Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Fiscal Year Ended: December 31, 2010
Commission file number: 000-51823
AEI INCOME & GROWTH FUND 26 LLC
(Exact name of registrant as specified in its charter)
State of Delaware 41-2173048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 East 7th Street, Suite 1300, St. Paul, Minnesota 55101
(Address of principal executive offices)
(651) 227-7333
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each className of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Units
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
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 for 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)
during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [ ] 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 a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2010, there were 1,827,736.0 Units of limited
membership interest outstanding and owned by nonaffiliates of the
registrant, which Units had an aggregate market value (based
solely on the price at which they were sold since there is no
ready market for such Units) of $18,277,360.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has not incorporated any documents by reference
into this report.
PART I
ITEM 1. BUSINESS.
AEI Income & Growth Fund 26 LLC (the "Company" or the
"Registrant") is a limited liability company which was organized
pursuant to the laws of the State of Delaware on March 14, 2005.
The registrant is comprised of AEI Fund Management XXI, Inc.
("AFM"), as the Managing Member, Robert P. Johnson, the President
and sole director of AFM, as the Special Managing Member, and
purchasers of LLC Units as Limited Members. The Company offered
for sale up to $100,000,000 of limited membership interests (the
"Units") (10,000,000 Units at $10 per Unit) pursuant to a
registration statement effective October 20, 2005. The Company
commenced operations on April 3, 2006 when minimum subscriptions
of 150,000 LLC Units ($1,500,000) were accepted. The offering
terminated October 19, 2007 when the extended offering period
expired. The Company received subscriptions for 1,832,736 LLC
Units. Under the terms of the Operating Agreement, the Limited
Members and Managing Members contributed funds of $18,327,360 and
$1,000, respectively.
The Company was organized to acquire existing and newly
constructed commercial properties, to lease such properties to
tenants under net leases, to hold such properties and to
eventually sell such properties. From subscription proceeds, the
Company purchased eight properties, including partial interests
in five properties, at a total cost of $15,376,536. The balance
of the subscription proceeds was applied to organization and
syndication costs, working capital reserves and distributions,
which represented a return of capital. The properties are
commercial, single tenant buildings leased under net leases.
The Company's properties were purchased without any
indebtedness. The Company will not finance properties in the
future to obtain proceeds for new property acquisitions. If it
is required to do so, the Company may incur short-term
indebtedness to finance day-to-day cash flow requirements
(including cash flow necessary to repurchase Units). The Company
may borrow to finance the refurbishing of a property.
The Company will hold its properties until the Managing
Members determine that the sale or other disposition of the
properties is advantageous in view of the Company's investment
objectives. In deciding whether to sell properties, the Managing
Members will consider factors such as potential appreciation, net
cash flow and income tax considerations. The Company expects to
sell some or all of its properties prior to its final liquidation
and to reinvest the proceeds from such sales in additional
properties. The Company reserves the right, at the discretion of
the Managing Members, to either distribute proceeds from the sale
of properties to the Members or to reinvest such proceeds in
additional properties, provided that sufficient proceeds are
distributed to the Limited Members to pay federal and state
income taxes related to any taxable gain recognized as a result
of the sale. It is anticipated that the Company will commence
liquidation through the sale of its remaining properties ten to
twelve years after completion of the acquisition phase, depending
upon the then current real estate and money markets, the economic
climate and the income tax consequences to the Members.
ITEM 1. BUSINESS. (Continued)
Leases
Although there are variations in the specific terms of the
leases, the following is a summary of the general terms of the
Company's leases. The properties are leased to various tenants
under net leases, classified as operating leases. Under a net
lease, the tenant is responsible for real estate taxes,
insurance, maintenance, repairs and operating expenses for the
property. For some leases, the Company is responsible for
repairs to the structural components of the building. At the
time the properties were acquired, the remaining primary lease
terms varied from 10 to 20 years. The leases provide the tenants
with three to four five-year renewal options subject to the same
terms and conditions as the primary term. The leases provide for
base annual rental payments, payable in monthly installments, and
contain rent clauses which entitle the Company to receive
additional rent in future years based on stated rent increases.
Major Tenants
During 2010, five tenants each contributed more than ten
percent of the Company's total rental revenue. The major tenants
in aggregate contributed 87% of total rental revenue in 2010. It
is anticipated that, based on minimum rental payments required
under the leases, each major tenant will continue to contribute
more than ten percent of rental revenue in 2011 and future years.
