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, 2002
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 0-21560
CNL INCOME FUND XI, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3078854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Oran ge 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 ($10 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 4,000,000 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 $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund XI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 20, 1991. 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 March 18, 1992, the
Partnership offered for sale up to $40,000,000 of limited partnership interests
(the "Units") (4,000,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 12, 1992. The offering terminated on September 28, 1992, at which date the
maximum offering proceeds of $40,000,000 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
$35,200,000, and were used to acquire 39 Properties, including interests in four
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, 1999, the Partnership owned 41 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.
During the year ended December 31, 2001, the Partnership sold its Property in
Sebring, Florida and the Property in Round Rock, Texas which was held as
tenants-in-common with an affiliate of the General Partners, and reinvested the
majority of these net sales proceeds in a Property in Houston, Texas. During the
year ended December 31, 2002, the Partnership sold its Properties in Columbus,
Ohio and East Detroit, Michigan, and reinvested the net sales proceeds in two
Properties located in Universal City and Schertz, Texas with an affiliate of the
General Partners and a Florida limited partnership, as two separate tenancy in
common arrangements. In addition, Ashland Joint Venture, in which the
Partnership has a 62.16% interest, sold its Property in Ashland, New Hampshire
and reinvested, in June 2002, the majority of the net sales proceeds in a
property in San Antonio, Texas. As of December 31, 2002, the Partnership owned
40 Properties. The 40 Properties include five Properties owned by joint ventures
in which the Partnership is a co-venturer and three Properties owned with
affiliates of the General Partners as tenants-in-common. In March 2003, the
Partnership sold the Property in Abilene, Texas. The Partnership expects to
reinvest these proceeds in an additional income producing Property. The
Partnership leases the Properties generally 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 tax considerations. 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, the
joint ventures in which the Partnership is a co-venturer and the property owned
with an affiliate of the General Partners as tenants-in-common provide for
initial terms ranging from 14 to 20 years (the average being 18 years) and
expire between 2006 and 2020. The leases are generally on a triple-net basis,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $45,600 to $218,100. The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in specified lease years (generally
the sixth lease year), the annual base rent required under the terms of the
lease will increase.
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 27 of the Partnership's 40 Properties also have been
granted options to purchase Properties at the Property's then fair market value
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised.
The leases generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership first must offer the
lessee the right to purchase the Property on the same terms and conditions, and
for the same price, as any offer which the Partnership has received for the sale
of the Property.
During 2001, Phoenix Restaurant Group, Inc. ("PRG") filed for
bankruptcy and neither rejected, nor affirmed the three leases it had with the
Partnership, including a lease held with an affiliate of the General Partners,
as tenants-in-common. The Partnership owns a 73% interest in the tenancy in
common. During 2002, the bankruptcy court assigned the leases relating to the
properties in Avon, Colorado, and Abilene and Corpus Christi, Texas to
CherryDen, LLC, SWAC, LLC, and RAI, LLC, respectively. CherryDen, LLC and RAI,
LLC are affiliates of the General Partners. In October 2002, SWAC, LLC assigned
its lease relating to the Property in Abilene, Texas to Continental Foods, Inc.,
a third party. All other lease terms remained the same.
During 2002, the Partnership reinvested the net sales proceeds it
received from the sales of the Properties in Columbus, Ohio and East Detroit,
Michigan, in two Taco Cabana Properties located in Universal City and Schertz,
Texas with an affiliate of the General Partners and a Florida limited
partnership, as two separate tenancy in common arrangements. Ashland Joint
Venture, in which the Partnership has a 62.16% interest, reinvested in June 2002
the majority of the net sales proceeds it received from the sale of its Property
in Ashland, New Hampshire in a Taco Cabana property located in San Antonio,
Texas. The lease terms for these Properties are substantially the same as the
Partnership's other leases.
Major Tenants
During 2002, three lessees (or groups of affiliated lessees) of the
Partnership and its consolidated joint ventures, (i) Golden Corral Corporation,
(ii) Jack in the Box Inc. and Jack in the Box Eastern, L.P. (which are
affiliated entities under common control) (hereinafter referred to as "Jack in
the Box Inc.") and (iii) Burger King Corporation and BK Acquisition, Inc. (which
are affiliated entities under common control) (hereinafter referred to as
"Burger King Corporation"), each contributed more than 10% of the Partnership's
total rental revenues (including rental revenues from the Partnership's
consolidated joint ventures, and the Partnership's share of 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,
2002, Golden Corral Corporation was the lessee under leases relating to three
restaurants, Jack in the Box Inc. was the lessee under leases relating to eight
restaurants, and Burger King Corporation was the lessee under leases relating to
four restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these three lessees (or groups of affiliated lessees)
each will continue to contribute more than 10% of the Partnership's total rental
revenues in 2003. In addition, four Restaurant Chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Jack in the Box, Burger King, and
Denny's, each accounted for more than 10% of the Partnership's total rental
revenues during 2002 (including rental revenues from the Partnership's
consolidated joint ventures, and the Partnership's share of rental revenues from
Properties owned by unconsolidated joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). In 2003, it is
anticipated that these four 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 could materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner. No
single tenant or group of affiliated tenants lease 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, 2002
Entity Name Year Ownership Partners Property
CNL/Airport Joint Venture 1992 77.33 % Various Third Party Partners Orlando, FL
Ashland Joint Venture 1992 62.16 % CNL Income Fund IX, Ltd. San Antonio, TX
CNL Income Fund X, Ltd.
Des Moines Real Estate 1992 76.60 % CNL Income Fund VII, Ltd. Des Moines, WA
Joint Venture CNL Income Fund XII, Ltd.
Denver Joint Venture 1992 85.00 % Various Third Party Partners Denver, CO
CNL Income Fund XI, Ltd. and 1997 72.58% CNL Income Fund XVII, Ltd. Corpus Christi, TX
CNL Income Fund XVII
Ltd., Tenants in Common
Portsmouth Joint Venture 1999 42.80 % CNL Income Fund XVIII, Ltd. Portsmouth, VA
CNL Income Fund VI, Ltd. and 2002 85.80% CNL Income Fund VI, Ltd. Universal City, TX
CNL Income Fund XI,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd. and 2002 90.50% CNL Income Fund VI, Ltd. Schertz, TX
CNL Income Fund XI,
Ltd., Tenants in Common
Each joint venture or tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership has management control of CNL/Airport Joint Venture and Denver 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 joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
business entity. 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 business entity.
