UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24095
CNL INCOME FUND XVIII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3295394
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801-3336
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($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]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 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 XVIII, Ltd. (the "Registrant" or the "Partnership") is
a limited partnership which was organized pursuant to the laws of the State of
Florida on February 10, 1995. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on September 20, 1996, the
Partnership offered for sale up to $35,000,000 of limited partnership interests
(the "Units") (3,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
August 11, 1995. The offering terminated on February 6, 1998, at which date the
maximum offering proceeds of $35,000,000 had been received from investors who
were admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food, family-style and casual dining
restaurant chains (the "Restaurant Chains"). As of December 31, 1998, net
proceeds to the Partnership from its offering of Units, after deduction of
organizational and offering expenses, totalled $30,810,000. During 1998, the
Partnership had invested approximately $29,859,000 of the proceeds to acquire 24
Properties (which included one Property owned by a joint venture in which the
Partnership is a co-venturer) and to pay acquisition fees and certain
acquisition expenses. In February 1999, the Partnership invested in a joint
venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI,
Ltd., an affiliate of the General Partners to hold and purchase one Property and
used the remaining amounts to establish a working capital reserve for
Partnership purposes. In December 1999, the Partnership sold one Property in
Atlanta, Georgia. In June 2000, the Partnership reinvested the net sales
proceeds from the sale of the Property in Atlanta, Georgia in a joint venture
arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL
Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., each an affiliate of the
General Partners, to purchase one Property in Homestead, Pennsylvania. In
January 2001, the Partnership sold a portion of its interest in TGIF Pittsburgh
Joint Venture to CNL Income Fund VII, Ltd., a Florida limited partnership and an
affiliate of the General Partners, for approximately $500,000. The Partnership
used the net sales proceeds to pay liabilities of the Partnership and to meet
the Partnership's working capital needs. During 2001, the Partnership sold its
Properties in Timonium, Maryland and Henderson, Nevada and reinvested the
majority of these net sales proceeds in a Property in Denver, Colorado, as
tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited
partnership and an affiliate of the General Partners. In addition, in December
2001, the Partnership sold its Property in Santa Rosa, California. As a result
of the above transactions, as of December 31, 2001, the Partnership owned 19
Properties directly, and had interests in four additional Properties indirectly
through joint venture or tenancy in common arrangements. In January 2002 the
Partnership reinvested a portion of the net sales proceeds from the sale of the
Property in Santa Rose, California in a Property in Houston, Texas. In addition,
in January 2002, the Partnership reinvested the remaining net sales in a
Property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., a
Florida limited partnership and an affiliate of the General Partners. The
Properties are generally leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees 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.
Description of Leases
The leases of the Properties provide for initial terms ranging from 15
to 20 years (the average being 18 years) and expire between 2012 and 2019. The
leases are generally on a triple-net basis, with the lessee responsible for all
repairs and maintenance, property taxes, insurance and utilities. The leases
provide for minimum base annual rental payments (payable in equal monthly
installments) ranging from approximately $58,400 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.
Generally, the leases provide for two to five five-year renewal options
subject to the same terms and conditions as the initial lease. Lessees of 17 of
the Partnership's 23 Properties also have been granted options to purchase the
Properties after a specified portion of the lease term has elapsed. The option
purchase price is equal to the Partnership's original cost of the Property
(including acquisition costs), plus a specified percentage of the Property's
fair market value at the time the purchase option is exercised, whichever is
greater. Fair market value will be determined through an appraisal by an
independent appraisal firm.
The leases also generally provide that, in the event the Partnership
wishes to sell the Properties, the Partnership first must offer the lessees the
right to purchase the Properties on the same terms and conditions, and for the
same price, as any offer which the Partnership has received for the sale of the
Properties.
In July 2001, the Partnership reinvested the majority of the net sales
proceeds it received from the sale of the Properties in Timonium, Maryland and
Henderson, Nevada, in a Property located in Denver, Colorado with CNL Income
Fund VIII, Ltd., as tenants-in-common, as described below in "Joint Venture and
Tenancy in Common Arrangements." The lease terms for this Property are
substantially the same as the Partnership's other leases, as described above.
In January 2002, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the Property in Santa Rosa, California, in
a Property located in Austin, Texas, with CNL Income Fund X, Ltd., as
tenants-in-common, as described below in "Joint Venture and Tenancy in Common
Arrangements." In addition, in January 2002, the Partnership reinvested the
remaining net sales proceeds in a Property located in Houston, Texas. The lease
terms for these Properties are substantially the same as the Partnership's other
leases, as described above.
Major Tenants
During 2001, four lessees of the Partnership, Golden Corral
Corporation, Jack in the Box Inc., IHOP Properties, Inc., and S&A Properties
Corporation and Steak and Ale of Colorado, Inc. (under common control of
Metromedia Restaurant Group, hereinafter referred to as Metromedia Restaurant
Group), each contributed more than ten percent of the Partnership's total rental
and earned income (including the Partnership's share of total rental and earned
income from joint ventures and the Property held as tenants-in-common with an
affiliate). As of December 31, 2001, Golden Corral Corporation was the lessee
under leases relating to four restaurants, Jack in the Box Inc. was the lessee
relating to three leases, Metromedia Restaurant Group was the lessee relating to
two leases and IHOP Properties, Inc. was the lessee relating to one lease. It is
anticipated that based on the minimum rental payments required by the leases,
Golden Corral Corporation, Jack in the Box Inc. and Metromedia Restaurant Group
will each continue to contribute more than ten percent of the Partnership's
total rental and earned income (including the Partnership's share of total
rental and earned income from joint ventures and the Property held as
tenants-in-common with an affiliate) in 2002. In addition, four Restaurant
Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Jack in
the Box, Bennigan's, and IHOP, each accounted for more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the Property held as
tenants-in-common with an affiliate) for 2001. In 2002, it is anticipated that
Golden Corral, Jack in the Box and Bennigan's will each contribute more than ten
percent of the Partnership's rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures and
the Property held as tenants-in-common with an affiliate) to which the
Partnership is entitled under the terms of the leases. Any failure of such
lessees or Restaurant Chains could materially adversely affect the Partnership's
income if the Partnership is not able to re-lease the Properties in a timely
manner. As of December 31, 2001, 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
In August 1998, the Partnership entered into a joint venture
arrangement, Columbus Joint Venture, with CNL Income Fund XII, Ltd. and CNL
Income Fund XVI, Ltd., affiliates of the General Partners, to construct and hold
one Property. Each of the affiliates is a limited partnership organized pursuant
to the laws of the State of Florida. The joint venture arrangement provides for
the Partnership and its joint venture partners to share in all costs and
benefits associated in the joint venture in proportion to each partner's
percentage interest in the joint venture. The Partnership has a 39.93% interest
in Columbus Joint Venture. The Partnership and its joint venture partners are
also jointly and severally liable for all debts, obligations and other
liabilities of the joint venture.
In addition, in February 1999, the Partnership entered into a joint
venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI,
Ltd., an affiliate of the General Partners, to purchase and hold one Property.
