 ) (18,342 )
Equity in earnings of unconsolidated joint ventures 863,472 1,027,311 717,096
------------------ ------------------ ---------------
Net income $ 2,228,667 $ 2,343,522 $ 2,215,570
================== ================== ===============
Income per limited partner unit $ 0.074 $ 0.078 $ 0.074
================== ================== ===============
Weighted average number of
limited partner units outstanding 30,000,000 30,000,000 30,000,000
================== ================== ===============
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
General Partners Limited Partners
-------------------------------------- -----------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2000 $ 1,000 $ 229,931 $ 30,000,000 $ (28,277,623 ) $ 26,167,693
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- -- -- -- 2,215,570
--------------- ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2001 1,000 229,931 30,000,000 (30,977,623 ) 28,383,263
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- -- -- -- 2,343,522
--------------- ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2002 1,000 229,931 30,000,000 (33,677,623 ) 30,726,785
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- -- -- -- 2,228,667
--------------- ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2003 $ 1,000 $ 229,931 $ 30,000,000 $ (36,377,623 ) $ 32,955,452
=============== ================ ================= ================ =================
See accompanying notes to financial statements.
Syndication
Costs Total
-------------- --------------
$ (3,440,000 ) $24,681,001
-- (2,700,000 )
-- 2,215,570
- -------------- --------------
(3,440,000 ) 24,196,571
-- (2,700,000 )
-- 2,343,522
- -------------- --------------
(3,440,000 ) 23,840,093
-- (2,700,000 )
-- 2,228,667
- -------------- --------------
$ (3,440,000 ) $23,368,760
============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------------- ------------------- ---------------
Cash Flows from Operating Activities:
Net income $ 2,228,667 $ 2,343,522 $ 2,215,570
----------------- ------------------- ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 223,836 223,831 246,735
Amortization of net investment in direct financing 122,782 108,647 95,360
leases
Minority interest 22,950 18,521 18,342
Gain on sale of assets -- -- (382,122 )
Provision for loss on real estate properties -- -- 279,862
Equity in earnings of unconsolidated joint
ventures, net of distributions 98,539 (66,871 ) 9,531
Decrease (increase) in receivables (25,839 ) 5,546 12,254
Decrease (increase) in due from related parties 46 12,922 (11,712 )
Decrease in interest receivable -- 1,136 18,335
Decrease (increase) in other assets 5,466 (13,906 ) 10,635
Decrease in accrued rental income 23,821 15,795 14,159
Increase (decrease) in accounts payable and
accrued expenses 1,652 (7,755 ) (19,109 )
Decrease in due to related parties (1,818 ) (8,686 ) (45,978 )
Increase in rents paid in advance 31,892 15,429 17,401
----------------- ------------------- ------------------
Total adjustments 503,327 304,609 263,693
----------------- ------------------- ------------------
Net cash provided by operating activities 2,731,994 2,648,131 2,479,263
----------------- ------------------- ------------------
Cash Flows from Investing Activities:
Additions to real estate properties with operating leases -- -- (1,495,699 )
Proceeds from sale of real estate properties -- -- 1,094,282
Investment in certificate of deposit -- -- 100,000
Investment in joint ventures -- (934,800 ) (1,769,135 )
Return of capital from joint venture -- 129,888 --
Decrease in restricted cash -- -- 1,503,682
Collections on mortgage notes receivable -- 103,581 1,101,865
----------------- ------------------- ------------------
Net cash (used in) provided by investing activities -- (701,331 ) 534,995
----------------- ------------------- ------------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,700,000 ) (2,700,000 ) (2,700,000 )
Distributions to holders of minority interest (25,698 ) (21,366 ) (20,920 )
----------------- ----------------- ------------------
Net cash used in financing activities (2,725,698 ) (2,721,366 ) (2,720,920 )
----------------- ------------------- ------------------
Net increase (decrease) in cash and cash equivalents 6,296 (774,566 ) 293,338
Cash and cash equivalents at beginning of year 972,797 1,747,363 1,454,025
----------------- ------------------- ------------------
Cash and cash equivalents at end of year $ 979,093 $ 972,797 $ 1,747,363
================= =================== ==================
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
----------------- --------------- --------------
Supplemental Schedule of Non-Cash Financing Activities:
Promissory note accepted in exchange for
sale of land and building $ -- $ -- $ 103,581
================= =============== ==============
Distributions declared and unpaid at
December 31 $ 675,000 $ 675,000 $ 675,000
================= =============== ==============
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Organization and Nature of Business - CNL Income Fund VII, 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 and family-style 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
acquisitions of real estate properties at cost, including acquisition
and closing costs. Real estate properties are leased to third parties
generally on a triple-net basis, whereby the tenant is generally
responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance and repairs. During
the years ended December 31, 2003, 2002, and 2001 tenants paid, or are
expected to pay, directly to real estate taxing authorities
approximately $259,700, $274,800 and $264,900, respectively, in
estimated real estate taxes in accordance with the terms of their
leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The Partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
operating or the direct financing methods.