Ashland Joint Venture has an initial term of 30 years, and each of the
other joint ventures has 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 partners to dissolve the joint venture.
Any liquidation proceeds, after paying joint venture debts and liabilities and
funding reserves for contingent liabilities, will be distributed first to the
joint venture partners with positive capital account balances in proportion to
such balances until such balances equal zero, and thereafter in proportion to
each joint venture partner's percentage interest in the joint venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its joint venture or tenancy in
common interest without first offering it for sale to its partners, either upon
such terms and conditions as to which the parties may agree or, in the event the
parties cannot agree, on the same terms and conditions as any offer from a third
party to purchase such joint venture or tenancy in common interest.
During 2002, the Partnership entered into two separate tenancy in
common agreements with CNL Income Fund VI, Ltd., each to hold a Property in
Universal City and Schertz, Texas.
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. (formerly known as CNL Restaurants XVIII, Inc.),
an affiliate of the General Partners, provides certain services relating to
management of the Partnership and its Properties pursuant to a management
agreement with the Partnership. CNL APF Partners, LP assigned its rights in, and
its obligations under, the management agreement with the Partnership to RAI
Restaurants, Inc. ("Advisor") effective January 1, 2002. All of the terms and
conditions of the management agreement, including the payment of fees, remained
unchanged. 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 had agreed to pay the Advisor an
annual fee of one percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer, but not in
excess of competitive fees for comparable services.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
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 American Properties Fund, Inc.,
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, 2002, the Partnership owned 40 Properties. Of the 40
Properties, 32 are owned by the Partnership in fee simple, five are owned
through joint venture arrangements and three 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, owned either directly or
indirectly, range from approximately 17,900 to 329,100 square feet depending
upon building size and local demographic factors. Sites purchased by the
Partnership are in locations zoned for commercial use which have been reviewed
for traffic patterns and volume.
The following table lists the Properties owned by the Partnership,
either directly or indirectly, as of December 31, 2002 by state. More detailed
information regarding the location of the Properties is contained in the
Schedule of Real Estate and Accumulated Depreciation.
State Number of Properties
Alabama 2
Arizona 1
California 1
Colorado 2
Connecticut 2
Florida 1
Kansas 1
Louisiana 1
Massachusetts 1
Mississippi 1
New Mexico 2
North Carolina 2
Ohio 3
Oklahoma 2
South Carolina 2
Texas 12
Virginia 2
Washington 2
--------------
TOTAL PROPERTIES 40
==============
Buildings. Each of the Properties owned by the Partnership, either
directly or indirectly, 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 2,100 to 11,400 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, 2002, 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, 2002, the aggregate cost of the Properties owned by
the Partnership (including its consolidated joint ventures) and the
unconsolidated joint ventures (including Properties owned through tenancy in
common arrangements) for federal income tax purposes was $31,230,706 and
$6,269,062, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly, as of December 31, 2002 by Restaurant Chain.
Restaurant Chain Number of Properties
Black-eyed Pea 1
Burger King 9
Casa del Rio 1
Denny's 6
Golden Corral 3
Gooney Bird's Sports Grill 1
Hardee's 4
Jack in the Box 8
KFC 1
Sagebrush Restaurant 1
Taco Bell 1
Taco Cabana 4
--------------
TOTAL PROPERTIES 40
==============
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 majority of 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.
At December 31, 2002, 2001, 2000, 1999, and 1998, all of the Properties
were occupied. The following is a schedule of the average rent per Property for
each of the years ended with December 31:
2002 2001 2000 1999 1998
-------------- ------------- ------------- -------------- -------------
Rental Revenues (1) $ 4,333,193 $ 3,747,614 $ 3,914,520 $ 4,087,385 $ 4,064,778
Properties 40 40 41 41 38
Average Rent per Property $ 108,329 $ 93,690 $ 95,476 $ 99,692 $ 106,968
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
The following is a schedule of lease expirations for leases in place as
of December 31, 2002 for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2003 -- $ -- --
2004 -- -- --
2005 -- -- --
2006 4 360,538 9.04%
2007 3 498,758 12.51%
2008 -- -- --
2009 -- -- --
2010 9 845,071 21.19%
2011 2 95,355 2.39%
2012 14 1,441,989 36.17%
Thereafter 7 745,533 18.70%
---------- ------------- -------------
Total (1) 39 $ 3,987,244 100.00%
========== ============= =============
(1) Excludes one Property sold in March 2003.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2002 (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 with
initial terms of 15 years (expiring in 2007) and average minimum base annual
rent of approximately $166,300 (ranging from approximately $157,300 to
$172,400).
Jack in the Box Inc. leases eight Jack in the Box restaurants with an
initial term of 18 years (expiring in 2010) and the average minimum base annual
rent is approximately $96,300 (ranging from approximately $78,800 to $110,300).
Burger King Corporation leases four Burger King restaurants with an
initial term of 14 years (expiring in 2006) and average minimum base annual rent
of approximately $90,100 (ranging from approximately $78,800 to $110,300).
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 10, 2003, there were 3,184 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 2002,
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, 2002, the price paid for
any Unit transferred pursuant to the Plan was $9.50 per Unit. The price paid for
any Unit transferred other than pursuant to the Plan was subject to negotiation
by the purchaser and the selling Limited Partner. The Partnership will not
redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2002 and 2001, other than
pursuant to the Plan, net of commissions.
2002 (1) 2001 (1)
---------------------------------- -----------------------------------
High Low Average High Low Average
--------- -------- ---------- --------- --------- ----------
First Quarter $9.51 $ 6.61 $ 7.81 $7.33 $ 6.85 $ 7.09
Second Quarter 9.50 7.00 8.66 9.50 6.45 7.49
Third Quarter 9.50 6.35 7.63 9.50 6.65 7.85
Fourth Quarter 9.50 6.61 8.16 9.50 6.40 8.78
(1) A total of 52,106 and 35,160 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2002 and 2001,
respectively.