The affiliate is a limited partnership organized pursuant to the laws of the
State of Florida. The joint venture agreement provides for the Partnership and
its joint venture partner to share in all costs and benefits associated with the
joint venture in proportion to each partner's percentage interest in the joint
venture. The Partnership owns a 57.2% interest in the joint venture.
In addition, in June 2000, the Partnership entered into a joint venture
arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL
Income Fund XV, Ltd. and CNL Income Fund XVI, Ltd., affiliates of the General
Partners, to purchase and hold one Property. Each of the affiliates is a limited
partnership organized pursuant to the laws of the State of Florida. The joint
venture agreement provides for the Partnership and its joint venture partners to
share in all costs and benefits associated with the joint venture in proportion
to each partner's percentage interest in the joint venture. In January 2001, the
Partnership sold a portion of its interest in TGIF Pittsburgh Joint Venture to
CNL Income Fund VII, Ltd., a Florida limited partnership and an affiliate of the
General Partners, for approximately $500,000. As of December 31, 2001, the
Partnership owned a 19.78% interest in the joint venture. The Partnership used
the net sales proceeds to pay liabilities of the Partnership and to meet the
Partnership's working capital needs.
Each joint venture 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 any of the joint venturers 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.
The Partnership shares management control equally with affiliates of
the General Partners for each of the joint ventures. The joint venture
agreements restrict each venturer's ability to sell, transfer or assign its
joint venture interest without first offering it for sale to its joint venture
partners, either upon such terms and conditions as to which the venturers may
agree or, in the event the venturers cannot agree, on the same terms and
conditions as any offer from a third party to purchase such joint venture
interest.
Net cash flow from operations of Columbus Joint Venture, CNL Portsmouth
Joint Venture and TGIF Pittsburgh Joint Venture are distributed 39.93%, 57.2%
and 19.78%, respectively, to the Partnership and the balance is distributed to
the respective joint venture partners in accordance with its respective
percentage interest in the joint venture. Any liquidation proceeds, after paying
joint venture debts and liabilities and funding reserves for contingent
liabilities, will be distributed first to the joint venture partners with
positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter in proportion to each joint venture
partner's percentage interest in the joint venture.
In addition to the above joint venture agreements, in July 2001, the
Partnership entered into an agreement to hold a Property as tenants-in-common,
with CNL Income Fund VIII, Ltd., an affiliate of the General Partners. The
agreement provides for the Partnership and the affiliate to share in the profits
and losses of the Property in proportion to each co-tenant's percentage
interest. The Partnership owns an 80.7% interest in this Property. CNL Income
Fund VIII, Ltd. is a limited partnership organized pursuant to the laws of the
State of Florida. The tenancy in common agreement restricts each co-tenant's
ability to sell, transfer, or assign its interest in the tenancy in common's
Property without first offering it for sale to the remaining co-tenant.
In addition, in January 2002, the Partnership reinvested a portion of
the sales proceeds from the 2001 sale of the Property in Santa Rosa, California
in a Property in Austin, Texas, as tenants-in-common, with CNL Income Fund X,
Ltd., a Florida limited partnership and an affiliate of the General Partners.
The Partnership entered into a separate long-term, triple-net lease with terms
substantially the same as its other leases for each property.
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.
Management Services
CNL APF Partners, LP, an affiliate of the General Partners, provides
certain services relating to the management of the Partnership and its
Properties pursuant to a management agreement with the Partnership. Under this
agreement, CNL APF Partners, LP (the "Advisor") is responsible for collecting
rental payments, inspecting the Properties and the tenants' books and records,
assisting the Partnership in responding to tenant inquiries and notices and
providing information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor an
annual fee of one 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.
Effective July 1, 2000, CNL Fund Advisors, Inc. assigned its rights in,
and its obligations under, the management agreement with the Partnership to the
Advisor. All of the terms and conditions of the management agreement, including
the payment of fees, as described above, remain unchanged.
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 family-style and casual dining 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 CNL 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, 2001, the Partnership owned 23 Properties. Of the 23
Properties, 19 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and one is owned through a tenancy in common
arrangement. 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. As of December 31, 2001, the Partnership's Property sites ranged
from approximately 24,400 to 148,500 square feet depending upon building size
and local demographic factors. Sites purchased by the Partnership are in
locations zoned for commercial use which have been reviewed for traffic patterns
and volume.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation for the year ended December 31, 2001.
State Number of Properties
Arizona 1
California 1
Colorado 1
Florida 2
Illinois 1
Kentucky 1
Minnesota 1
North Carolina 3
New York 1
Ohio 2
Pennsylvania 1
Tennessee 1
Texas 6
Virginia 1
--------------
TOTAL PROPERTIES 23
==============
Buildings. Each of the Properties owned by the Partnership as of
December 31, 2001, includes a building that is one of a Restaurant Chain's
approved designs. The buildings generally are rectangular and constructed from
various combinations of stucco, steel, wood, brick and tile. Building sizes
range from approximately 2,100 to 9,700 square feet. All buildings on Properties
acquired by the Partnership are freestanding and surrounded by paved parking
areas. Buildings are suitable for conversion to various uses, although
modifications may be required prior to use for other than restaurant operations.
As of December 31, 2001, the Partnership had no plans for renovation of the
Properties. Depreciation expense is computed for buildings and improvements
using the straight line method using a depreciable life of 40 years for federal
income tax purposes.
As of December 31, 2001, the aggregate cost of the Properties owned by
the Partnership and joint ventures for federal income tax purposes was
$23,240,960 and $6,205,016, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 2
Bennigan's 2
Boston Market 3
Burger King 1
Chevy's Fresh Mex 1
Golden Corral 4
Ground Round 1
IHOP 1
Jack in the Box 3
NI's International Buffet 1
On the Border 1
Taco Bell 1
T.G.I. Friday's 1
Wendy's 1
--------------
TOTAL PROPERTIES 23
==============
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food, family-style and casual dining restaurant
chains. The leases are generally on a long-term "triple net" basis, meaning that
the tenant is responsible for repairs, maintenance, property taxes, utilities
and insurance. Generally, a lessee is required, under the terms of its lease
agreement, to make such capital expenditures as may be reasonably necessary to
refurbish buildings, premises, signs and equipment so as to comply with the
lessee's obligations, if applicable, under the franchise agreement to reflect
the current commercial image of its Restaurant Chain. These capital expenditures
are required to be paid by the lessee during the term of the lease. The terms of
the leases of the Properties owned by the Partnership are described in Item 1.
Business - Leases.
At December 31, 2001, 2000, 1999, 1998 and 1997 the Properties were
83%, 80%, 96%, 96% and 100% occupied, respectively. The following is a schedule
of the average rent per Property for each of the years ended December 31:
2001 2000 1999 1998 1997
------------- ------------- --------------- -------------- -------------
Rental Revenues (1)(2) $ 2,564,402 $ 2,888,408 $ 3,141,240 $ 2,953,285 $1,290,621
Properties (2) 19 20 23 24 22
Average rent per
property $ 134,969 $ 144,420 $ 136,576 $ 123,054 $58,665
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture and tenancy in common
arrangements. Rental revenues have been adjusted, as applicable, for
any amounts for which the Partnership has established an allowance for
doubtful accounts.