Operating method - Property leases accounted for using the operating
method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings
are depreciated on the straight-line method over their estimated useful
lives of 30 years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a
constant periodic rent over the lease term commencing on the date the
property is placed in service.
Direct financing method - Leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset).
Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
Substantially all leases are for 10 to 20 years and provide for minimum
and contingent rentals. The lease options generally allow tenants to
renew the leases for two to 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.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is made to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 83.3%
interest in San Antonio #849 Joint Venture using the consolidation
method. Minority interest represents the minority joint venture
partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership's investments in CNL Restaurant Investments II, Des
Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, Duluth
Joint Venture, and TGIF Pittsburgh Joint Venture, CNL VII & XVII
Lincoln Joint Venture and CNL VII, XV Columbus Joint Venture, Arlington
Joint Venture and a property in Smithfield, North Carolina, a property
in Miami, Florida, a property in Montgomery, Alabama, and a property in
Colorado Springs, Colorado, for which each of the four properties is
held as tenants-in-common with affiliates of the general partners, are
accounted for using the equity method since each joint venture
agreement requires the consent of all partners on all key decisions
affecting the operations of the underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not experienced
any losses in such accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes syndication costs represent a reduction of
Partnership equity and a reduction in the basis of each partner's
investment.
Rents Paid in Advance - Rents paid in advance by lessees for future
periods are deferred upon receipt and are recognized as revenues during
the period in which the rental income is earned.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2003 presentation.
These reclassification had no effect on total partners' capital, net
income or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 "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 statement also requires that the results of
operations of a component of an entity that either has been disposed of
or is classified as held for sale be reported as a discontinued
operation if the disposal activity was initiated subsequent to the
adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The general partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
----------------- -----------------
Land $ 6,756,854 $ 6,756,854
Buildings 6,714,927 6,714,927
---------------- ----------------
13,471,781 13,471,781
Less accumulated depreciation (2,586,029 ) (2,362,193 )
----------------- -----------------
$ 10,885,752 $ 11,109,588
================= =================
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2003:
2004 1,512,739
2005 1,210,453
2006 1,005,436
2007 984,805
2008 884,882
Thereafter 3,697,918
----------------
$ 9,296,233
================
3. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct
financing leases at December 31:
2003 2002
----------------- -----------------
Minimum lease payments receivable $ 2,821,213 $ 3,223,555
Estimated residual values 768,233 768,233
Less unearned income (1,367,911 ) (1,647,471 )
----------------- -----------------
Net investment in direct financing leases $ 2,221,535 $ 2,344,317
================= =================
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2003:
2004 402,342
2005 402,342
2006 402,342
2007 402,342
2008 402,342
Thereafter 809,503
--------------
$ 2,821,213
===============
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures
The Partnership has an 18% interest, a 4.79% interest, a 79% interest,
a 56% interest, a 36.88% interest, a 14% interest, a 68.75% interest
and a 79% interest in the profits and losses of CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture, CNL Mansfield
Joint Venture, Duluth Joint Venture, TGIF Pittsburgh Joint Venture, CNL
VII & XVII Lincoln Joint Venture, CNL VII, XV Columbus Joint Venture
and Arlington Joint Venture, respectively. The remaining interests in
these joint ventures are held by affiliates of the Partnership which
have the same general partners. The Partnership also has a 53% interest
in a property in Smithfield, North Carolina, with an affiliate of the
general partners, as tenants-in-common, a 35.64% interest in a property
in Miami, Florida, with affiliates of the general partners, as
tenants-in-common, a 71% interest in a property in Montgomery, Alabama,
with an affiliate of the general partners, as tenants-in-common and a
43% interest in a property in Colorado Springs, Colorado, with an
affiliate of the general partners, as tenants-in-common. Amounts
relating to its investment are included in investment in joint
ventures.