Any failure of these major tenants could materially affect the
Company's net income and cash distributions.
Competition
The Company is a minor factor in the commercial real
estate business. There are numerous entities engaged in the
commercial real estate business which have greater financial
resources than the Company. At the time the Company elects to
dispose of its properties, it will be in competition with other
persons and entities to find buyers for its properties.
Employees
The Company has no direct employees. Management services
are performed for the Company by AEI Fund Management, Inc., an
affiliate of AFM.
ITEM 1A. RISK FACTORS.
Not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not required for a smaller reporting company.
ITEM 2. PROPERTIES.
Investment Objectives
The Company's investment objectives are to acquire
existing or newly-developed commercial properties that provide
(i) regular rental income; (ii) growth in lease income through
rent escalation provisions; (iii) capital growth through
appreciation in the value of properties; (iv) reduced occupancy
risks as a result of long-term leases with creditworthy corporate
tenants; and (v) passive income that may be offset by eligible
passive losses from other investments for tax purposes. The
Company does not have a policy, and there is no limitation, as to
the amount or percentage of assets that may be invested in any
one property. However, to the extent possible, the Managing
Members attempt to diversify the type and location of the
properties.
Description of Properties
The Company's properties are commercial, single tenant
buildings. The properties were acquired on a debt-free basis and
are leased to various tenants under net leases, classified as
operating leases. The Company holds an undivided fee simple
interest in the properties.
The Company's properties are subject to the general
competitive conditions incident to the ownership of single tenant
investment real estate. Since each property is leased under a
long-term lease, there is little competition until the Company
decides to sell the property. At this time, the Company will be
competing with other real estate owners, on both a national and
local level, in attempting to find buyers for the properties. In
the event of a tenant default, the Company would be competing
with other real estate owners, who have property vacancies, to
attract a new tenant to lease the property. The Company's
tenants operate in industries that are very competitive and can
be affected by factors such as changes in regional or local
economies, seasonality and changes in consumer preference.
The following table is a summary of the properties that
the Company acquired and owned as of December 31, 2010.
Annual Annual
Purchase Property Lease Rent Per
Property Date Cost Tenant Payment Sq. Ft.
Sports Authority Store
Wichita, KS 4/3/06 to
(40%) 6/30/06 $2,230,753 TSA Stores, Inc. $204,665 $ 9.79
Advance Auto Parts Store
Middletown, OH Advance Stores
(55%) 6/1/06 $1,022,289 Company, Inc. $ 71,679 $18.94
Applebee's
Restaurant 9/21/06 to Apple Indiana
Indianapolis, IN 12/1/06 $3,054,187 II LLC $220,262 $42.12
Applebee's Restaurant
Crawfordsville, IN Apple Indiana
(40%) 12/29/06 $1,237,771 II LLC $ 89,289 $42.44
ITEM 2. PROPERTIES. (Continued)
Annual Annual
Purchase Property Lease Rent Per
Property Date Cost Tenant Payment Sq. Ft.
Starbucks Store Starbucks
Bluffton, IN 8/10/07 $1,150,116 Corporation $ 79,800 $44.16
Red Robin
Beavercreek, OH Red Robin
(land only) 12/28/07 $1,533,655 International, Inc.$115,500 $ 1.30
Best Buy Store
Eau Claire, WI Best Buy
(30%) 1/31/08 $2,021,162 Stores, L.P. $142,222 $10.01
Dick's Sporting Goods
Fredericksburg, VA Dick's Sporting
(27%) 5/8/08 $3,126,603 Goods, Inc. $219,445 $16.69
The properties listed above with a partial ownership
percentage are owned with the following affiliated entities:
Sports Authority store (AEI Income & Growth Fund 25 LLC); Advance
Auto Parts store (AEI Income & Growth Fund 24 LLC); Applebee's
restaurant in Crawfordsville, Indiana (AEI Income & Growth Fund
XXII Limited Partnership); Best Buy store (AEI Income & Growth
Fund XXI Limited Partnership and AEI Income & Growth Fund 23
LLC); and Dick's Sporting Goods store in Fredericksburg, Virginia
(AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 24 LLC
and AEI Income & Growth Fund 25 LLC).
The Company accounts for properties owned as tenants-in-
common with affiliated entities using the proportionate
consolidation method. Each tenant-in-common owns a separate,
undivided interest in the properties. Any tenant-in-common that
holds more than a 50% interest does not control decisions over
the other tenant-in-common interests. The financial statements
reflect only this Company's percentage share of the properties'
land, building and equipment, liabilities, revenues and expenses.