The capital contribution per Unit was $10. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31, 2002 and 2001, the Partnership
declared cash distributions of $3,700,024 and $3,500,024, respectively, to the
Limited Partners. During the quarter ended December 31, 2002, the Partnership
declared a special distribution to the Limited Partners of $200,000 which
represented cumulative excess operating reserves. This special distribution was
effectively a return of a portion of the limited partners' investment, although
in accordance with the partnership agreement, $200,000 was applied toward the
limited partners' 10% Preferred Return. No amounts distributed to partners for
the years ended December 31, 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. 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.
Quarter Ended 2002 2001
--------------------------- ---------------- ----------------
March 31 $ 875,006 $ 875,006
June 30 875,006 875,006
September 30 875,006 875,006
December 31 1,075,006 875,006
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
2002 2001 2000 1999 1998
------------- -------------- ------------- -------------- -------------
Year ended December 31:
Continuing Operations (2):
Revenues $ 3,832,322 $ 3,388,613 $ 3,569,401 $ 3,671,193 $ 3,755,912
Equity in earnings (loss) of
unconsolidated joint
ventures 863,810 (147,538 ) 256,056 259,676 215,501
Income from continuing
operations (1) 3,806,470 1,584,154 2,956,840 2,997,386 3,673,961
Discontinued Operations (2):
Revenues 76,863 172,234 166,695 173,460 164,515
Income from discontinued
operations (3) 507,656 143,162 137,623 144,388 135,443
Net income 4,314,126 1,727,316 3,094,463 3,141,774 3,809,404
Net income per unit:
Continuing operations $ 0.95 $ 0.39 $ 0.74 $ 0.75 $ 0.92
Discontinued operations 0.13 0.04 0.03 0.04 0.03
------------- -------------- ------------- -------------- -------------
Total $ 1.08 $ 0.43 $ 0.77 $ 0.79 $ 0.95
============= ============== ============= ============== =============
Cash distributions
declared (4) $ 3,700,024 $ 3,500,024 $ 3,500,024 $ 3,500,024 $ 3,660,024
Cash distributions
declared per unit (4) 0.93 0.88 0.88 0.88 0.92
At December 31:
Total assets $34,320,216 $33,451,728 $35,227,373 $35,792,092 $36,103,592
Partners' capital 32,535,195 31,921,093 33,693,801 34,099,362 34,457,612
(1) Income from continuing operations for the years ended December 31, 2001
and 1998, includes $8,604 and $461,861, respectively, from gains on
sale of assets. Income from continuing operations for the years ended
December 31, 2001 and 2000 include $654,393 and $60,490 for provisions
for write-down of assets.
(2) Certain items in the prior year's financial statements have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on total net income. The results of operations relating
to properties that were either disposed of or were classified as held
for sale as of December 31, 2002 are reported as discontinued
operations. The results of operations relating to properties that were
identified for sale as of December 31, 2001 but sold subsequently are
reported as continuing operations.
(3) Income from discontinued operations for the year ended December 31,
2002 includes gains on sale of assets of $442,146.
(4) Distributions for the year ended December 31, 2002 and 1998, include
special distributions to the Limited Partners of $200,000 and $160,000,
respectively, which represented cumulative excess operating reserves.
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 20, 1991, 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
selected national and regional fast-food and family-style Restaurant Chains. The
leases are 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 $45,600 to $218,100. The majority of the leases
provide for percentage rent, based on sales in excess of a specified amount. In
addition, some of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.
As of December 31, 2001 and 2000, the Partnership owned 34 Properties
directly, and six and five Properties indirectly through joint venture or
tenancy in common arrangements, respectively. As of December 31, 2002, the
Partnership owned 32 Properties directly and eight Properties indirectly through
joint venture or tenancy in common arrangements.
Capital Resources
For the years ended December 31, 2002, 2001 and 2000, cash from
operating activities was $4,229,263, $3,267,699, and $3,417,750, respectively.
The increase in cash from operating activities during 2002, as compared to 2001,
and the decrease in cash from operating activities during 2001, as compared to
2000, resulted from changes in the Partnership's working capital and changes in
income and expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2002, 2001, and 2000.
In October 2001, the Partnership and CNL Income Fund VI, Ltd., a
Florida limited partnership and affiliate of the General Partners, as
tenants-in-common, sold the Property in Round Rock, Texas and received net sales
proceeds of approximately $1,510,700, resulting in a gain, to the
tenancy-in-common, of approximately $123,900. The Partnership owned a 23%
interest in this Property and received approximately $345,000 as a liquidating
distribution for its pro-rata share of the net sales proceeds. In November 2001,
the Partnership sold its Property in Sebring, Florida to the tenant and received
net sales proceeds of approximately $1,029,000, resulting in a gain of $8,604.
In December 2001, the Partnership reinvested approximately $1,376,800 of the net
sales proceeds received from the sale of the Property in Sebring, Florida and
from the liquidation proceeds received from the sale of the Property in Round
Rock, Texas, in a Property in Houston, Texas.
In June 2002, the Partnership sold its Burger King Properties in
Columbus, Ohio and East Detroit, Michigan, to the tenant and received net sales
proceeds of approximately $1,734,400, resulting in a gain of approximately
$442,100. The Partnership reinvested in June 2002 the majority of the net sales
proceeds from the sale of these Properties in two Properties in Universal City
and Schertz, Texas, each Property as a separate tenants-in-common arrangement
with CNL Income Fund VI, Ltd., a Florida limited partnership and affiliate of
the General Partners. The Partnership and CNL Income Fund VI, Ltd. entered into
agreements whereby each co-tenant will share in the profits and losses of each
Property in proportion to its applicable percentage interest. As of December 31,
2002, the Partnership contributed approximately $897,200 and $942,500 for an
85.8% and a 90.5% interest, respectively, in these Properties. In addition, in
June 2002, Ashland Joint Venture, in which the Partnership has a 62.16%
interest, sold its Burger King Property in Ashland, New Hampshire to the tenant
and received net sales proceeds of approximately $1,472,900, resulting in a gain
of approximately $500,900. The Joint Venture reinvested in June 2002 the
majority of the net sales proceeds from the sale of this Property in a Property
in San Antonio, Texas.
