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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2004

OR

For the transition period from             to             

Commission file number 333-108355

CNL INCOME PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x

Aggregate market value of the common stock held by nonaffiliates of the registrant: No established market exists for the Registrant’s shares of common stock, so there is no market value for such shares. Based on the $10 offering price of the shares, $5,006,183 of our common stock was held by non-affiliates as of June 30, 2004. There were no Reinvestment Plan shares outstanding as of that date.

The number of shares of common stock outstanding as of March 11, 2005 was 11,854,979.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant incorporates by reference portions of the CNL Income Properties, Inc. Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders (Items 10, 11, 12, 13 and 14 of Part III) to be filed no later than April 29, 2005.

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Contents

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PART I

STATEMENT REGARDING FORWARD LOOKING INFORMATION

The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as “may,” “will,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: changes in general economic conditions, changes in government regulations, changes in local and national real estate conditions, terrorism, extended U.S. military combat operations, our ability to obtain a line of credit or permanent financing on satisfactory terms, our ability to raise additional proceeds from our offering of shares, our ability to identify suitable investments, our ability to successfully compete for properties in the asset classes we select, our ability to locate suitable tenants and operators for our properties and borrowers for mortgage loans, and the ability of such tenants and borrowers to make payments under their respective leases or mortgage loans. Given these uncertainties, we caution you not to place undue reliance on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

Item 1. Business

GENERAL

CNL Income Properties, Inc. is a corporation that was organized pursuant to the laws of the State of Maryland on August 11, 2003. We have elected to qualify, and are operating, as a real estate investment trust (a “REIT”) for federal income tax purposes. We have retained CNL Income Corp. (the “Advisor”) as our advisor to provide management, acquisition, advisory and administrative services. Various wholly owned subsidiaries and unconsolidated entities have been and will be formed in the future by us for the purpose of acquiring and owning real estate properties. The terms “CNL Income Properties,” “we,” “us” and “our” includes CNL Income Properties, Inc., each of our subsidiaries and unconsolidated entities.

We were formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20 years, plus multiple renewal options), triple-net basis to tenants or operators who are significant industry leaders. The asset classes in which we initially are most likely to invest in include the following (in no order of priority):

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Although these are initially the most likely asset classes in which we will invest, we may acquire or invest in other types of properties which are not listed above that we believe have the potential for long-term revenue generation based upon certain underwriting criteria and models that we have developed and/or certain demographic criteria. We may obtain debt financing or sell additional shares of our stock in the future to finance any acquisitions.

The properties that we acquire may consist of land and buildings, the land underlying the buildings with the buildings owned by the tenant or a third party, or the buildings only with land owned by a third party.

We may also make or acquire loans or other permitted investments related to interests in real estate and may purchase equity and other interests in financings. In addition, we may invest up to 10% of our assets in businesses that provide services to, or are otherwise ancillary to, the types of properties in which we are permitted to invest.

Beginning on April 16, 2004, we commenced our initial public offering of up to $2 billion in shares of our common stock (200 million shares of common stock at $10 per share), pursuant to a registration statement on Form S-11 under the Securities Act of 1933. The offering provides that five million of the 200 million shares of common stock have been initially designated for purchase through our distribution reinvestment plan. Pursuant to our distribution reinvestment plan, stockholders may elect to have the full amount of their cash distributions reinvested in additional shares of our common stock at $9.50 per share. As of June 23, 2004, we had received aggregate subscription proceeds of approximately $3.4 million, which exceeded the minimum offering amount of $2.5 million, and approximately $3.4 million of the funds were released from escrow. As of March 11, 2005, we had received aggregate subscription proceeds of approximately $116.8 million (11,717,271 shares) from 3,873 investors in connection with this offering including $569,677 (59,966 shares) through our distribution reinvestment plan.

Our primary investment objectives are to preserve, protect and enhance our assets, while:

We intend to capitalize on the growing real estate needs in properties that we believe have the potential for long term revenue generation. We intend to do this by continuing to invest in properties or loans using proceeds received from our public offering and any permanent financings which we may acquire. Management expects to continue to acquire properties with a view to diversify among the types of tenants, operators and the geographic location of the properties. We are not limited to any asset class.

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We have considered certain demographic trends which we believe may affect consumer demand for the services provided by various property classes. Certain of these property classes are included in the types of investments in which we are likely to initially focus. We believe that these properties will be supported by the behavioral and spending patterns of the “Baby Boomer” generation, a strong and growing demographic segment in the United States today, and, to a lesser extent, their children and grandchildren, the “Generation X” and the “Echo Boomer” generation.

Although we believe that current demographic trends will impact many of our initial investments, other factors will be important to our analysis as well and may have a more immediate impact on our investment decisions for certain of the asset classes in which we invest. Those factors include whether the supply of developed, specific-use real estate is greater than the demand and whether industry sectors are experiencing constraints on the availability of new capital.