(2) Excludes Properties that were vacant at December 31, and did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2001 for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2001 -- -- --
2002 -- -- --
2003 -- -- --
2004 -- -- --
2005 -- -- --
2006 -- -- --
2007 -- -- --
2008 -- -- --
2009 -- -- --
2010 -- -- --
Thereafter 19 $ 2,594,700 100.00%
---------- ------------- -------------
Total (1) 19 $ 2,594,700 100.00%
========== ============= =============
(1) Excludes four Properties which were vacant at December 31, 2001.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants, as of December 31, 2001 (See Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Description of Leases.
Golden Corral Corporation leases four Golden Corral restaurants. The
initial term of each lease is 15 years (expiring in 2012 to 2013) and the
average minimum base annual rent is approximately $164,400 (ranging from
approximately $156,700 to $178,200).
Jack in the Box Inc. leases three Jack in the Box restaurants. The
initial term of each lease is 18 years (expiring in 2015) and the average
minimum base annual rent is approximately $113,000 (ranging from approximately
$77,900 to $132,200).
Metromedia Restaurant Group leases two Bennigan's restaurants. The
initial term of one lease is 11 years (expiring in 2019) and the initial term of
the other lease is ten years (expiring in 2018) and the average minimum base
annual rent is approximately $218,400 (ranging from approximately $200,200 to
$236,600).
IHOP Properties, Inc. leases one IHOP restaurant. The initial term of
the lease is 18 years (expiring in 2017) and the minimum base annual rent is
approximately $144,100.
Item 3. Legal Proceedings
On August 10, 1998, DJD Partners VII, LLC served a lawsuit filed on or
about July 28, 1998 against Finest Foodservice, LLC and CNL Income Fund XVIII,
Ltd., DJD Partners VII, LLC v. Finest Foodservice, LLC, et al, Case No. CT
98-014942, in the District Court of the Fourth Judicial District of Hennepin
County, Minnesota, alleging a breach of a contract entered into by Finest
Foodservice, LLC and assigned to CNL Income Fund XVIII, Ltd. in connection with
the construction of a Boston Market property in Minnetonka, Minnesota. In
October 1998 Finest Foodservice, LLC filed for bankruptcy and rejected its
lease, causing the obligations of the contract to become the responsibility of
CNL Income Fund XVIII, Ltd. On May 4, 2001, the District Court awarded a
judgment of approximately $85,400 to the plaintiff. CNL Income Fund XVIII, Ltd.
is appealing the judgment.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 15, 2002, there were 1,559 holders of record of the
Units. There is no public trading market for the Units, and it is not
anticipated that a public market for the Units will develop. During 2001,
Limited Partners who wished to sell their Units may have offered the Units for
sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"),
and Limited Partners who wished to have their distributions used to acquire
additional Units (to the extent Units were available for purchase), may have
done so pursuant to such Plan. The General Partners have the right to prohibit
transfers of Units. The price paid for any Unit transferred pursuant to the Plan
through December 31, 2001 range from $8.57 to $9.50 per Unit. The price paid for
any Unit transferred other than pursuant to the Plan was subject to negotiation
by the purchaser and the selling Limited Partner. The Partnership will not
redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2001 and 2000 other than
pursuant to the Plan, net of commissions.
2001 (1) 2000(1)
-------------------------------------- ------------------------------------------
High Low Average High Low Average
--------- --------- ------------ ----------- --------- -------------
First Quarter $6.86 $ 6.80 $ 6.83 $9.30 $ 7.45 $ 8.73
Second Quarter 6.57 6.57 6.57 6.65 6.65 6.65
Third Quarter 6.30 6.30 6.30 7.27 7.27 7.27
Fourth Quarter 8.00 8.00 8.00 6.47 6.47 6.47
(1) A total of 22,500 and 10,290 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2001 and 2000,
respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the Plan.
The capital contribution per Unit was $10. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 2001 and 2000, the Partnership
declared cash distributions of $2,800,000 to the Limited Partners. Distributions
of $700,000 were declared at the close of each of the Partnership's calendar
quarters during 2001 and 2000, to the Limited Partners. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive such distributions on this basis. No amounts distributed to partners for
the years ended December 31, 2001 and 2000, are required to be or have been
treated by the Partnership as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. No
distributions have been made to the General Partners to date.
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
The following selected financial data should be read in conjunction
with the financial statements and related notes in Item 8. hereof.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
---------------- --------------- --------------- ---------------- ---------------
Revenues (1) $ 2,681,283 $ 3,021,125 $ 3,192,371 $ 3,097,757 $ 1,453,242
Net income (3)(4)(5) 1,168,765 1,117,197 2,515,356 2,302,322 1,154,760
Cash distributions
declared 2,800,000 2,800,000 2,799,998 2,657,764 1,310,885
Net income per Unit 0.33 0.32 0.72 0.66 0.51
Cash distributions
declared per Unit 0.80 0.80 0.80 0.76 0.57
Weighted average number
of Limited Partner
Unitsoutstanding (2) 3,500,000 3,500,000 3,500,000 3,495,278 2,279,801
2001 2000 1999 1998 1997
---------------- --------------- --------------- ---------------- ----------------
At December 31:
Total assets $ 27,511,695 $ 29,112,352 $30,866,006 $31,112,617 $31,807,255
Total partners' 26,669,817 28,301,052 29,983,855 30,268,497 29,846,580
capital
(1) Revenues include equity in earnings of joint ventures.
(2) Represents the weighted average number of Units outstanding during the
period the Partnership was operational.
(3) Net income for the years ended December 31, 2001, 2000, and 1998,
includes $708,377, $993,178 and $197,466, respectively, from provisions
for write-down of assets.
(4) Net income for the years ended December 31, 2001 and 1999, include
$429,072 and $46,300 from gains on sale of assets.
(5) Net income for the year ended December 31, 2000, includes $100,000 from
lease termination income.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on February 10, 1995, to acquire for
cash, either directly or through joint venture arrangements, both newly
constructed and existing restaurant Properties, as well as land upon which
restaurants were to be constructed, which are leased primarily to operators of
selected national and regional fast-food, family-style and casual dining
Restaurant Chains. The leases are generally triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of December 31, 2001, the Partnership owned 23 Properties,
either directly or through joint venture or tenancy in common arrangements.
Capital Resources
Currently, the Partnership's primary source of capital is cash from
operations (which includes cash received from tenants, interest received and
distributions from joint ventures, less cash paid for expenses). Cash from
operations was $1,684,911, $2,310,051, and $2,797,040, for the years ended
December 31, 2001, 2000, and 1999, respectively. The decrease in cash from
operations during 2001 and 2000, each as compared to the previous year, was
primarily a result of changes in income and expenses as described in "Results of
Operations" below.
Other sources and uses of capital included the following during the
years ended December 31, 2001, 2000, and 1999.
In February 1999, the Partnership entered into a joint venture
arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., a
Florida limited partnership and an affiliate of the General Partners, to own and
lease one restaurant Property. As of December 31, 2001, the Partnership had
contributed approximately $330,500 to the joint venture and owned a 57.2%
interest in this joint venture.