In June 2002, CNL Restaurant Investments II, in which the Partnership
owns an 18% interest, sold its property in Columbus, Ohio to the tenant
for a sales price of approximately $1,219,600 and received net sales
proceeds of approximately $1,215,700, resulting in a gain of $448,300.
In addition, in June 2002, CNL Restaurant Investments II sold its
property in Pontiac, Michigan to the tenant for a sales price of
$725,000 and received net sales proceeds of approximately $722,600,
resulting in a loss of $189,800. The tenants exercised their option to
purchase the properties under the terms of their respective leases. The
Partnership received $129,888 as a return of capital from the net sales
proceeds, and used approximately $63,900 to pay an additional
contribution to CNL Mansfield Joint Venture. The joint venture used the
proceeds from the sale of the property in Columbus, Ohio to acquire a
property in Dallas, Texas at an approximate cost of $1,147,400. The
joint venture acquired this property from CNL Funding 2001-A, LP, an
affiliate of the general partners.
In addition, in June 2002, the Partnership used a portion of the net
sales proceeds from the 2001 sale of its properties in Saddlebrook,
Gainesville and Daytona Beach, Florida to enter into a joint venture
arrangement, Arlington Joint Venture, with CNL Income Fund XVI, Ltd.,
an affiliate of the general partners, to hold one restaurant property.
The joint venture acquired this property from CNL Funding 2001-A, LP,
an affiliate of the general partners.
In May 2002, CNL Mansfield Joint Venture, in which the Partnership owns
a 79% interest, entered into negotiations with the tenant to sell the
property in Mansfield, Texas. As a result, the joint venture
reclassified the assets relating to this property from land and
building on operating leases and accrued rental income to real estate
held for sale. The property was recorded at the lower of its carrying
amount or fair value less cost to sell. In addition, the joint venture
stopped recording depreciation and accrued rental income upon
identifying the property as held for sale. In August 2002, the joint
venture sold the property to the tenant for a sales price of $1,045,000
and received net sales proceeds of approximately $1,011,500, resulting
in a gain of approximately $269,800. The joint venture used the
proceeds from the sale of the property in Mansfield, Texas and an
additional contribution of approximately $63,900 received from the
Partnership, as described above, to acquire a property in Arlington,
Texas from CNL Net Lease Investors, L.P., at an approximate cost of
$1,089,900. CNL Net Lease Investors, L.P. is an affiliate of the
general partners.
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
In October 2003, CNL Restaurant Investments II, in which the
Partnership owns an 18% interest, entered into negotiations with a
third party to sell the property in San Antonio, Texas. As a result,
the joint venture reclassified the assets relating to this property
from land and building on operating leases to real estate held for
sale. The property was recorded at the lower of its carrying amount or
fair value less cost to sell. In addition, the joint venture stopped
recording depreciation upon identifying the property as held for sale.
The financial results for the Columbus, Ohio; Pontiac, Michigan;
Mansfield, Texas and San Antonio, Texas properties are reflected as
discontinued operations in the condensed financial information
presented below.
As of December 31, 2003, CNL Restaurant Investments II owns five
properties. Des Moines Joint Venture, CNL Mansfield Joint Venture,
Duluth Joint Venture, TGIF Pittsburgh Joint Venture, CNL VII & XVII
Lincoln Joint Venture, CNL VII, XV Columbus Joint Venture and Arlington
Joint Venture each own one property. In addition, the Partnership and
affiliates, in four separate tenancy in common arrangements, each own
one property.
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures and
properties held as tenants-in-common with affiliates at:
December 31,
2003 2002
-------------------- -----------------
Real estate properties with operating leases,
net $ 18,124,486 $ 18,531,334
Net investment in direct financing leases $ 1,719,424 1,743,852
Real estate held for sale 724,380 739,968
Cash 89,783 52,263
Receivables -- 2,445
Accrued rental income 539,816 424,858
Other assets -- 512
Liabilities 172,186 149,219
Partners' capital 21,025,703 21,346,013
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
Years ended December 31,
2003 2002 2001
--------------- --------------- ---------------
Continuing Operations:
Revenues $ 2,395,721 $ 2,193,739 $ 2,016,556
Expenses (422,734 ) (430,185 ) (341,214 )
Provision for write-down of assets --