As of March 11, 2005, we have invested in retail and commercial properties at seven resort villages and one merchandise mart property.

SKI RESORTS

General. In December 2004 we acquired, through unconsolidated entities, interests at retail and commercial properties at seven resort villages in the U.S. and Canada (the “Resort Village Properties”) six of which are near ski resorts. All of the Resort Village Properties were acquired from Intrawest Corporation (“Intrawest”), which retained a twenty percent ownership interest in the Resort Village Properties and continues to operate them on behalf of our partnership (the “Intrawest Partnership”).

As we expand our portfolio of properties, we will continue to consider acquiring ski resorts and their related real estate assets. The ski resorts that we may seek to acquire will be managed by operators who will provide services such as the sale of lift tickets and passes, ski and snowboard lesson packages, equipment rental and repair outlets and food and beverage sales. In addition to the Resort Village Properties that we have acquired, related real estate assets that we seek to acquire may include hotel and other lodging accommodations and properties located in proximity to the ski mountain, including golf courses, indoor tennis courts and swimming pools, health club facilities, restaurants and retail shops.

Government Regulation. Ski resort mountain and lodging operations often require permits and approvals from certain federal, state and local authorities. Many ski resorts that we may consider acquiring have been granted the right to use federal land as the site for ski lifts and trails and related activities pursuant to permits with the USDA Forest Service. The USDA Forest Service has the right to review and approve the location, design and construction of improvements in the permit area and many operational matters. Where development in or around wetlands is involved, permits must be obtained from the U.S. Army Corps of Engineers. Further, ski resort operations are subject to environmental laws and regulations, and compliance with these laws and regulations may require expenditures or modifications of development plans and operations in a manner that could have a detrimental effect on the ski resort. There can be no assurance that new applications of laws, regulations and policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a detrimental effect on a ski resort that we may acquire, or that material permits, licenses, or approvals will not be terminated, non-renewed or renewed on terms or interpreted in ways that are materially less favorable to the resorts that we purchase. No assurance can be given that any particular permit or approval will be obtained or upheld on judicial review.

Competition. The ski resort industry is highly competitive and capital intensive. The general unavailability of new, developable ski mountains, regulatory requirements and the high costs and expertise required to build and operate ski resorts present significant barriers to entry in the ski industry. We believe that these barriers are an attractive characteristic that may help the long-term growth prospects of ski resorts that we may acquire in the future.

We will compete in the acquisition of ski resort properties with many other entities engaged in investment activities, some of which may have greater assets than we do. The number of entities and the amount of funds available for investment in the properties of a type suitable for investment by us may increase, resulting in increased competition for such investments.

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Competitors will include major ski resorts throughout the United States, Canada and Europe, as well as other worldwide recreation resorts, including warm weather resorts and various other leisure activities. A ski resort’s competitive position in the markets in which it competes is dependent upon many diverse factors, including: (i) proximity to population centers; (ii) availability and cost of transportation to ski areas; (iii) ease of travel to ski areas (including direct flights by major airlines); (iv) pricing of ski resorts’ products and services; (v) natural snowfall and snowmaking facilities; (vi) attractiveness of the skiing terrain; (vii) duration of the ski season; (viii) weather conditions; (ix) resort size and reputation; (x) lift ticket prices; (xi) number, price and appeal of related services and lodging; and (xii) proximity to and quality of other ski resorts.

MERCHANDISE MARTS

General. On February 14 and March 11, 2005, we acquired an 80% ownership interest in the Trade Mart, the World Trade Center, Market Hall and surface and garage parking areas at the Dallas Market Center (the “DMC Property”). The acquisition was made by CNL Dallas Market Center, L.P. (the “DMC Partnership”), a Delaware limited partnership that we formed with Dallas Market Center Company, Ltd. (“DMC”). DMC is a Dallas based company affiliated with Crow Holdings. The DMC Property was leased to Dallas Market Center Operating, L.P., a subsidiary of the existing management company, Market Center Management Company, Ltd. (“MCMC”), which will continue managing the DMC Property. MCMC is an operating company owned by Crow Holdings.

We may consider acquiring additional merchandise marts. Merchandise marts, also commonly called trade marts, house showrooms and tradeshow space leased to merchandise manufacturers and wholesalers that market their products on site to visiting retailer buyers, specifiers and end users. Because of the significant customer base of merchandise manufacturers and wholesalers and the merchandise manufacturers and wholesalers’ sensitivity to national as well as regional consumer trends, merchandise marts are typically located in major metropolitan areas on campuses featuring gross leasable areas of over three million square feet in some cases.

We expect to lease merchandise marts we acquire primarily on a long-term, triple-net lease basis to tenants that are operators who are significant merchandise mart industry leaders or to tenants who will engage selected operators who are significant merchandise mart industry leaders and who will operate the merchandise marts. The merchandise marts generally are expected to be leased pursuant to leases designed to provide us with minimum annual base rent with periodic increases over the lease term or increases in rent based on increases in consumer price indices. In addition, our leases are expected to provide for the payment of percentage rent generally based on a percentage of gross revenues at our merchandise marts over certain thresholds. As part of our leasing strategy, we plan to seek tenants that maintain a high level of merchant occupancy, aggressively market available space, and replace low volume merchants with high volume brand-name merchants.