The Partnership acquired the Properties in Houston, Universal City,
Schertz, and San Antonio, Texas, from CNL Funding 2001-A, LP, a Delaware limited
partnership and an affiliate of the General Partners. CNL Funding 2001-A, LP had
purchased and temporarily held title to the Properties in order to facilitate
the acquisition of the Properties by the Partnership. The purchase prices paid
by the Partnership represented the costs incurred by CNL Funding 2001-A, LP to
acquire the Properties. The General Partners believe that the transactions, or a
portion thereof, relating to the sales of the Properties and the reinvestment of
the proceeds will qualify as like-kind exchange transactions for federal income
tax purposes.
In August 2002, the Partnership received a parcel of land adjacent to
its Property in Roswell, New Mexico from the tenant of the Partnership's
property in payment for approximately $32,500 of rental revenues owed. The
parcel of land is developed as a parking lot which is continuous to the parking
lot of the Partnership's Property. The Partnership accounted for this
transaction as a non-monetary exchange of assets at their fair value. No gain or
loss was recognized on this transaction.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership. The General Partners further have represented that
they will use their reasonable efforts to structure any borrowing so that it
will not constitute "acquisition indebtedness" for federal income tax purposes
and also will limit the Partnership's outstanding indebtedness to three percent
of the aggregate adjusted tax basis of its Properties. 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 are invested
in 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 use of such funds to pay Partnership
expenses or to make distributions to partners. At December 31, 2002, the
Partnership had $1,763,878 invested in such short-term investments as compared
to $993,402 at December 31, 2001. As of December 31, 2002, the average interest
rate earned by the Partnership on the rental income deposited in demand deposit
accounts at commercial banks was approximately one percent annually. The funds
remaining at December 31, 2002, after payment of distributions and other
liabilities, will be used to meet the Partnership's working capital needs.
In March 2003, the Partnership sold the Property located in Abilene,
Texas, to the tenant and received net sales proceeds of approximately $931,900,
resulting in a gain of $377,961. The Partnership expects to reinvest these
proceeds in an additional income producing Property.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate net cash
flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all leases of 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 Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based on cash from operations, and for the years ended December
31, 2002 and 2001, anticipated future cash from operations, the Partnership
declared distributions to the Limited Partners of $3,700,024 for the year ended
December 31, 2002, and $3,500,024 for each of the years ended December 31, 2001
and 2000. This represents distributions of $0.93 per Unit for the year ended
December 31, 2002, and $0.88 per Unit for each of the years ended December 31,
2001 and 2000. During the quarter ended December 31, 2002, the Partnership
declared a special distribution to the Limited Partners of $200,000, which
represented cumulative excess operating reserves. This special distribution was
effectively a return of a portion of the limited partners' investment, although
in accordance with the partnership agreement, the total amount was applied
toward the limited partners' 10% Preferred Return. No amounts distributed to the
Limited Partners for the years ended December 31, 2002, 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. 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, 2002 and 2001.
As of December 31, 2002 and 2001, the Partnership owed $20,101 and
$16,701, respectively, to affiliates for operating expenses, accounting and
administrative services, and management fees. As of March 15, 2003, the
Partnership had reimbursed the affiliates for these amounts. Other liabilities,
including distributions payable, increased to $1,256,929 at December 31, 2002,
from $1,004,557 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 as using either the direct financing or the operating
method. FAS 13 requires management to estimate the economic life of the leased
property, the residual value of the leased property and the present value of
minimum lease payments to be received from the tenant. In addition, management
assumes that all payments to be received under its leases are collectible.
Changes in management's estimates or assumptions regarding collectibility of
lease payments could result in a change in accounting for the lease 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 the Partnership's Properties and investments in
unconsolidated entities periodically for impairment amount 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.
When the Partnership makes the decision to sell or commits to a plan to
sell a Property, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2002 to the year ended
December 31, 2001
Total rental revenues were $3,479,707 for the year ended December 31,
2002, as compared to $3,096,309 for the year ended December 31, 2001. Rental
revenues were lower during the year ended December 31, 2001, as compared to the
same period in 2002, due to the fact that Phoenix Restaurant Group, Inc. and its
Subsidiaries (collectively referred to as "PRG"), the tenant of two Denny's
Properties, experienced financial difficulties and ceased paying rent in 2001.
As a result, the Partnership stopped recognizing rental revenues from the
Properties in Avon, Colorado and Abilene, Texas. In October 2001, PRG filed for
Chapter 11 bankruptcy protection. Since the bankruptcy filing, the tenant
resumed paying rent. The Partnership received from PRG the rent payments
relating to these Properties from the bankruptcy date through May 2002. During
May 2002, the bankruptcy court assigned its leases to two new tenants,
CherryDen, LLC and SWAC, LLC. CherryDen, LLC is an affiliate of the General
Partners. All other lease terms remained unchanged and are substantially the
same as the Partnership's other leases. As a result of the assignment relating
to the Property in Abilene, Texas, the Partnership collected and recognized as
revenue $158,000 representing 2001 and 2000 past due rents. In October 2002,
SWAC, LLC assigned its lease to Continental Foods, Inc., a third party. All
other lease terms remained unchanged and are substantially the same as the
Partnership's other leases.
The increase in rental revenues during the year ended December 31,
2002, as compared to the same period in 2001, was also partially due to the
acquisition in December 2001 of a Property in Houston, Texas with the majority
of the net sales proceeds received from the sale of the Property in Sebring,
Florida. The increase in rental revenues during the year ended December 31,
2002, as compared to the same period in 2001, was partially offset by the 2001
sale of the Property in Sebring, Florida.
The increase in rental revenues during the year ended December 31,
2002, was also partially offset by a rent reduction of $16,500 provided to the
tenant of the Property in Yelm, Washington. The Partnership does not anticipate
that the rent reduction will have an adverse effect on the financial position of
the Partnership.
During the year ended December 31, 2002 and 2001, the Partnership also
earned $294,891 and $233,365, respectively, in contingent rental income. The
increase in contingent rental income during the year ended December 31, 2002, as
compared to same period in 2001, was primarily attributable to an increase in
gross sales of certain restaurant Properties, the leases of which require the
payment of contingent rental income.