At the time the properties were acquired, the remaining
primary lease terms varied from 10 to 20 years. The leases
provide the tenants with three to four five-year renewal options
subject to the same terms and conditions as the primary term.
Pursuant to the lease agreements, the tenants are required
to provide proof of adequate insurance coverage on the properties
they occupy. The Managing Members believe the properties are
adequately covered by insurance and consider the properties to be
well-maintained and sufficient for the Company's operations.
ITEM 2. PROPERTIES. (Continued)
For tax purposes, the Company's properties are depreciated
under the Modified Accelerated Cost Recovery System (MACRS). The
largest depreciable component of a property is the building which
is depreciated, using the straight-line method, over 39 years.
The remaining depreciable components of a property are personal
property and land improvements which are depreciated, using an
accelerated method, over 5 and 15 years, respectively. Since the
Company has tax-exempt Members, the Company is subject to the
rules of Section 168(h)(6) of the Internal Revenue Code which
requires a percentage of the properties' depreciable components
to be depreciated over longer lives using the straight-line
method. In general, the federal tax basis of the properties for
tax depreciation purposes will be the same as the basis for book
depreciation purposes.
At December 31, 2010, all properties listed above were
100% occupied.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK-
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) As of December 31, 2010, there were 454 holders of
record of the registrant's LLC Units. There is no other class of
security outstanding or authorized. The registrant's Units are
not a traded security in any market. During the period covered
by this report, the Company did not sell any equity securities
that are not registered under the Securities Act of 1933.
Cash distributions of $28,333 and $25,009 were made to the
Managing Members and $916,092 and $916,368 were made to the
Limited Members for 2010 and 2009, respectively. The
distributions were made on a quarterly basis and represent Net
Cash Flow, as defined, and a partial return of contributed
capital. These distributions should not be compared with
dividends paid on capital stock by corporations.
(b) Not Applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK-
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(c) Pursuant to Section 7.7 of the Operating Agreement,
each Limited Member has the right to present Units to the Company
for purchase by submitting notice to the Managing Member during
January or July of each year. The purchase price of the Units is
equal to 85% of the net asset value per Unit, as of the first
business day of January or July of each year, as determined by
the Managing Member in accordance with the provisions of the
Operating Agreement. The purchase price is equal to 100% of the
net asset value per Unit in the case of Units of a deceased
investor, who purchased the Units in the initial offering and who
is a natural person, including Units held by an investor that is
an IRA or other qualified plan for which the deceased person was
the primary beneficiary, or Units held by an investor that is a
grantor trust for which the deceased person was the grantor.
Units tendered to the Company during January and July are
redeemed on April 1st and October 1st, respectively, of each year
subject to the following limitations. The Company will not be
obligated to purchase in any year more than 2% of the total
number of Units outstanding on January 1 of such year. In no
event shall the Company be obligated to purchase Units if, in the
sole discretion of the Managing Member, such purchase would
impair the capital or operation of the Company. During the last
three months of 2010, the Company did not purchase any Units.
Other Information
The Company is required, pursuant to FINRA Rule 2810, to
disclose in each annual report distributed to Limited Members a
per Unit estimated value, the method by which it was developed
and the date of the data used to develop the estimated value. At
December 31, 2010, the Company's Units were valued at $7.57.
This value was the aggregate estimated value of the Company's
assets less the Company's liabilities, and less the value
attributable to the interest of the Managing Members, divided by
the number of Units outstanding. The Company's cash, receivables
and liabilities were valued at face value. Each of the Company's
properties were valued by dividing their annual rental income as
of December 1, 2010 by a capitalization rate the Managing Member
believed to be representative of the retail market for the sale
of each property. The resulting value for each property was
reviewed to determine that it also reflected circumstances that
may have been unique to each specific property. No independent
property appraisals were obtained. The valuations performed by
the Managing Member were estimates only, and were based on a
number of assumptions which may not be accurate or complete. In
addition, property values are subject to change and could decline
after the date of the valuations. Accordingly, this estimated
value, prepared by the Managing Member, should not be viewed as
the amount at which a Limited Member may be able to sell his
units, or the fair market value of the Company properties, nor
does it represent the amount of net proceeds Limited Members
would receive if the Company properties were sold and the
proceeds distributed in a liquidation of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This section contains "forward-looking statements" which
represent management's expectations or beliefs concerning future
events, including statements regarding anticipated application of
cash, expected returns from rental income, growth in revenue, the
sufficiency of cash to meet operating expenses, rates of
distribution, and other matters. These, and other forward-
looking statements, should be evaluated in the context of a
number of factors that may affect the Company's financial
condition and results of operations, including the following:
Market and economic conditions which affect the value
of the properties the Company owns and the cash from
rental income such properties generate;
the federal income tax consequences of rental income,
deductions, gain on sales and other items and the
effects of these consequences for Members;
resolution by the Managing Members of conflicts with
which they may be confronted;
the success of the Managing Members of locating
properties with favorable risk return characteristics;
the effect of tenant defaults; and
the condition of the industries in which the tenants of
properties owned by the Company operate.