Competition. We estimate that there are eight merchandise marts with over one million square feet of space, all of which are located in Atlanta, Chicago, Dallas, Highpoint, North Carolina, and two each in Los Angeles and San Francisco. We believe that competition with other merchandise marts for new and existing tenants and tradeshows is generally based on cost, location, quality of facilities, a mix of the centers’ existing tenants, buyer traffic and the degree and quality of the support and marketing services provided by the owner of the merchandise mart. As a result of these factors and due to the strong merchandise manufacturer and wholesaler relationships that presently exist with the current major merchandise mart operators, we believe there are significant barriers to entry into the merchandise mart industry by new operators and/or developers.

INVESTMENT PROPERTIES

Portfolio of Properties. At December 31, 2004, we indirectly owned an 80% interest in retail and commercial properties at the Resort Village Properties through our unconsolidated entities. However, our interest is not considered a controlling interest due to the significant rights and obligations held by Intrawest, our partner in the venture. Our ownership percentage exceeds our economic interest and our voting rights in the unconsolidated entities and Intrawest may receive a greater return than us when the Resort Village Properties perform at certain levels.

The Resort Village Properties are managed by affiliates of Intrawest and are located in five states and Canada. The following table provides summary information regarding the Resort Village Properties owned through unconsolidated entities as of December 31, 2004 and the total purchase price paid, excluding transaction costs, by those entities to acquire the Resort Village Properties. CNL Income Properties, Inc. contributed 80% of the total consideration to purchase the Resort Village Properties:

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Subsequent to the acquisition of the Resort Village Properties, we acquired the DMC Property. As of March 11, 2005, we have contributed approximately $60 million to the DMC Partnership. DMC and its affiliates contributed a portion of their interests in the DMC Property and will hold an interest equal to $15 million in the DMC Partnership. Although we own an 80% interest in the DMC Property and receive a certain return prior to any payments to DMC, DMC has equal voting rights on the management board of the DMC Property and retains control over certain key decisions.

With this investment, we acquired an interest in the facilities and long term ground leases for the underlying land for the Trade Mart, the World Trade Center, Market Hall and surface and garage parking areas. These three facilities at the Dallas Market Center consist of 4.3 million leaseable square feet. We anticipate that we will acquire an interest in the International Floral and Gift Center by June 30, 2005 or within 60 days of lender approval, which will complete the Dallas Market Center acquisition. There can be no assurances that this acquisition will be completed.

Leases. The Resort Village Properties are generally leased on a long-term triple net basis, whereby the tenants are generally responsible for all operating expenses relating to the property, including property taxes, maintenance, repairs, utilities and insurance. The property leases at the Resort Village Properties provide for minimum annual base rent payments, payable in monthly installments. The leases also provide that the minimum base rent required under the terms of the leases will increase at predetermined intervals (typically on an annual basis) during the terms of the leases. In addition to minimum annual base rent, some tenants are subject to contingent rent if they achieve specified operating performance thresholds. The amount of contingent rent payable is generally based on a percentage of gross revenues. We may be responsible for a portion of capital expenditures for the Resort Village Properties.

At December 31, 2004, all of the leases on the Resort Village Properties, most of which were assumed from Intrawest without significant modification, were accounted for as operating leases and generally provide for initial terms of five to 20 years (expiring between 2005 and 2024). The operating leases generally provide options that allow the tenants to renew the leases from five to 25 successive years subject to the same terms and conditions as the initial leases.

At the Dallas Market Center, the DMC Partnership leased the DMC Property to Dallas Market Center Operating, L.P., a subsidiary of the previous management company, MCMC. The lease is a five-year triple-net lease with five five-year renewals. Renewals are automatic unless the parties mutually agree in writing not to renew the lease at least seven months in advance of expiration of the applicable lease period. The lease calls for payment of the greater of minimum annual rent of approximately $20.7 million or percentage rent. Percentage rent under the lease is equal to certain applicable percentages of various revenue thresholds achieved by MCMC at the DMC Property. Management believes that there is no immediate need for repairs on the DMC Property. DMC has invested approximately $35 million in improvements at the DMC Property over the last six years. Management will continue to evaluate opportunities with MCMC that could result in capital improvements as well as increased minimum annual rent at the DMC Property.

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The tenants’ ability to satisfy their lease obligations will depend primarily on the operating results of the properties. With respect to certain properties, we will attempt to obtain various forms of credit enhancements, such as corporate guarantees, security deposits and letters of credit to secure the tenants’ obligations. These will be considered if a property was recently opened or is otherwise in the process of achieving stable occupancy rates. For the year ended December 31, 2004, no amounts under guarantees or other forms of credit support were paid to us.