In December 1999, the Partnership sold its Property in Atlanta,
Georgia, and received net sales proceeds of $688,997, resulting in a gain of
$46,300. In June 2000, the Partnership reinvested the net sales proceeds from
this sale into a joint venture arrangement, TGIF Pittsburgh Joint Venture, with
CNL Income Fund VII, Ltd., CNL Income Fund XV, Ltd., and CNL Income Fund XVI,
Ltd., each of which is a Florida limited partnership and an affiliate of the
General Partners, to own and lease one restaurant Property. As of December 31,
2000, the Partnership had contributed approximately $1,001,600 to the joint
venture. In January 2001, the Partnership sold a portion of its interest in TGIF
Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., for approximately
$500,000. Because the Partnership sold 50% of its interest in TGIF Pittsburgh
Joint Venture at its current carrying value, no gain or loss was recognized. As
of December 31, 2001, the Partnership had a remaining investment of
approximately $501,500 in the joint venture representing a 19.78% interest in
this joint venture. The Partnership used the net sales proceeds to pay
liabilities of the Partnership and to meet the Partnership's working capital
needs.
In June 2001, the Partnership sold its Property in Timonium, Maryland
to an unrelated third party for $875,000 and received net sales proceeds of
approximately $848,600, resulting in a loss of $18,855. In July 2001, the
Partnership reinvested the majority of these sales proceeds in a Property in
Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., as
described below.
In July 2001, the Partnership sold its Property in Henderson, Nevada to
an unrelated third party for approximately $1,314,700 and received net sales
proceeds of approximately $1,278,000 resulting in a gain of approximately
$177,900. In July 2001, the Partnership reinvested the majority of these sales
proceeds in a Property in Denver, Colorado, as tenants-in-common, with CNL
Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the
General Partners. As of December 31, 2001, the Partnership had contributed
approximately $1,766,400 for an 80.7% interest in the profits and losses of the
Property.
In addition, in December 2001, the Partnership sold its Property in
Santa Rosa, California to an unrelated third party for approximately $1,718,800
and received net sales proceeds of approximately $1,664,800 resulting in a gain
of approximately $270,100. In January 2002, the Partnership reinvested a portion
of these net sales proceeds in a Property in Houston, Texas and reinvested the
remaining net sales proceeds in a Property in Austin, Texas, as
tenants-in-common with CNL Income Fund X, Ltd., a Florida limited partnership
and an affiliate of the General Partners.
In 2001, the Partnership entered in a promissory note with the
corporate General Partner for a loan in the amount of $75,000 in connection with
the operations of the partnership. The loan was uncollateralized, non-interest
bearing and due on demand. As of December 31, 2001, the Partnership had repaid
the loan in full to the corporate General Partner.
None of the Properties owned or to be acquired by the Partnership, or
the joint ventures 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 or 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 expenses on behalf of the Partnership for which the
Partnership reimburses the affiliates without interest.
In November 2001, the Partnership entered into an agreement with an
unrelated third party to sell the On the Border property in San Antonio, Texas.
As of March 15, 2002 the sale had not occurred.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, money market accounts and
certificates of deposit with less than a 90 day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At December 31, 2001, the Partnership had
$226,136 invested in such short-term investments, as compared to $479,603 at
December 31, 2000. As of December 31, 2001, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately 3.1% annually. The funds remaining at December 31, 2001 will be
used to pay distributions and other liabilities of the Partnership.
In January 2002, the Partnership entered into a promissory note with
the corporate General Partner for a loan in the amount of $125,000 in connection
with the operations of the partnership. The loan was uncollateralized,
non-interest bearing and due on demand. As of March 15, 2002, the Partnership
had repaid the loan in full to the corporate General Partner.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them generally 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 generate cash flow
in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because all of the leases for the Partnership's Properties
are generally on a triple-net basis, it is not anticipated that a permanent
reserve for maintenance and repairs is necessary at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs. The General
Partners have the right to cause the Partnership to maintain reserves if, in
their discretion, they determine such reserves are required to meet the
Partnership's working capital needs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based on current and anticipated future cash from operations, and
for the year ended December 31, 2001 loans from the corporate General Partner,
as described above in "Capital Resources," the Partnership declared
distributions to the Limited Partners of $2,800,000, $2,800,000, and $2,799,998,
for the years ended December 31, 2001, 2000, and 1999, respectively. This
represents distributions of $0.80 per Unit, for each of the years ended December
31, 2001, 2000 and 1999. No distributions were made to the General Partners for
the years ended December 31, 2001, 2000, or 1999. No amounts distributed or to
be distributed to the Limited Partners for the years ended December 31, 2001,
2000 or 1999, are required to be or have been treated by the Partnership as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Partnership intends to continue to
make distributions of cash available for distribution to the Limited Partners on
a quarterly basis, although some Limited Partners, in accordance with their
election, receive monthly distributions, for an annual fee.
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 accounts as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the years ended December 31, 2001 and 2000.
As of December 31, 2001 and 2000, the Partnership owed $20,273 and
$53,181, respectively, to related parties for operating expenses and accounting
and administrative services. As of March 15, 2002, the Partnership had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, increased to $821,605 at December 31, 2001, as compared
to $758,119 at December 31, 2000. Liabilities at December 31, 2001, to the
extent they exceed cash and cash equivalents at December 31, 2001, will be paid
from anticipated future cash from operations, loans from the General Partners,
or from future General Partners contributions.
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 operating leases. FAS 13 requires management to
estimate the economic life of the leased property, the residual value of the
leased property and the present value of minimum lease payments to be received
from the tenant. In addition, management assumes that all payments to be
received under its leases are collectible. Changes in management's estimates or
assumption regarding collectibility of lease payments could result in a change
in accounting for the lease at the inception of the lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted 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 ventures agreement requires the consent of all
partners on all key decisions affecting the operations of the underlying
Property.
Management reviews its Properties and investments in unconsolidated
entities periodically (no less than once per year) for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through operations. Management determines whether
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the Property, with the carrying cost
of the individual Property. If an impairment is indicated, the assets are
adjusted to their fair value.
Results of Operations
During 1999, the Partnership owned and leased 25 wholly owned
Properties (including one Property which was sold in 1999). During 2000 and
2001, the Partnership owned and leased 22 wholly owned Properties (including
three Properties which were sold in 2001). In addition, during 1999, the
Partnership was a co-venturer in two joint ventures, that each owned and leased
one Property. During 2000 and 2001, the Partnership was a co-venturer in one
additional joint venture that owned and leased one Property, and during 2001,
the Partnership owned and lease one Property with an affiliate, as
tenants-in-common. As of December 31, 2001, the Partnership owned, either
directly or through joint venture or tenancy in common arrangements, 23
Properties, which are generally subject to long-term triple-net leases. The
leases of the Properties provide for minimum base annual rental payments
(payable in monthly installments) ranging from approximately $58,400 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. For a
further description of the Partnership's leases and Properties, see Item 1.
Business - Leases and Item 2. Properties.