Application of Critical Accounting Policies
The preparation of the Company's financial statements
requires management to make estimates and assumptions that may
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. Management evaluates these estimates on an ongoing
basis, including those related to the carrying value of
investments in real estate and the allocation by AEI Fund
Management, Inc. of expenses to the Company as opposed to other
funds they manage.
The Company purchases properties and records them in the
financial statements at cost (not including acquisition
expenses). The Company tests long-lived assets for
recoverability when events or changes in circumstances indicate
that the carrying value may not be recoverable. For properties
the Company will hold and operate, management determines whether
impairment has occurred by comparing the property's probability-
weighted future undiscounted cash flows to its current carrying
value. For properties held for sale, management determines
whether impairment has occurred by comparing the property's
estimated fair value less cost to sell to its current carrying
value. If the carrying value is greater than the net realizable
value, an impairment loss is recorded to reduce the carrying
value of the property to its net realizable value. Changes in
these assumptions or analysis may cause material changes in the
carrying value of the properties.
AEI Fund Management, Inc. allocates expenses to each of
the funds they manage primarily on the basis of the number of
hours devoted by their employees to each fund's affairs. They
also allocate expenses at the end of each month that are not
directly related to a fund's operations based upon the number of
investors in the fund and the fund's capitalization relative to
other funds they manage. The Company reimburses these expenses
subject to detailed limitations contained in the Operating
Agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Management of the Company has discussed the development
and selection of the above accounting estimates and the
management discussion and analysis disclosures regarding them
with the managing member of the Company.
Results of Operations
For the years ended December 31, 2010 and 2009, the
Company recognized rental income of $1,142,862 and $1,144,072,
respectively. Based on the scheduled rent for the properties
owned as of February 28, 2011, the Company expects to recognize
rental income of approximately $1,149,000 in 2011.
For the years ended December 31, 2010 and 2009, the
Company incurred LLC administration expenses from affiliated
parties of $174,243 and $177,110, respectively. These
administration expenses include costs associated with the
management of the properties, processing distributions, reporting
requirements and communicating with the Limited Members. During
the same periods, the Company incurred LLC administration and
property management expenses from unrelated parties of $24,236
and $25,948, respectively. These expenses represent direct
payments to third parties for legal and filing fees, direct
administrative costs, outside audit costs, taxes, insurance and
other property costs.
For the years ended December 31, 2010 and 2009,
depreciation expense was $375,383 and $436,708, respectively. In
2009, depreciation expense was higher as a result of
reclassifying the Sports Authority store in Wichita, Kansas from
held-for-sale status to held-for-use status during the fourth
quarter of 2009. At the time of reclassification, the Company
recognized $122,651 of additional depreciation expense that
represented the amount of depreciation that would have been
recognized if the property had not been classified as Real Estate
Held for Sale. This amount represented two years of depreciation
expense for the property, which was recognized in the fourth
quarter of 2009.
For the years ended December 31, 2010 and 2009, the
Company recognized interest income of $2,367 and $2,513,
respectively.
Management believes inflation has not significantly
affected income from operations. Leases may contain rent
increases, based on the increase in the Consumer Price Index over
a specified period, which will result in an increase in rental
income over the term of the leases. Inflation also may cause the
real estate to appreciate in value. However, inflation and
changing prices may have an adverse impact on the operating
margins of the properties' tenants, which could impair their
ability to pay rent and subsequently reduce the Net Cash Flow
available for distributions.