During the year ended December 31, 2002 and 2001, the Partnership
recognized income of $863,810 and a loss of $147,538, respectively, attributable
to net operating results reported by unconsolidated joint ventures. Net
operating results reported by joint ventures were lower during the year ended
December 31, 2001, as compared to the same period in 2002, due to PRG, the
tenant of Corpus Christi, Texas, filing for Chapter 11 bankruptcy protection in
October 2001, as described above. As a result, the Partnership and an affiliate
of the general partners, as tenants-in-common, in which the Partnership owns an
approximate 73% interest, stopped recording rental revenues. Net operating
results reported by joint ventures were also lower during the year ended
December 31, 2001, due to the Partnership incurring Property related expenses
such as legal fees, insurance and real estate taxes relating to this Property.
Since the bankruptcy filing, the tenant resumed paying rent. The Partnership and
the affiliate, as tenants-in-common, received from PRG the rent payments
relating to this Property from the bankruptcy date through April, 2002. During
April 2002, the bankruptcy court assigned its lease to a new tenant, an
affiliate of the General Partners. All other lease terms remained unchanged and
are substantially the same as the Partnership's other leases. As a result of the
assignment relating to this Property, the Partnership collected and recognized
as revenue from the new tenant $309,700 representing 2001 and 2000 past due
rents. The Partnership and the affiliate, as tenants-in-common of this Property,
recorded during the year ended December 31, 2001, a provision for write-down of
assets of approximately $356,700. The provision represented the difference
between the carrying value of the Property and its estimated fair value.
The increase in net income earned by unconsolidated joint ventures
during the year ended December 31, 2002, as compared to the same period in 2001,
was partially due to the fact that in June 2002, Ashland Joint Venture, in which
the Partnership owns a 62.16% interest, sold its Property in Ashland, New
Hampshire, to the tenant and recognized a gain of approximately $500,900. The
Joint Venture reinvested the majority of the net sales proceeds from this sale
in a Property in San Antonio, Texas.
In addition, the increase in net income earned by unconsolidated joint
ventures during 2002 was partially due to the Partnership reinvesting the net
sales proceeds, from the sale of two wholly owned Properties, in two Properties,
one in Universal City and the other in Schertz, Texas. Each Property is held as
a separate tenancy-in-common arrangement with CNL Income Fund VI, Ltd., a
Florida limited partnership and affiliate of the General Partners.
The increase in net income earned by joint ventures during the year
ended December 31, 2002, as compared to 2001, was partially offset by the fact
that in October 2001, the Partnership and CNL Income Fund VI, Ltd., as
tenants-in-common, sold the Property in Round Rock, Texas, in which the
Partnership owned a 23% interest. The tenancy in common recognized a gain of
approximately $123,900 during 2001.
During 2002, three lessees (or groups of affiliated lessees) of the
Partnership and its consolidated joint ventures, (i) Golden Corral Corporation,
(ii) Jack in the Box Inc. and Jack in the Box Eastern, L.P. (which are
affiliated entities under common control) (hereinafter referred to as "Jack in
the Box Inc.") and (iii) Burger King Corporation and BK Acquisition, Inc. (which
are affiliated entities under common control) (hereinafter referred to as
"Burger King Corporation"), each contributed more than 10% of the Partnership's
total rental revenues (including rental revenues from the Partnership's
consolidated joint ventures, and the Partnership's share of 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,
2002, Golden Corral Corporation was the lessee under leases relating to three
restaurants, Jack in the Box Inc. was the lessee under leases relating to eight
restaurants, and Burger King Corporation was the lessee under leases relating to
four restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these three lessees (or groups of affiliated lessees)
each will continue to contribute more than 10% of the Partnership's total rental
revenues in 2003. In addition, four Restaurant Chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Jack in the Box, Burger King, and
Denny's, each accounted for more than 10% of the Partnership's total rental
revenues during 2002 (including rental revenues from the Partnership's
consolidated joint ventures, and the Partnership's share of rental revenues from
Properties owned by unconsolidated joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). In 2003, it is
anticipated that these four 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 could materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner.
During the year ended December 31, 2002 and 2001, the Partnership and
its consolidated joint ventures earned $57,724 and $58,939, respectively, in
interest and other income. Interest income decreased due to the redemption of
certificates of deposit held by the Partnership. The decrease in interest income
during the year ended December 31, 2002 was offset by the Partnership collecting
and recognizing as income $29,800 in charges relating to the Property in
Abilene, Texas.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $826,150 and $1,599,065 for the years
ended December 31, 2002 and 2001, respectively. Operating expenses were higher
during the year ended December 31, 2001, as compared to the same period in 2002,
due to the recording of approximately $610,400 in provisions for write-down of
assets for the Properties in Abilene, Texas and Avon, Colorado as a result of
the PRG bankruptcy. During the year ended December 31, 2001, the Partnership
also recorded a provision for write-down of assets of approximately $43,900
relating to the Property located in Sebring, Florida. The provisions represented
the difference between the carrying value of the Properties and their estimated
fair value at December 31, 2001. Operating expenses were also higher during the
year ended December 31, 2001, as compared to the same period in 2002, due to
provisions for doubtful accounts and real estate taxes incurred in 2001 relating
to the Properties in Avon, Colorado and Abilene, Texas. The bankruptcy court
assigned the leases relating to the two Properties in May 2002, and the
Partnership sold the Property in Sebring, Florida in November 2001.
During the year ended December 31, 2002, operating expenses were lower
because the Partnership incurred lower administrative expenses for servicing the
Partnership and its Properties. The decrease in operating expenses during the
year ended December 31, 2002, as compared to the same period in 2001, was
partially offset by the fact that during the year ended December 31, 2002, the
Partnership elected to reimburse the tenant of the Properties in Oklahoma City,
Oklahoma and McAllen, Texas for certain renovation costs.
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 estimated fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived asset is
its new cost basis. The statement also requires that the results of operations
of a component of an entity that either has been disposed of or is classified as
held for sale be reported as a discontinued operation if the disposal activity
was initiated subsequent to the adoption of the Standard.