During the years ended December 31, 2001, 2000, and 1999, the
Partnership earned $2,465,515, $2,772,490, and $3,071,229, respectively, in
rental income from operating leases and earned income from direct financing
leases. The decrease in rental and earned income during 2001 and 2000, each as
compared to the previous year, was partially due to the fact that the tenants of
three Boston Market Properties, Boston Chicken, Inc., Finest Foodservice, L.L.C.
and WMJ Texas, Inc., filed for bankruptcy in 1998. During 1998, one of these
tenants in bankruptcy rejected its lease and ceased making rental payments to
the Partnership for this lease. The Partnership continued receiving rental
payments relating to the leases that were not rejected until June 2000, at which
time the other two tenants rejected the leases relating to two remaining
Properties and ceased making rental payments. In June 2001, the Partnership sold
the Property in Timonium, Maryland, as described in "Capital Resources." The
Partnership will not recognize any rental and earned income from the remaining
vacant Properties in Minnetonka, Minnesota and San Antonio, Texas until new
tenants for the Properties are located, or until the Properties are sold and the
proceeds from such sales are reinvested in additional Properties. The lost
revenues resulting from the remaining vacant Properties, could have an adverse
affect on the results of operations of the Partnership if the Partnership is not
able to re-lease these Properties in a timely manner. The General Partners are
currently seeking either new tenants or purchasers for these vacant Properties.
Rental and earned income also decreased during 2001 and 2000, each as
compared to the previous year, due to the fact that in October 2000, the
Partnership terminated the lease with the tenant of the Boston Market Property
in Raleigh, North Carolina, due to financial difficulties the tenant was
experiencing. In connection therewith, the Partnership received $100,000 in
lease termination income in consideration for the Partnership releasing the
tenant from its obligations under the lease. The Partnership will not recognize
any rental income relating to this Property until a new tenant for the Property
is located or until the Property is sold and the proceeds from such sale are
reinvested in an additional Property. The Partnership is currently seeking a new
tenant or purchaser for this Property.
Rental and earned income also decreased during 2001 and 2000, each as
compared to the previous year, due to the fact that in June 2000, the tenant of
the On the Border Property in San Antonio, Texas defaulted under the terms of
its lease, vacated the Property and discontinued making rental payments. As a
result, in 2000, the Partnership reclassified the asset from net investment in
direct financing leases to land and buildings on operating leases. In accordance
with Statement of Financial Accounting Standards No. 13, "Accounting for
Leases," the Partnership recorded the reclassified assets at the lower of
original cost, present fair value, or present carrying value. No loss on
termination of direct financing leases was recorded. The Partnership will not
recognize any rental income relating to this Property until a new tenant for the
Property is located or until the Property is sold and the proceeds from such
sale are reinvested in an additional Property. The Partnership is currently
seeking a new tenant or purchaser for this Property.
The decrease in rental income during 2001 and 2000, was also partially
due to the 2001 sale of the Property in Henderson, Nevada, and the 1999 sale of
the Property in Atlanta, Georgia, as described in "Capital Resources." In June
2000, the Partnership reinvested the net sales proceeds from the 1999 sale of
the Property in Atlanta, Georgia, in a joint venture arrangement, TGIF
Pittsburgh Joint Venture, and in July 2001, the Partnership reinvested the net
sales proceeds from the 2001 sale of the Property in Henderson, Nevada, in a
Property in Denver, Colorado, with an affiliate of the General Partners as
tenants-in-common. Rental and earned income are expected to remain at reduced
amounts while equity in earnings of joint ventures is expected to increase due
to the fact that the Partnership reinvested these net sales proceeds in a joint
venture and a Property with an affiliate of the General Partners, as
tenants-in-common.
During the years ended December 31, 2001, 2000 and 1999, the
Partnership also earned $197,012, $112,863 and $61,656, respectively,
attributable to net income earned by joint ventures in which the Partnership is
a co-venturer. The increase in net income earned by joint ventures during 2001,
as compared to 2000, was primarily due to the Partnership reinvesting the net
sales proceeds from the sale of the Property in Henderson, Nevada, in a Property
in Denver, Colorado, during 2001, with an affiliate of the General Partners, as
tenants-in-common, as described in "Capital Resources". The increase in net
income earned by joint ventures during 2000, as compared to 1999, was primarily
attributable to the Partnership entering into TGIF Pittsburgh Joint Venture
during 2000 and CNL Portsmouth Joint Venture in February 1999, as described
above in "Capital Resources."
During 2001, four lessees of the Partnership, Golden Corral
Corporation, Jack in the Box Inc., IHOP Properties, Inc. and Metromedia
Restaurant Group, each contributed more than ten percent of the Partnership's
total rental and earned income (including the Partnership's share of total
rental and earned income from joint ventures and the Property held as
tenants-in-common with an affiliate). As of December 31, 2001, Golden Corral
Corporation was the lessee under leases relating to four restaurants, Jack in
the Box Inc. was the lessee relating to three leases, Metromedia Restaurant
Group was the lessee relating to two leases and IHOP Properties, Inc. was the
lessee relating to one lease. It is anticipated that based on the minimum rental
payments required by the leases, Golden Corral Corporation, Jack in the Box Inc.
and Metromedia Restaurant Group will each continue to contribute more than ten
percent of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures and
the Property held as tenants-in-common with an affiliate) in 2002. In addition,
four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden
Corral"), Jack in the Box, Bennigan's, and IHOP, each accounted for more than
ten percent of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures and
the Property held as tenants-in-common with an affiliate) for 2001. In 2002, it
is anticipated that Golden Corral, Jack in the Box and Bennigan's will each
contribute more than ten percent of the Partnership's rental and earned income
(including the Partnership's share of total rental and earned income from joint
ventures and the Property held as tenants-in-common with an affiliate) to which
the Partnership is entitled under the terms of the leases. Any failure of such
lessees or Restaurant Chains could materially adversely affect the Partnership's
income if the Partnership is not able to re-lease the Properties in a timely
manner.
During the years ended December 31, 2001, 2000 and 1999, the
Partnership earned $18,756, $35,772, and $59,486, respectively, in interest and
other income. The decrease in interest and other income during 2001 and 2000,
each as compared to the previous year, was primarily attributable to the
decrease in the amount of funds invested in cash and cash equivalents due to the
acquisition of an additional Property in 1999 and the investment in joint
venture arrangements during 2000 and 1999.