Significant Tenants and Operators. As of December 31, 2004, there were eight tenants in total that individually leased more than 10% of the gross leaseable space at their respective locations of the Resort Village Properties. These tenants collectively contributed approximately 11% of the total rental income generated by the Resort Village Properties for the year ended December 31, 2004. In addition, Intrawest, through various affiliates, leases approximately 35% of the gross leaseable space at the Resort Village Properties. The failure of these tenants would significantly impact our results of operations. It is expected that the percentage of total rental income contributed to us by these tenants will decrease as additional properties are acquired and leased to diversified tenants during subsequent periods.

Intrawest executed leases as a tenant for all unleased space at the time that we acquired the Resort Village Properties and guaranteed the leases for all space then leased to Intrawest or its affiliates. In addition, Intrawest operates the Resort Village Properties for us. In the event that Intrawest’s brand is impaired, and Intrawest experiences serious financial difficulty or Intrawest fails to meet its guaranty commitment if called upon to do so, it could have a significant detrimental effect on our investments in the Resort Village Properties and thus, our expected returns.

As of March 11, 2005, we were involved in the DMC Partnership with DMC, whose affiliate operates the DMC Property. In the event that DMC experiences financial difficulties or DMC and/or Crow Holdings brand names were impaired, it could have a significant negative impact on the operations of the DMC Property, which is the only asset of the DMC Partnership.

OTHER PERMITTED INVESTMENTS

We may provide mortgage and other financing relating to interests in real estate or may purchase equity and other interests in financings. We may also make mortgage and other loans with respect to any of the types of properties in which we are permitted to invest. We expect that the interest rates and terms of those loans will be similar to those of our leases. In addition, through subsidiaries, we may invest up to a maximum of 10% of our total assets in businesses that provide services to, or are otherwise ancillary to, the types of properties in which we are permitted to invest. As of December 31, 2004, we had not provided or purchased any mortgages or other financing.

ADVISORY SERVICES

Under the terms of the advisory agreement, our Advisor has responsibility for our day-to-day operations, administers our bookkeeping and accounting functions, serves as our consultant in connection with policy decisions to be made by our board of directors, manages our properties, loans, and other permitted investments and renders other services as the board of directors deems appropriate. In exchange for these services, our Advisor is entitled to receive certain fees from us. For supervision of the properties and the mortgage loans, our Advisor receives an asset management fee, which is payable monthly, in an amount equal to 0.08334% of the total amount paid or allocated to purchase, develop, construct or improve the properties (exclusive of acquisition fees and acquisition expenses), the outstanding principal amounts of any loans and the amount invested in any other permitted investments as of the end of the preceding month. For the selection, purchase, financing, development, construction or renovation of real properties and services related to the incurrence of debt, our Advisor receives an acquisition fee equal to 3% of the gross proceeds from the offering and loan proceeds from debt from lines of credit and permanent financing that are used to acquire properties or used to make or acquire loans and other permitted investments.

In accordance with the advisory agreement, our Advisor is required to reimburse us the amount by which the total operating expenses (as defined in the advisory agreement) incurred by us in any four consecutive fiscal quarters (the “Expense Year”) exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”). The Expense Cap test is applicable to us for the 12 months ended June 30, 2005, which is considered to be the end of our first Expense Year.

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The advisory agreement continues until April 16, 2005, and thereafter may be extended annually upon mutual consent of our Advisor and our entire board of directors including our independent directors unless terminated at an earlier date upon 60 days prior written notice by either party. Our board of directors has approved the advisory agreement for an additional year.

BORROWINGS

We intend to borrow money to acquire assets and to pay certain related fees. We also intend to encumber assets in connection with such borrowings. In general, the aggregate amount of permanent financing is not expected to exceed 50% of our total assets on an annual basis, however, it may likely exceed 50% for a limited period in our early acquisition stage. The maximum amount we may borrow is 300% of our net assets in the absence of a satisfactory showing that a higher level of borrowing is appropriate. In order to borrow an amount in excess of 300% of our net assets, a majority of the independent members of our board of directors must approve the borrowing, and the borrowing must be disclosed and explained to stockholders in our first quarterly report after such approval occurs.

In connection with our investment in the seven Resort Village Properties (described above), the unconsolidated entities in which we hold an interest, borrowed and encumbered the Resort Village Properties with, approximately $67.3 million in the aggregate (approximately $22.3 million for the Canadian Resort Village Properties and $45 million for the U.S. Resort Village Properties) under notes payable to fund the acquisition. The borrowing totaled approximately 60% of the total assets acquired. For a description of the borrowings encumbering the Resort Village Properties and our obligations with respect to such borrowings, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Borrowings of our Unconsolidated Entities.”