During the year ended December 31, 2002, the Partnership identified and
sold two Properties in Columbus, Ohio and East Detroit, Michigan that met the
criteria of this standard. In June 2002, the Partnership received net proceeds
relating to the sale of these Properties of approximately $1,734,400, resulting
in gains of approximately $442,100. The financial results of these Properties
were classified as Discontinued Operations in the accompanying financial
statements. The net sales proceeds from the sales of these Properties were
reinvested in two Properties owned indirectly through two separate tenancy in
common arrangements.
During the year ended December 31, 2002, Ashland Joint Venture, in
which the Partnership owns a 62.16% interest, identified and sold the Property
in Ashland, New Hampshire. In June 2002, the joint venture received net proceeds
relating to the sale of this Property of approximately $1,472,900, resulting in
a gain of approximately $500,900. The financial results of this Property were
classified as Discontinued Operations in the condensed financial information for
the unconsolidated joint ventures and the properties held as tenants-in-common
with affiliates presented in the footnotes to the accompanying financial
statements. The joint venture reinvested the net sales proceeds from the sale of
this Property in an additional income producing Property.
Comparison of the year ended December 31, 2001 to the year ended
December 31, 2000
Total rental revenues were $3,096,309 for the year ended December 31,
2001, as compared to $3,279,295, for the same period in 2000. The decrease in
rental revenues during 2001 was partially attributable to the fact that PRG
experienced financial difficulties, and the Partnership stopped recording rental
revenues, as described above. In October 2001, PRG filed for Chapter 11
bankruptcy protection, and subsequently, the tenant resumed paying rent.
The decrease in rental revenues was also due to the sale in 2001 of the
Property in Sebring, Florida. The decrease in rental revenues was partially
offset by an increase in rental revenues from a Property in Houston, Texas,
which was acquired with the net sales proceeds from the sale of the Property in
Sebring, Florida.
During the years ended December 31, 2001 and 2000, the Partnership also
earned $233,365 and $200,925, respectively, in contingent rental income. The
increase in contingent rental income during 2001, was primarily due to the
collection of approximately $21,000 in contingent rents from the tenants of two
Properties that had ceased paying such rents.
During the years ended December 31, 2001 and 2000, the Partnership
recorded a loss of $147,538 and income of $256,056, respectively, attributable
to net operating results reported by unconsolidated joint ventures. Net
operating results from joint ventures decreased during 2001, as compared to
2000, because the Partnership and an affiliate of the General Partners, as
tenants-in-common of the Property in Corpus Christi, Texas, stopped recording
rental revenues due to PRG's financial difficulties, as described above. The
Partnership owns an approximate 73% interest on this Property. In addition, the
tenancy in common recorded a provision for write-down of assets of $356,719. The
provision represented the difference between the carrying value of the Property,
and its estimated fair value. The tenancy in common also incurred approximately
$58,400 in real estate taxes during 2001 relating to this Property. In October
2001, PRG filed for Chapter 11 bankruptcy protection, and resumed paying rent.
The decrease in net operating results reported by joint ventures during
2001, as compared to 2000, was partially offset by a gain of approximately
$123,900 recognized for the sale of a Property in Round Rock, Texas, which was
held by the Partnership in a tenancy in common arrangement. The Partnership
owned a 23% interest on this Property.
During the years ended December 31, 2001 and 2000, the Partnership
earned $58,939 and $89,181, respectively, in interest and other income. The
decrease in interest and other income during 2001, as compared to 2000, was
primarily attributable to a reduction in interest earned on the net sales
proceeds received from the sale of Properties due to reinvestment in additional
Properties.
Operating expenses, including depreciation and amortization expense,
and provisions for write-down of assets, were $1,599,065 and $801,011 for the
years ended December 31, 2001 and 2000, respectively. During 2001 and 2000, as a
result of PRG's financial difficulties, the Partnership recorded provisions for
write-down of assets of approximately $610,400 and $60,490, respectively,
relating to the Properties in Abilene, Texas and Avon, Colorado. The provisions
represented the difference between the carrying value of the Properties, and
their estimated fair value at December 31, 2001 and 2000.
In addition, as of March 2001, a provision for write-down of assets was
recorded of approximately $43,949 relating to the Property located in Sebring,
Florida. The provision represented the difference between the carrying value of
the Property and the estimated net sales proceeds from the anticipated sale of
the Property. The Partnership sold this Property in November 2001.
During 2001, the Partnership also recorded a provision for doubtful
accounts of approximately $34,400 for past due rental amounts relating to the
Properties in Avon, Colorado and Abilene, Texas, and incurred approximately
$111,300 in real estate taxes relating to these two Properties. Operating
expenses also increased during 2001 due to an increase in the costs incurred for
administrative expenses for servicing the Partnership and its Properties, as
permitted by the Partnership agreement.
During 2000, the Partnership incurred transaction costs related to the
General Partners retaining financial and legal advisors to assist them in
evaluating and negotiating the proposed merger with CNL American Properties
Fund, Inc. On March 1, 2000, the General Partners and APF mutually agreed to
terminate the merger.
As a result of the sale of the Property in Sebring, Florida, the
Partnership recognized a gain of $8,604 for the year ended December 31, 2001.
The restaurant industry has been relatively resilient during this
volatile time with steady performance during 2002. However, the industry remains
in a state of cautious optimism. Restaurant operators expect their business to
be better in 2003, according to a nationwide survey conducted by the National
Restaurant Association, but are concerned by the budget deficits being
experienced by many states and the potential of new taxes on the industry to
alleviate the situation.
The Partnership's leases as of December 31, 2002, are generally
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation may cause capital
appreciation of the Partnership's Properties. Inflation and changing prices,
however, also may have an adverse impact on the sales of the restaurants and on
potential capital appreciation of the Properties.