Operating expenses, including depreciation and amortization expense and
provisions for write-down on assets, were $1,941,590, $1,819,055, and $723,315,
during the years ended December 31, 2001, 2000 and 1999, respectively. The
increase in operating expenses during 2001 and 2000, each as compared to the
previous year, was partially due to the fact that the Partnership recorded a
provision for write-down of assets of $387,138 and $553,317 during the years
ended December 31, 2001 and 2000, respectively, relating to the Boston Market
Properties in Timonium, Maryland; Raleigh, North Carolina; and San Antonio,
Texas. The tenant of the Timonium and San Antonio, Properties declared
bankruptcy and rejected the leases relating to these Properties. The tenant of
the Raleigh Property terminated its lease with the Partnership and ceased
restaurant operations. The provisions represented the difference between each of
the Properties' carrying values and the General Partners' estimated net
realizable value of each of the Properties. No such provision was established
during the year ended December 31, 1999. In June 2001, the Partnership sold the
Timonium, Maryland Property, as described in "Capital Resources." In addition,
during the year ended December 31, 2000, the Partnership recorded a provision
for write-down of assets in the amount of $299,849 relating to the On the Border
Property in San Antonio, Texas. The tenant of this Property defaulted under the
terms of its lease, vacated the Property and ceased operation during 2000. The
provision represented the difference between the carrying value of the asset at
December 31, 2000, and the General Partners' estimated net realizable value for
this Property. During 2001, the Partnership recognized an additional provision
for write-down of assets relating to this Property of $321,239. The total
provision represented the difference between the carrying value of the Property
at December 31, 2001 and the estimated net sales proceeds from the anticipated
sale of the Property based on a purchase and sales contract with an unrelated
third party. As of March 15, 2002, the sale had not occurred. No such provision
was established during the year ended December 31, 1999. The increase in
operating expenses during 2001, as compared to 2000, was partially attributable
to the fact that during 2001, the Partnership incurred approximately $85,400
pursuant to a judgment entered against the Partnership in a lawsuit relating to
the Property in Minnetonka, Minnesota. The General Partners are appealing the
judgment. In addition, the increase in operating expenses during 2001 and 2000,
each as compared to the previous year, was partially due to the fact that the
Partnership incurred expenses such as insurance, repairs and maintenance, legal
fees and real estate taxes relating to the vacant Properties described above.
The Partnership will continue to incur such costs until the Partnership finds
replacement tenants or purchasers for the remaining vacant Properties.
The increase in operating expenses during 2001, as compared to 2000,
was also partially attributable to the fact that during 2000, the tenant of the
On the Border Property in San Antonio, Texas, in which the Partnership only owns
the building portion, subject to a ground lease, vacated the Property and ceased
restaurant operations. In accordance with an agreement executed in conjunction
with the execution of the initial lease, the ground lessor, the tenant and the
Partnership agreed that the Partnership would be provided certain rights to help
protect its interest in the building in the event of a default by the tenant
under the terms of the initial lease. As a result of the default by the tenant
and in order to preserve its interest in the building, during the year ended
December 31, 2001 and 2000, the Partnership incurred approximately $135,900 and
$31,400, respectively, in rent expense relating to the ground lease of the
Property. No such expense was recorded during the year ended December 31, 1999.
The Partnership will continue to incur such expense until the Partnership finds
a replacement tenant for this Property.
The increase in operating expenses during 2001, as compared to 2000,
was also partially attributable to an increase in the costs incurred for
administrative expenses for servicing the Partnership and its Properties, as
permitted by the Partnership agreement. In addition, the increase in operating
expenses during 2001, as compared to 2000, was partially due to the fact that
the Partnership incurred additional state taxes due to changes in the tax laws
of a state in which the Partnership conducts business.
The increase in operating expenses during 2000, as compared to 1999,
was partially attributable to an increase in depreciation expense as the result
of the fact that the Properties acquired during 1999, and the fact that during
2000, the Partnership reclassified the lease relating to the Property in San
Antonio, Texas from direct financing lease to operating lease. The increase in
operating expenses during 2001 and 2000, was partially offset by a decrease in
the amount of transaction costs the Partnership incurred relating to the General
Partners retaining financial and legal advisors to assist them in evaluating and
negotiating the proposed and terminated Merger with APF, as described below in
"Termination of Merger."
As a result of the sales of three Properties, as described above in
"Capital Resources," the Partnership recognized total gains of $429,072 for the
year ended December 31, 2001. As a result of the sale of the Property in
Atlanta, Georgia, as described above in "Capital Resources," the Partnership
recognized a gain of $46,300 for the year ended December 31, 1999. No Properties
were sold during 2000.
The lease termination refund to tenant of $84,873 during 2000, was due
to lease termination negotiations related to the 1999 sale of the Property in
Atlanta, Georgia, as described in "Capital Resources." No such amounts were
incurred during 2001 or 1999. The Partnership does not anticipate incurring any
additional costs related to the sale of this Property.
The restaurant industry, as a whole, has been one of the many
industries affected by the general slowdown in the economy. While the
Partnership has experienced some losses due to the financial difficulties of a
limited number of restaurant operators, the General Partners remain confident in
the overall performance of the fast-food and family style restaurants, the
concepts that comprise the Partnership's portfolio. Industry data shows that
these restaurant concepts continue to outperform and remain more stable than
higher-end restaurants, those that have been more adversely affected by the
slowing economy.
The Partnership's leases are on a triple-net basis and contain
provisions that management believes will mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based on certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Inflation, overall, has had a minimal effect on the results of operations of the
Partnership. Continued inflation may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
In December 1999, the Securities and Exchange Commission released SAB
101, which provides the staff's view in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 requires the
Partnership to defer recognition of certain percentage rental income until
certain defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material impact on the
Partnership's results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). The Partnership has reviewed both statements and
has determined that both FAS 141 and FAS 142 do not apply to the Partnership as
of December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement requires
that a long-lived asset be tested for recoverability whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. The
carrying amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. The assessment is based on the carrying amount of the
asset at the date it is tested for recoverability. An impairment loss is
recognized when the carrying amount of a long-lived asset exceeds its fair
value. If an impairment is recognized, the adjusted carrying amount of a
long-lived asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this Statement
retained the fundamental provisions of FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Termination of Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF. Subsequent to entering into the Merger agreement, the
General Partners received a number of comments from brokers who sold the
Partnership's units concerning the loss of passive income treatment in the event
the Partnership merged with APF. On June 3, 1999, the General Partners, on
behalf of the Partnership, and APF agreed that it would be in the best interests
of the Partnership and APF that APF not attempt to acquire the Partnership in