On February 14, 2005, upon closing the first tranche of the acquisition of the Dallas Market Center, the DMC Partnership became obligated for approximately $143 million in existing debt on the DMC Property. The securitized loan bears interest at a blended rate of 6.04% and requires monthly principal and interest payments of $889,145. The loan is amortized over 27.4 years. The loan matures in September 2014 and allows prepayment after October 2006 under certain terms and conditions.

We plan to obtain lines of credit initially in an amount up to $100 million. The lines of credit may be increased at the discretion of our board of directors and may be repaid with offering proceeds, proceeds from the sale of assets, working capital or permanent financing. We have engaged in preliminary discussions with potential lenders but have not received a commitment for a line of credit. There is no assurance that we will obtain any line of credit on satisfactory terms, or at all.

We borrowed funds in order to fund a portion of our distributions in the approximate principal amount of $480,945 from CNL Financial Group, Inc. (“CFG”) our affiliate and parent company of our Advisor. CFG is wholly-owned by our chairman of the board and his wife. On December 16, 2004, our board of directors authorized us to issue approximately 48,534 restricted shares of common stock at a share price of $10.00 per share to CFG in exchange for the cancellation of the loan due to CFG of approximately $485,340, including accrued interest.

COMPETITION

We compete with other REITs, real estate partnerships, opportunity funds and other investors, including, but not limited to, banks and insurance companies, many of which may have greater financial resources than we do for the acquisition, leasing and financing of properties. Since we commenced operations, at least three new direct competitors have entered the marketplace targeting properties similar to those we target. We anticipate that we will face increased competition for acquisitions in our targeted asset classes due to this increase in direct competition.

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RISK FACTORS

Offering-Related Risks

The price of our shares is subjective and may not bear any relationship to what a stockholder could receive if the shares were resold or if we are liquidated. We determined the offering price of our shares in our sole discretion based on the price which we believed investors would pay for the shares; estimated fees to third parties, as well as the fees to be paid to our advisor and its affiliates; the expenses of this offering and the funds we believed should be available to invest in properties, loans and other permitted investments. There is no public market for the shares on which to base market value.

Insufficient offering proceeds will impact our operations. Because this offering will be made on a best efforts basis, our potential profitability and ability to diversify our investments, both geographically and by type and number of properties, loans and other permitted investments will be limited by the amount of funds at our disposal. For example, if additional gross proceeds of $50 million are raised in 2005, we expect to only be able to acquire an interest in two additional properties and we would not expect to make or acquire any loans or other permitted investments.

There is no public market for our shares. Currently there is no public market for the shares, so stockholders may not be able to sell their shares promptly or at a desired price. Therefore, our investors should consider purchasing the shares as a long-term investment only. Although we anticipate applying for listing on or before December 31, 2015, if it is determined by our board of directors to be in the best interest of our stockholders, we do not know if we will ever apply to list our shares on a national securities exchange or whether our shares will be included for quotation on the National Market System of the Nasdaq Stock Market or, if we do apply for listing or quotation, when such application would be made or whether it would be accepted. In making a determination of whether listing is in the best interest of our stockholders, our board of directors may consider a variety of criteria, including, but not limited to, market capitalization, the number of properties owned, portfolio diversification, portfolio performance, our financial condition, potential access to capital as a listed company, and the potential for stockholder liquidity. If our shares are listed, we cannot assure investors that a public trading market will develop. Further, our articles of incorporation provide that we will not apply for listing before the completion or termination of this offering. We cannot assure investors that the price they would receive in a sale on a national securities exchange or on the National Market System of the Nasdaq Stock Market would be representative of the value of the assets we own or that it would equal or exceed the amount you paid for the shares.

In addition, although we have adopted a redemption plan, we have discretion to not redeem an investor’s shares, to suspend the plan, and to cease redemptions. Further, the plan has many limitations and should not be relied upon as a method to sell shares promptly and at a desired price. In particular, those limitations include: (i) no more than $100,000 of proceeds from the sale of shares pursuant to any offering in any calendar quarter may be used to redeem shares (but the full amount of the proceeds from the sale of shares under the reinvestment plan attributable to any calendar quarter may be used to redeem shares presented for redemption during such quarter and any subsequent quarter), and (ii) no more than five percent of the number of shares of our common stock (outstanding at the beginning of any 12-month period) may be redeemed during such 12-month period.

Company-Related Risks

We have a limited operating history. We commenced operations in June 2004 and are still in the early stage of growth and have limited previous performance history. As a result, you cannot be sure how we will be operated, whether we will achieve our business and investment objectives or how we will perform financially.

We will be dependent on our Advisor and our Advisor has limited or no experience with the types of investments in which we may invest. Our Advisor, subject to approval by the board of directors, is responsible for our investments and daily management. The historical industry experience of our Advisor’s management personnel is primarily in the hospitality, retirement, retail, office and restaurant industries, with limited or no experience investing in certain of the properties in which we initially intend to focus our investment activities. Our Advisor and its affiliates may be engaged in other activities that would result in potential conflicts of interest with the services that our Advisor and affiliates provide to us. The management of such entities could take actions that are more favorable to other entities than us. The resolution of conflicts in favor of other entities could have a negative impact on our financial performance.