In January 2003, 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 (more commonly referred to as special-purpose entities or
off-balance sheet structures), FIN 46 requires that a variable interest entity
be considered 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. Consolidation of variable
interests entities will provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Management believes
adoption of this standard may result in either consolidation or additional
disclosure requirements with respect to the Partnership's unconsolidated joint
ventures or Properties held with affiliates of the General Partners as
tenants-in-common, 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 XI, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
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 24-36
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XI, 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 XI, Ltd. (a Florida limited
partnership) at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002 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.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 31, 2003, except for Note 12, to which the date is March 4, 2003
23CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 19,291,059 $ 19,645,302
Net investment in direct financing leases 6,768,822 6,941,611
Real estate held for sale -- 1,303,330
Investment in joint ventures 4,414,071 2,389,323
Cash and cash equivalents 1,763,878 993,402
Certificates of deposit -- 218,217
Receivables, less allowance for doubtful accounts of
$23,196 and $487,127, respectively 230,688 186,780
Accrued rental income 1,715,758 1,640,219
Other assets 135,940 133,544
------------------- -------------------
$ 34,320,216 $ 33,451,728
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 3,271 $ 9,153
Real estate taxes payable 15,632 54,185
Distributions payable 1,075,006 875,006
Due to related parties 20,101 16,701
Rents paid in advance and deposits 163,020 66,213
------------------- -------------------
Total liabilities 1,277,030 1,021,258
Minority interests 507,991 509,377
Partners' capital 32,535,195 31,921,093
------------------- -------------------
$ 34,320,216 $ 33,451,728
=================== ===================
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
----------------- --------------- ---------------
Revenues:
Rental income from operating leases $ 2,471,705 $ 2,234,480 $ 2,366,141
Earned income from direct financing leases 1,008,002 861,829 913,154
Contingent rental income 294,891 233,365 200,925
Interest and other income 57,724 58,939 89,181
---------------
----------------- ---------------
3,832,322 3,388,613 3,569,401
----------------- --------------- ---------------
Expenses:
General operating and administrative 277,616 313,146 199,606
Property expenses 85,567 137,589 25,767
Provision for doubtful accounts -- 34,443 --
Management fees to related parties 44,392 36,076 39,227
State and other taxes 31,779 29,022 50,596
Depreciation 386,796 394,396 397,524
Provision for write-down of assets -- 654,393 60,490
Transaction costs -- -- 27,801
----------------- --------------- ---------------
826,150 1,599,065 801,011
----------------- --------------- ---------------
Income Before Gain on Sale of Assets, Minority Interests in
Income of Consolidated Joint Ventures, and Equity in
Earnings (Loss) of Unconsolidated Joint Ventures 3,006,172 1,789,548 2,768,390
Gain on Sale of Assets -- 8,604 --
Minority Interests in Income of Consolidated
Joint Ventures (63,512 ) (66,460 ) (67,606 )
Equity in Earnings (Loss) of Unconsolidated Joint
Ventures 863,810 (147,538 ) 256,056
----------------- --------------- ---------------
Income from Continuing Operations 3,806,470 1,584,154 2,956,840
----------------- --------------- ---------------
Discontinued Operations (Note 5):
Income from discontinued operations 65,510 143,162 137,623
Gain on disposal of discontinued operations 442,146 -- --
----------------- --------------- ---------------
507,656 143,162 137,623
----------------- --------------- ---------------
Net Income $ 4,314,126 $ 1,727,316 $ 3,094,463
================= =============== ===============
Income Per Limited Partner Unit
Continuing Operations $ 0.95 $ 0.39 $ 0.74
Discontinued Operations 0.13 0.04 0.03
----------------- --------------- ---------------
Total $ 1.08 $ 0.43 $ 0.77
================= =============== ===============
Net Income Per Limited Partner Unit $ 1.08 $ 0.43 $ 0.77
================= =============== ===============
Weighted Average Number of
Limited Partner Units Outstanding 4,000,000 4,000,000 4,000,000
================= =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2002, 2001, and 2000
General Partners Limited Partners
--------------------------- -------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs
------------ -------------- -------------- -------------- ------------- --------------
Balance, December 31, 1999 $ 1,000 $ 241,465 $ 40,000,000 $ (25,715,158 ) $ 24,362,055 $ (4,790,000 )
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,500,024 ) -- --
Net income -- -- -- -- 3,094,463 --
------------ ------------- -------------- -------------- -------------- --------------
Balance, December 31, 2000 1,000 241,465 40,000,000 (29,215,182 ) 27,456,518 (4,790,000 )
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,500,024 ) -- --
Net income -- -- -- -- 1,727,316 --
------------ ------------- -------------- -------------- -------------- --------------
Balance, December 31, 2001 1,000 241,465 40,000,000 (32,715,206 ) 29,183,834 (4,790,000 )
Distributions to limited
partners ($0.93 per
limited partner unit) -- -- -- (3,700,024 ) -- --
Net income -- -- -- -- 4,314,126 --
------------ ------------- -------------- -------------- -------------- --------------
Balance, December 31, 2002 $ 1,000 $ 241,465 $ 40,000,000 $ (36,415,230 ) $ 33,497,960 $ (4,790,000 )
============ ============= ============== ============== ============== ==============
Total
--------------
$34,099,362
(3,500,024 )
3,094,463
--------------
33,693,801
(3,500,024 )
1,727,316
--------------
31,921,093
(3,700,024 )
4,314,126
--------------
$32,535,195
==============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---------------- --------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net Income $ 4,314,126 $ 1,727,316 $ 3,094,463
---------------- --------------- --------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 397,899 423,468 426,596
Provision for doubtful accounts -- 34,443 --
Provision for write-down of assets -- 654,393 60,490
Gain on sale of assets (442,146 ) (8,604 ) --
Minority interests in income of consolidated joint
ventures 63,512 66,460 67,606
Equity in earnings and loss of unconsolidated joint
ventures, net of distributions (184,950 ) 338,292 4,311
Decrease (increase) in receivables (69,831 ) 13,656 (66,009 )
Amortization of investment in direct financing leases 172,789 1,629 124,176
Decrease (increase) in accrued rental income (75,539 ) (90,221 ) (135,691 )
Decrease(increase) in other assets (2,396 ) 109,374 966
Increase (decrease) in accounts payable and accrued
expenses (44,435 ) 16,859 (88,358 )
Increase (decrease) in due to related parties 3,400 (5,801 ) (48,098 )
Increase (decrease) in rents paid in advance and
deposits 96,807 (13,565 ) (22,702 )
---------------- --------------- ---------------
Total adjustments (84,890 ) 1,540,383 323,287
---------------- --------------- ---------------
Net Cash Provided by Operating Activities 4,229,236 3,267,699 3,417,750
---------------- --------------- ---------------
Cash Flows from Investing Activities:
Additions to real estate properties -- (1,376,792 ) --
Proceeds from sale of real estate properties 1,734,373 1,029,000 --
Investment in joint ventures (1,839,798 ) -- --
Liquidating distribution from joint venture -- 345,376 --
Investment in certificates of deposit -- (211,587 ) (500,000 )
Redemption of certificates of deposit 211,587 500,000 --
---------------- --------------- ---------------
Net cash provided by (used in) investing
activities 106,162 285,997 (500,000 )
---------------- --------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,500,024 ) (3,500,024 ) (3,500,024 )
Distributions to holders of minority interest (64,898 ) (66,890 ) (67,606 )
----------------
--------------- ---------------
Net cash used in financing activities (3,564,922 ) (3,566,914 ) (3,567,630 )
---------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 770,476 (13,218 ) (649,880 )
Cash and Cash Equivalents at Beginning of Year 993,402 1,006,620 1,656,500
---------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 1,763,878 $ 993,402 $ 1,006,620
================ =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
2002 2001 2000
--------------- --------------- --------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Distributions declared and unpaid at
December 31 $ 1,075,006 $ 875,006 $ 875,006
=============== =============== =============
Addition to real estate properties $ 32,553 $ -- $ --
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund XI, 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 real
estate property acquisitions at cost. These properties are leased to
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. During
the years ended December 31, 2002, 2001, and 2000, tenants paid
directly to real estate taxing authorities approximately $428,800,
$400,900, and $399,020, respectively, in real estate taxes in
accordance with the terms of their triple net leases with the
Partnership.