the acquisition. Therefore in June 1999, APF entered into a termination
agreement with the General Partners of the Partnership.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND XVIII, 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 24-42
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XVIII, 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 XVIII, Ltd. (a Florida
limited partnership) at December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedules listed in the index appearing under item 14(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
February 8, 2002
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2001 2000
------------------- ------------------
ASSETS
Land and buildings on operating leases, net $ 18,917,589 $22,421,426
Net investment in direct financing leases 3,145,098 3,984,296
Investment in joint ventures 3,011,159 1,762,821
Cash and cash equivalents 226,136 479,603
Restricted cash 1,662,201 --
Receivables, less allowance for doubtful accounts of
$75,201 and $123,993,respectively 19,767 346
Accrued rental income 513,016 440,148
Other assets 16,729 23,712
------------------- ------------------
$ 27,511,695 $29,112,352
=================== ==================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 92,368 $ 33,559
Escrowed real estate taxes payable 12,817 11,788
Distributions payable 700,000 700,000
Due to related parties 20,273 53,181
Rents paid in advance 11,441 7,474
Deferred rental income 4,979 5,298
------------------- ------------------
Total liabilities 841,878 811,300
Commitment (Note 13)
Partners' capital 26,669,817 28,301,052
------------------- ------------------
$ 27,511,695 $29,112,352
=================== ==================
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
------------------ --------------- ---------------
Revenues:
Rental income from operating leases $ 2,067,066 $ 2,327,142 $ 2,444,692
Earned income from direct financing leases 398,449 445,348 626,537
Lease termination income -- 100,000 --
Interest and other income 18,756 35,772 59,486
------------------ --------------- ---------------
2,484,271 2,908,262 3,130,715
------------------ --------------- ---------------
Expenses:
General operating and administrative 521,346 229,811 142,554
Provision for doubtful accounts -- 2,973 --
Professional services 163,585 35,304 61,288
Management fees to related party 24,943 27,875 30,235
Real estate taxes 121,188 87,603 --
State and other taxes 22,252 17,604 21,983
Depreciation and amortization 379,899 397,175 392,521
Provisions for write-down of assets 708,377 993,178 --
Transaction costs -- 27,532 74,734
------------------ --------------- ---------------
1,941,590 1,819,055 723,315
------------------ --------------- ---------------
Income Before Gain on Sale of Assets, Termination
Refund to Tenant, and Equity in Earnings of Joint
Ventures 542,681 1,089,207 2,407,400
Gain on Sale of Assets 429,072 -- 46,300
Termination Refund to Tenant -- (84,873 ) --
Equity in Earnings of Joint Ventures 197,012 112,863 61,656
------------------ --------------- ---------------
Net Income $ 1,168,765 $ 1,117,197 $ 2,515,356
================== =============== ===============
Allocation of Net Income:
General partners $ -- $ -- $ (3,309 )
Limited partners 1,168,765 1,117,197 2,518,665
------------------ --------------- ---------------
$ 1,168,765 $ 1,117,197 $ 2,515,356
================== =============== ===============
Net Income Per Limited Partner Unit $ 0.33 $ 0.32 $ 0.72
================== =============== ===============
Weighted Average Number of
Limited Partner Units Outstanding 3,500,000 3,500,000 3,500,000
================== =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2001, 2000 and 1999
General Partners Limited Partners
----------------------------------- -----------------------------------------------------
Accumulated Accumulated
ntributions Earnings Contributions Distributions Earnings
-------------- ----------------- ----------------- --------------- ----------------
Balance, December 31, 1998 $ 1,000 $ (3,010 ) $ 35,000,000 $ (4,026,495 ) $ 3,487,002
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,799,998 ) --
Net income -- (3,309 ) -- -- 2,518,665
-------------- ----------------- ----------------- --------------- ----------------
Balance, December 31, 1999 1,000 (6,319 ) 35,000,000 (6,826,493 ) 6,005,667
Contributions from limited partners
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,800,000 ) --
Net income -- -- -- -- 1,117,197
-------------- ----------------- ----------------- --------------- ----------------
Balance, December 31, 2000 1,000 (6,319 ) 35,000,000 (9,626,493 ) 7,122,864
Contributions from limited partners
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,800,000 ) --
Net income -- -- -- -- 1,168,765
-------------- ----------------- ----------------- --------------- ----------------
Balance, December 31, 2001 $ 1,000 $ (6,319 ) $ 35,000,000 $ (12,426,493 ) $ 8,291,629
============== ================= ================= =============== ================
See accompanying notes to financial statements.
- ------------------
Syndication
Costs Total
--------------- -------------
$ (4,190,000 ) $30,268,497
-- (2,799,998 )
-- 2,515,356
--------------- -------------
(4,190,000 ) 29,983,855
-- (2,800,000 )
-- 1,117,197
--------------- -------------
(4,190,000 ) 28,301,052
-- (2,800,000 )
-- 1,168,765
--------------- -------------
$ (4,190,000 ) $26,669,817
=============== =============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
--------------- -------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 2,281,026 $ 2,738,192 $ 2,930,415
Distributions from joint ventures 203,437 97,264 60,076
Interest received 17,822 41,937 53,448
Cash paid for expenses (817,374 ) (482,469 ) (246,899 )
Lease termination refund -- (84,873 ) --
--------------- -------------- ---------------
Net cash provided by operating activities 1,684,911 2,310,051 2,797,040
--------------- -------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 4,291,443 -- 688,997
Additions to land and buildings on operating
leases -- -- (25,792 )
Investment in joint ventures (1,766,420 ) (1,001,558 ) (526,138 )
Decrease (increase) in restricted cash (1,663,401 ) 688,997 (688,997 )
Other -- -- (117 )
--------------- -------------- ---------------
Net cash provided by (used in) investing
activities 861,622 (312,561 ) (552,047 )
--------------- -------------- ---------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and syndication
costs paid by related parties on behalf of
the Partnership -- -- (2,495 )
Proceeds from loan from corporate general
partner 75,000 -- --
Repayment of loan from corporate general
partner (75,000 ) -- --
Distributions to limited partners (2,800,000 ) (2,800,000 ) (2,799,998 )
--------------- -------------- ---------------
Net cash used in financing activities (2,800,000 ) (2,800,000 ) (2,802,493 )
--------------- -------------- ---------------
Net Decrease in Cash and Cash Equivalents (253,467 ) (802,510 ) (557,500 )
Cash and Cash Equivalents at Beginning of Year 479,603 1,282,113 1,839,613
--------------- -------------- ---------------
Cash and Cash Equivalents at End of Year $ 226,136 $ 479,603 $ 1,282,113
=============== ============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2001 2000 1999
--------------- ---------------- ---------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 1,168,765 $ 1,117,197 $ 2,515,356
--------------- ---------------- ---------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 376,679 395,565 386,932
Amortization 3,220 1,610 5,589
Provision for doubtful accounts -- (2,973 ) --
Equity in earnings of joint ventures net
of distributions 6,425 (15,599 ) (1,580 )
Provision for write-down of assets 708,377 993,178 --
Gain on sale of assets (429,072 ) -- --
Decrease in net investment in direct
financing leases 41,450 70,178 38,556
Decrease (increase) in receivables (11,003 ) 32,552 (29,925 )
Increase in accrued rental income (218,691 ) (196,435 ) (152,726 )
Decrease (increase) in other assets 6,983 (14,371 ) (5,688 )
Increase (decrease) in accounts payable
and 61,038 (40,947 ) 83,736
escrowed real estate taxes payable
Increase (decrease) in due to related (32,908 ) 16,444 6,457
parties acquisition costs paid on b
Increase (decrease) in rents paid in
advance 3,967 (6,495 ) 6,618
Decrease (increase) in deferred rental (319 ) (39,853 ) (56,285 )
income
--------------- ---------------- ---------------
Total adjustments 516,146 1,192,854 281,684
--------------- ---------------- ---------------
Net Cash Provided by Operating Activities $ 1,684,911 $ 2,310,051 $ 2,797,040
=============== ================ ===============
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at December 31 $ 700,000 $ 700,000 $ 700,000
=============== ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund XVIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food, family-style and casual dining restaurant chains.