We will experience competition for allocation of properties, loans and other permitted investments. Our

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Advisor or its affiliates from time to time may acquire properties, loans or other permitted investments on a temporary basis with the intention of subsequently transferring such assets to us. Further, our Advisor or its affiliates may from time to time seek to transfer certain of its or its affiliates’ assets to us. The selection of properties, loans or other permitted investments to be transferred by our Advisor to us may be subject to conflicts of interest. We cannot be sure that our Advisor will act in our best interests when deciding whether to allocate any particular opportunity to us. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before making your investment.

There will be competing demands on our officers and directors. Some of our officers and directors, who are also officers or directors of our Advisor, may experience conflicts of interest in their management of CNL Income Properties because they also have management responsibilities for other companies, including companies that may invest in some of the same types of assets in which we may invest. In addition, substantially all of the other companies for which our officers and directors work are affiliates of CNL Income Properties and/or our Advisor. For these reasons, these officers and directors will share their management time and services among those companies and us, will not devote all of their attention to us and could take actions that are more favorable to the other companies than to us.

Our Advisor’s fee structure may encourage our Advisor to recommend speculative investments and a high amount of leverage. Our Advisor will realize substantial compensation in connection with the acquisition of properties, and as a result, may recommend speculative investments to us. In addition, because our Advisor will receive fees based on the amount of permanent financing we obtain, our Advisor may have an incentive to recommend a high amount of leverage to us. Similarly, because our Advisor may receive fees upon the sale of properties, loans and other permitted investments, our Advisor may have an incentive to recommend to us the premature sale of these assets.

Real Estate and Other Investment Risks

Multiple property leases or loans with individual tenants or borrowers increase our risks. The value of our properties will depend principally upon the value of the leases of the properties. Minor defaults by a tenant or borrower may continue for some time before our Advisor or board of directors determines that it is in our interest to evict the tenant or foreclose on the property of the borrower. Tenants may lease more than one property, and borrowers may enter into more than one loan. As a result, a default by or the financial failure of a tenant or borrower could cause more than one property to become vacant or more than one loan to become non-performing in some circumstances. Vacancies would reduce our cash receipts and funds available for distribution and could decrease the properties’ resale value until we are able to re-lease the affected properties.

Our exposure to typical real estate investment risks could reduce our income. Our properties, loans and other permitted investments will be subject to the risks typically associated with investments in real estate. Such risks include the possibility that our properties will generate rent and capital appreciation, if any, at rates lower than anticipated or will yield returns lower than those available through other investments, and that our ability to vary our portfolio in response to changes in economic and other conditions will be limited because of the general illiquidity of real estate investments.

A concentration of our investments in only a few property classes may leave our profitability vulnerable to a downturn in such sectors. At any one time, a significant portion of our investments could be in only a few property classes. As of March 11, 2005, we have investments in only two property classes. As a result, we are subject to risks inherent in investments in these classes. The potential effects on our revenues, and as a result on cash available for distribution to our stockholders, resulting from a downturn in the business conducted on those properties could be more pronounced than if we had more fully diversified our investments.

Marinas, ski resorts, golf courses and other types of properties in which we may invest may not be readily adaptable to other uses. Ski resorts and related properties, marinas, golf courses and other types of properties in which we may invest are specific-use properties that have limited alternative uses. Therefore, if the operations of any of our properties in these sectors, such as the Intrawest Resort Village Properties, become unprofitable for our tenant or operator due to industry competition, a general deterioration of the applicable industry or otherwise, such that the tenant becomes unable to meet its obligations under its lease, we may have great difficulty re-leasing the property and the liquidation value of the property may be substantially less than would be the case if the property were readily adaptable to other uses. Should any of these events occur, our income and cash available for distribution and the value of our property portfolio could be reduced.

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We will not control the management of our properties. In order to qualify as a REIT for federal income tax purposes, we may not be permitted to operate certain types of properties we acquire or participate in the decisions affecting its daily operations. Our success will depend on our ability to select qualified and creditworthy tenants for each property we acquire, and upon their ability to effectively manage and operate the property. Our tenants will be responsible for maintenance and other day-to-day management of the properties either directly or by entering into operating agreements with third-party operators. Because our revenues will largely be derived from rents, our financial condition will be dependent on the ability of third-party tenants or operators that we do not control to operate the properties successfully. We will attempt to enter into leasing agreements with tenants having substantial prior experience in the operation of the type of property being rented. There can be no assurance, however, that we will be able to make such arrangements. If our tenants or third-party operators are unable to operate the properties successfully, or if our tenants or operators lease more properties from us than they can manage, or if we select unqualified operators, they may not have sufficient revenue to be able to pay our rent, which could adversely affect our financial condition.