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
direct financing or the operating methods. Such methods are described
below:
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
portions of the majority of these leases are operating leases.
Operating method - Real estate property leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce
a constant periodic rent over the lease term commencing on the
date the property is placed in service.
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 14 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 XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
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 the estimated fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is recorded to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 85%
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport
Joint Venture using the consolidation method. Minority interests
represent the minority joint venture partners' proportionate share of
equity in the Partnership's consolidated joint ventures. All
significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in Ashland Joint Venture, Des Moines Real
Estate Joint Venture and Portsmouth Joint Venture and the properties in
Corpus Christi, Universal City and Schertz, Texas, for which each
property is held as tenants-in-common, are accounted for using the
equity method since each joint venture agreement requires the consent
of all partners on all key decisions affecting the operations of the
underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (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 represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
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 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 XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
Reclassification - Certain items in the prior year's financial
statements have been reclassified to conform to 2002 presentation,
including a change in presentation of the statement of cash flows from
the direct to the indirect method. These reclassifications had no
effect on partner's capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 ("FAS 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 estimated fair
value. If an impairment is recognized, the adjusted carrying amount of
a long-lived asset is its new cost basis. The statement also requires
that the results of operations of a component of an entity that either
has been disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 ("FIN 46") - In January 2003, 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 (more commonly referred to as
special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be considered 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. Consolidation of
variable interests entities will provide more complete information
about the resources, obligations, risks and opportunities of the
consolidated company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003, and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Management believes adoption of this
standard may result in either consolidation or additional disclosure
requirements with respect to the Partnership's unconsolidated joint
ventures or properties held with affiliates of the general partners as
tenants-in-common, which are currently accounted for under the equity
method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
2. Real Estate Properties with Operating Leases:
Real estate properties with operating leases consisted of the following
at December 31:
2002 2001
-------------------- --------------------
Land $ 11,540,346 $ 11,507,793
Buildings 11,508,936 11,508,936
-------------------- --------------------
23,049,282 23,016,729
Less accumulated depreciation (3,758,223 ) (3,371,427 )
-------------------- --------------------
$ 19,291,059 $ 19,645,302
==================== ====================
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
2. Real Estate Properties with Operating Leases - Continued:
In 2001, the Partnership recorded a provision for write-down of assets
in the amount of $363,461 relating to the property in Avon, Colorado
due to the fact that on October 31, 2001, Phoenix Restaurant Group,
Inc. and its Subsidiaries (collectively referred to as "PRG"), a tenant
of the Partnership, experienced financial difficulties and filed for
Chapter 11 bankruptcy protection. The provision represented the
difference between the carrying value of the property at December 31,
2002 and its estimated fair value.
At March 2001, the Partnership recorded a provision for write-down of
assets of $43,949 relating to the property located in Sebring, Florida.
The provision represented the difference between the carrying value of
the property, and the estimated net sales proceeds from the anticipated
sale of the Property. In November 2001, the Partnership sold this
property to the tenant and received net sales proceeds of approximately
$1,029,000, resulting in a gain of $8,604. In December 2001, the
Partnership reinvested approximately $1,376,800 of the net sales
proceeds received from the sale of this Property and from the
liquidation proceeds received from the sale of the Property in Round
Rock, Texas, in a Property in Houston, Texas. The Partnership acquired
the Property from CNL Funding 2001-A, LP, an affiliate of the general
partners.
In August 2002, the Partnership received a parcel of land adjacent to
its Property in Roswell, New Mexico from the tenant of the
Partnership's property in payment for approximately $32,500 of rental
revenues owed. The parcel of land is developed as a parking lot which
is continuous to the parking lot of the Partnership's Property. The
Partnership accounted for this transaction as a non-monetary exchange
of assets at their fair value. No gain or loss was recognized on this
transaction.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2002:
2003 $ 2,502,055
2004 2,520,969
2005 2,531,612
2006 2,348,955
2007 1,952,743
Thereafter 8,452,531
--------------
$ 20,308,865
==============
3. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct
financing leases at December 31:
2002 2001
----------------- -----------------
Minimum lease payments
receivable $ 11,078,894 $ 12,155,263
Estimated residual values 2,439,551 2,439,551
Less unearned income (6,749,623 ) (7,653,203 )
----------------- -----------------
Net investment in direct
financing leases $ 6,768,822 $ 6,941,611
================= =================
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2