Under the terms of a registration statement filed with the Securities
and Exchange Commission, the Partnership was authorized to sell a
maximum of 3,500,000 units ($35,000,000) of limited partnership
interest. A total of 3,500,000 units ($35,000,000) of limited
partnership interest had been sold as of December 31, 1998.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
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. The
leases are accounted for using the direct financing or operating
methods. Such methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset) (see Note 4). Unearned income is deferred
and amortized to income over the lease terms so as to produce
a constant periodic rate of return on the Partnership's net
investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals (including rental payments, if
any, required during the construction of a property) vary
during the lease term, income is recognized on a straight-line
basis
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
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. In contrast, deferred
rental income represents the aggregate amount of scheduled
rental payments to date (including rental payments due during
construction and prior to the property being placed in
service) in excess of income recognized on a straight-line
basis over the lease term commencing on the date the property
is placed in service. Whenever a tenant defaults under the
terms of its lease, or events or changes in circumstance
indicate that the tenant will not lease the property through
the end of the lease term, the Partnership either reserves or
reverses the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, plus any accrued rental income, are removed from the
accounts and gains or losses from sales are reflected in income. The
general partners of the Partnership review properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations. The
general partners determine whether an impairment in value has occurred
by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the
individual property. If an impairment is indicated, the assets are
adjusted to the fair value. Although the general partners have made
their best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near term which
could adversely affect the general partners' estimate of net cash flows
expected to be generated from its properties and the need for asset
impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible,
the corresponding receivable and allowance for doubtful accounts are
decreased accordingly.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
Investment in Joint Ventures - The Partnership's investments in
Columbus Joint Venture, CNL Portsmouth Joint Venture and TGIF
Pittsburgh Joint Venture and the property in Denver Colorado, which is
held as tenants-in-common, are accounted for using the equity method
since the joint venture agreement requires the consent of all partners
on all key decisions affecting the operations of the underlying
property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not experienced
any losses in such accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment. See "Income Taxes"
footnote for a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
Rents Paid in Advance - Rents paid in advance by lessees for future
periods are deferred upon receipt and are recognized as revenues during
the period in which the rental income is earned. Rents paid in advance
include "interim rent" payments required to be paid under the terms of
certain leases for construction properties equal to a pre-determined
rate times the amount funded by the Partnership during the period
commencing with the effective date of the lease to the date minimum
annual rent becomes payable. Once minimum annual rent becomes payable,
the "interim rent" payments are amortized and recorded as income either
(i) over the lease term so as to produce a constant periodic rate of
return for leases accounted for using the direct financing method, or
(ii) over the lease term using the straight-line method for leases
accounted for using the operating method, whichever is applicable.
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. Actual results could differ from those
estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2001 presentation.
These reclassifications had no effect on total partners' capital or net
income.
Staff Accounting Bulletin No. 101 ("SAB 101") - In December 1999, the
Securities and Exchange Commission released SAB 101, which provides the
staff's view in applying generally accepted accounting principles to
selected revenue recognition issues. SAB 101 requires the Partnership
to defer recognition of certain percentage rental income until certain
defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material
impact on the Partnership's results of operations.
Statement of Financial Accounting Standards No. 141 ("FAS 141") and
Statement of Financial Accounting Standards No. 142 ("FAS 142") - - In
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" (FAS
141) and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" (FAS 142). The Partnership has reviewed
both statements and has determined that both FAS 141 and FAS 142 do not
apply to the Partnership as of December 31, 2001.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
Statement of Financial Accounting Standards No. 144 ("FAS 144") - In
October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement requires
that a long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this
Statement retained the fundamental provisions of FAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of".
2. Leases:
The Partnership leases its land and buildings to operators of national
and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the Partnership's
leases are classified as operating leases and some of the leases have
been classified as direct financing leases. For the leases classified
as direct financing leases, the building portions of the property
leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. The leases
have initial terms of 15 to 20 years and the majority of the leases
provide for minimum and contingent rentals. In addition, the tenant
generally pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage
for public liability, property damage, fire and extended coverage. The
lease options generally allow the 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 XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
2001 2000
-------------------- --------------------
Land $ 9,707,338 $ 11,670,473
Buildings 10,749,500 12,046,303
-------------------- --------------------
20,456,838 23,716,776
Less accumulated depreciation (1,539,249 ) (1,295,350 )
-------------------- --------------------
$ 18,917,589 $ 22,421,426
==================== ====================
During the year ended December 31, 2000, the Partnership recorded a
provision for write-down of assets of $656,409 relating to the
properties located in Raleigh, North Carolina and Timonium, Maryland.
The tenant of the property in Raleigh, North Carolina terminated its
lease. The tenant of the property in Timonium, Maryland filed for
bankruptcy in October 1998 and rejected the lease relating to this
property in June 2000. The provisions represented the difference
between the net carrying value of the properties, including the
accumulated accrued rental income balance, at December 31, 2000, and
the general partners' estimated net realizable value for the
properties. In June 2001, the Partnership sold this property to an
unrelated third party for $875,000 and received net sales proceeds of
approximately $848,600, resulting in an additional loss of $18,855. In
July 2001, the Partnership reinvested the majority of these sales
proceeds in a Bennigan's property in Denver, Colorado, as
tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited
partnership and an affiliate of the general partners (see Note 5).
In July 2001, the Partnership sold its property in Henderson, Nevada to
an unrelated third party for approximately $1,314,700 and received net
sales proceeds of approximately $1,278,000 resulting in a gain of
approximately $177,900. In July 2001, the Partnership reinvested the
majority of these sales proceeds in a Bennigan's property in Denver,
Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a
Florida limited partnership and an affiliate of the general partners
(see Note 5).
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
3. Land and Buildings on Operating Leases - Continued:
In December 2001, the Partnership sold its property in Santa Rosa,
California for which the building was classified as a direct financing
lease (see Note 4) to an unrelated third party for approximately
$1,718,800 and received net sales proceeds of approximately $1,664,800
resulting in a gain of approximately $270,100. In January 2002, the
Partnership reinvested a portion of these net sales proceeds in a
property in Houston, Texas (see Note 14). In addition, in January 2002,
the Partnership reinvested a portion of these net sales proceeds in a
property in Austin, Texas, as tenants-in-common with CNL Income Fund X,
Ltd. (see Note 14).
During the years ended December 31, 2001 and 2000, the Partnership
recorded a provision for write-down of assets of $387,138 and $36,920,
respectively, relating to the Boston Market property in San Antonio,
Texas. The tenant of this property filed for bankruptcy in October
1998, and during 2000, rejected the lease relating to the property. The
provision represented the difference between the carrying value of the
property, including the accumulated accrued rental income balance, and
the general partners' estimated net realizable value of each property.
In addition, the Partnership recorded a provision for write-down of
assets of $321,239 relating to the On the Border property in San
Antonio, Texas. The tenant of this property defaulted under the terms
of its lease, vacated the property and ceased restaurant operations.
The provision represented the difference between the carrying value of
the property at December 31, 2001 and the estimated net sales proceeds
from the anticipated sale of the property based on a purchase and sales
contract with an unrelated third party (see Note 13).
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases
is recognized on a straight-line basis over the terms of the leases.
For the years ended December 31, 2001, 2000 and 1999, the Partnership
recognized $169,007, $95,700, and $196,020, respectively, of such
rental income.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)