We may not control the joint ventures in which we enter. Our independent directors must approve all joint venture or general partnership arrangements in which we enter. Subject to that approval, we may enter into a joint venture with an unaffiliated party to purchase a property or to make loans or other permitted investments, and the joint venture or general partnership agreement relating to that joint venture or partnership may provide that we will share management control of the joint venture with the unaffiliated party. For instance, at both the Resort Village Properties and the DMC Property, our venture partners have approval rights on many major decisions. Those third-parties may have differing interests from ours and the power to direct the joint venture or partnership on certain matters in a manner with which we do not agree.

Further, in the event the joint venture or general partnership agreement provides that we will have sole management control of the joint venture, the agreement may be ineffective as to a third party who has no notice of the agreement, and we therefore may be unable to control fully the activities of the joint venture. If we enter into a joint venture with another program sponsored by an affiliate, we do not anticipate that we will have sole management control of the joint venture. In addition, when we invest in properties, loans or other permitted investments indirectly through the acquisition of interests in entities that own such assets or interests in such assets, we may not control the management of such assets.

Joint venture partners may have different interests than we have. Investments in joint ventures involve the risk that our co-venturer may have economic or business interests or goals which, at a particular time, are inconsistent with our interests or goals, that the co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, or that the co-venturer may experience financial difficulties. Among other things, actions by a co-venturer might subject assets owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement or to other adverse consequences. This risk is also present when we make investments in securities of other entities. If we do not have full control over a joint venture, the value of our investment will be affected to some extent by a third party that may have different goals and capabilities than ours. As a result, joint ownership of investments and investments in other entities may adversely affect our returns on the investments and, therefore, cash available for distributions to our stockholders may be reduced.

Industry-Related Risks

Our exposure to typical real estate investment risks could reduce our income. Our properties, loans and other permitted investments will be subject to the risks typically associated with investments in real estate. Such risks include the possibility that our properties will generate rent and capital appreciation, if any, at rates lower than we anticipated or will yield returns lower than those available through other investments, and that our ability to vary our portfolio in response to changes in economic and other conditions will be limited because of the general illiquidity of real estate investments. Income from our properties may be adversely affected by many factors, including an increase in the local supply of the various properties which we seek to acquire, a decrease in the number of people interested in participating in the activities related to the businesses conducted on the properties which we seek to acquire, adverse weather conditions, changes in government regulation, national or local economic deterioration and changes in consumer tastes.

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Our properties may be subject to environmental liabilities. Operations at certain of the properties we may acquire may involve the use, handling, storage, and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as herbicides, pesticides, fertilizers, motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels, and sewage. Accordingly, the operations of certain properties we acquire will be subject to regulation by federal, state, and local authorities establishing investigation and health and environmental quality standards.

Under various federal and state environmental laws and regulations, as an owner of real estate, we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum products located on, in or emanating from our properties. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the release of hazardous substances. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with the contamination.

In addition to being subject to environmental laws and regulations, certain of the development plans and operations conducted or to be conducted on properties we may acquire require permits, licenses and approvals from certain federal, state and local authorities. For example, ski resort operations often require federal, state and local permits from the USDA Forest Service and the U.S. Army Corps of Engineers to use forests as ski slopes. Marinas that we may acquire must be dredged from time to time to remove the silt and mud that collect in harbor-areas as a result of, among other factors, heavy boat traffic, tidal flow, water flow and storm runoff, in order to assure that boat traffic can safely enter the harbor. Dredging and disposing of the dredged material can be very costly, and require permits from various governmental authorities.

Seasonal revenue variations in certain asset classes will require our operators of such asset classes to manage cash flow properly over time so as to meet their nonseasonal scheduled rent payments to us. Certain of the properties in which we may invest, including the skiing, golfing and marina industries, are generally seasonal in nature. For example, the typical ski season begins in early November and runs through April, during which time ski resorts generate the vast majority of their annual revenues. Revenues and profits at ski resorts and their related properties are substantially lower and historically result in losses during the summer months due to the closure of ski operations. We expect this to be the case with respect to certain of the Resort Village Properties. As a result of the seasonal nature of certain industries which may be conducted on properties we acquire, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us. The failure of an operator, such as Intrawest at the Resort Village Properties, to properly manage its cash flow may result in such operator having insufficient cash on hand to make its scheduled rent payments to us during low seasons, which may adversely affect our cash available for distribution to stockholders. In addition, certain of the asset classes in which we seek to acquire rely on seasonal workforces, and the inability of our tenants or operators to maintain a stable workforce, could negatively affect the level of services provided at properties we acquire, and as a result could adversely affect the revenues earned at such a property and ultimately the ability of our tenants to meet their rental obligations to us.

Adverse weather conditions may damage certain of the properties we acquire or reduce our operators’ ability to make scheduled rent payments to us. Weather conditions beyond our control may influence revenues at certain types of properties we acquire. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or merely reduced rainfall levels), excessive rain, avalanches, mudslides and floods. For example, adverse weather could reduce the number of people participating in skiing, golfing and boating activities at properties we acquire and those we have acquired such as the Resort Village Properties. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which damage (including but not limited to property damage and loss of revenue) is not generally insurable at commercially reasonable rates. Further, the physical condition of golf courses we may acquire must be satisfactory to attract play. In addition to severe or generally inclement weather, other factors, including plant disease and insect infestation, and the quality and quantity of water, could adversely affect the turf grass conditions at the golf courses we acquire or develop. Poor weather conditions could also disrupt operations at properties we acquire and may adversely affect both the value of our investment in a property, as well as the ability of our tenants and operators to make their scheduled rent payments to us.

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Financing Risks

Anticipated borrowing creates risks. We may borrow money to acquire assets, to preserve our status as a REIT or for other corporate purposes. We may mortgage or put a lien on one or more of our assets in connection with any borrowing. We intend to obtain one or more revolving lines of credit up to $100 million to provide financing for the acquisition of assets, although our board of directors could determine to borrow a greater amount. We also intend to obtain long-term, permanent financing. We may not borrow more than 300% of the value of our net assets without the approval of a majority of our independent directors and the borrowing must be disclosed and explained to our stockholders in our first quarterly report after such approval occurs. Borrowing may be risky if the cash flow from our real estate and other investments is insufficient to meet our debt obligations. In addition, our lenders may seek to impose restrictions on future borrowings, distributions and operating policies, including with respect to capital expenditures and asset dispositions. If we mortgage or pledge assets as collateral and we cannot meet our debt obligations, the lender could take the collateral, and we would lose both the asset and the income we were deriving from it.

We may not be able to obtain adequate financing. We intend to obtain one or more lines of credit and long-term permanent financing. We are engaged in preliminary discussions with potential lenders, but we have not yet obtained a commitment for a line of credit or any permanent financing (other than permanent financing obtained through our unconsolidated entities). We cannot be sure that we will be able to obtain a line of credit or any long-term permanent financing on satisfactory terms. If we do not obtain adequate financing in the future, we may not be able to acquire as many properties, or make or acquire as many loans or other permitted investments as we anticipated, which could limit the diversification of our investments and our ability to achieve our investment objectives.

We can borrow money to make distributions. We have borrowed, and may continue to borrow, money as necessary or advisable to make distributions, including, but not limited to, distributions for the purpose of maintaining our qualification as a REIT for federal income tax purposes. In such an event, it is possible that we could make distributions in excess of its earnings and profits and, accordingly, the distributions could constitute a return of capital for federal income tax and accounting purposes.

Tax Risks

We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes. We intend to operate in a manner that will enable us to meet the requirements for qualification and to remain qualified as a REIT for federal income tax purposes, commencing with our taxable year ending December 31, 2004. A REIT generally is not taxed at the federal corporate level on income it distributes to its stockholders, as long as it distributes annually at least 90% of its taxable income to its stockholders. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service that we will qualify as a REIT. However, in connection with the registration of our public offering we received an opinion from our tax counsel, Greenberg Traurig, LLP, that our organization and proposed method of operation would enable us to meet the requirements for qualification as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2004.

If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. In addition to these taxes, we may be subject to the federal alternative minimum tax. Unless we are entitled to relief under specific statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. Therefore, if we lose our REIT status, the funds available for distribution to you, as a stockholder, would be reduced substantially for each of the years involved.

EMPLOYEES

Reference is made to Item 10. Directors and Executive Officers of the Registrant for a listing of our executive officers. We have no employees, other than our executive officers who are compensated by our Advisor. We have retained our Advisor to provide management, acquisition, advisory and certain administrative services and have retained certain other affiliates of our Advisor to provide additional administrative services.

AVAILABLE INFORMATION

We make available free of charge on or through our Internet website, www.cnlonline.com/ir/investcnl_ip.asp, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,

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amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission (the “Commission”). The public may read and copy any materials that we file with the Commission at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and may obtain information on the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission (http://www.sec.gov).

Item 2. Properties

As of December 31, 2004, we had invested approximately $41.9 million in the Resort Village Properties located in five states and Canada. Initially, we intend to invest in properties in the asset classes set forth above under Item 1. Business. In addition to those classes, we may acquire or invest in other types of properties which are not specifically identified that we believe have the potential for long-term revenue generation based upon certain underwriting criteria and models that we have developed and/or certain demographic criteria. We are not limited to any asset class.

Generally, properties acquired consist of both land and building, however, in certain cases we may acquire only the land underlying the building with the building owned by the tenant or a third party, and we also may acquire the building only with the land owned by a third party.

The following table summarizes the Resort Village Properties, their location, number of units, square footage, our unconsolidated entities’ total purchase price at December 31, 2004 and the rental income recorded by those entities for the year ended December 31, 2004. We contributed 80% of the total purchase price paid for the Resort Village Properties.