Liquidity and Capital Resources
During the year ended December 31, 2010, the Company's
cash balances decreased $47,754 as a result of distributions and
redemption payments paid to the Members in excess of cash
generated from operating activities. During the year ended
December 31, 2009, the Company's cash balances decreased $13,001
as a result of distributions paid to the Members in excess of
cash generated from operating activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Net cash provided by operating activities decreased from
$940,186 in 2009 to $936,172 in 2010 as a result of a decrease in
total rental and interest income in 2010 and net timing
differences in the collection of payments from the tenants and
the payment of expenses, which were partially offset by a
decrease in LLC administration and property management expenses
in 2010.
The Company's primary use of cash flow, other than
investment in real estate, is distribution and redemption
payments to Members. The Company declares its regular quarterly
distributions before the end of each quarter and pays the
distribution in the first week after the end of each quarter.
The Company attempts to maintain a stable distribution rate from
quarter to quarter. Redemption payments are paid to redeeming
Members on a semi-annual basis.
For the years ended December 31, 2010 and 2009, the
Company declared distributions of $944,425 and $941,377,
respectively. The Limited Members received distributions of
$916,092 and $916,368 and the Managing Members received
distributions of $28,333 and $25,009 for the periods,
respectively.
The Company may acquire Units from Limited Members who
have tendered their Units to the Company. Such Units may be
acquired at a discount. The Company will not be obligated to
purchase in any year more than 2% of the total number of Units
outstanding on January 1 of such year. In no event shall the
Company be obligated to purchase Units if, in the sole discretion
of the Managing Member, such purchase would impair the capital or
operation of the Company.
During 2010, one Limited Member redeemed a total of 5,000
Units for $38,225 in accordance with the Operating Agreement.
The Company acquired these Units using Net Cash Flow from
operations. During 2009, the Company did not redeem any Units
from the Limited Members. The redemptions increase the remaining
Limited Members' ownership interest in the Company. As a result
of this redemption payment and pursuant to the Operating
Agreement, the Managing Members received distributions of $1,182
in 2010.
The continuing rent payments from the properties should be
adequate to fund continuing distributions and meet other
obligations on both a short-term and long-term basis.
The Economy and Market Conditions
The impact of conditions in the current economy, including
the turmoil in the credit markets, has adversely affected many
real estate investment funds. However, the absence of mortgage
financing on the Company's properties eliminates the risks of
foreclosure and debt-refinancing that can negatively impact the
value and distributions of leveraged real estate investment
funds. Nevertheless, a prolonged economic downturn may adversely
affect the operations of the Company's tenants and their cash
flows. If a tenant were to default on its lease obligations, the
Company's income would decrease, its distributions would likely
be reduced and the value of its properties might decline.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
The Company's plan is to periodically sell properties to
generate capital gains that would be included in the Company's
regular quarterly distributions and to make special distributions
on occasion. Beginning in the fourth quarter of 2008, general
economic conditions caused the volume of property sales to slow
dramatically for all real estate sellers. During 2008, 2009 and
2010, the Company did not complete any property sales. Until
such time as economic conditions allow the Company to begin
selling properties at attractive prices, quarterly distributions
will reflect the distribution of net core rental income and
capital reserves, if any. Distribution rates in 2011 are
expected to be consistent with distribution rates in 2010.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying index to financial statements.
AEI INCOME & GROWTH FUND 26 LLC
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2010 and 2009
Statements for the Years Ended December 31, 2010 and 2009:
Income
Cash Flows
Changes in Members' Equity (Deficit)
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members:
AEI Income & Growth Fund 26 LLC
St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI Income
& Growth Fund 26 LLC (a Delaware limited liability company) as of
December 31, 2010 and 2009 and the related statements of income,
cash flows and changes in members' equity (deficit) for the years
then ended. The Company's management is responsible for these
financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of AEI Income & Growth Fund 26 LLC as of December 31, 2010 and
2009, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
March 25, 2011
AEI INCOME & GROWTH FUND 26 LLC
BALANCE SHEET
DECEMBER 31
ASSETS
2010 2009
CURRENT ASSETS:
Cash $ 327,898 $ 375,652
INVESTMENTS IN REAL ESTATE:
Land 5,991,984 5,991,984
Buildings and Equipment 9,384,552 9,384,552
Accumulated Depreciation (1,413,596) (1,038,213)
----------- -----------
Net Investments in Real Estate 13,962,940 14,338,323
----------- -----------
Total Assets $14,290,838 $14,713,975
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 11,813 $ 22,391
Distributions Payable 236,083 236,177
Unearned Rent 25,796 25,796
----------- -----------
Total Current Liabilities 273,692 284,364
----------- -----------
MEMBERS' EQUITY (DEFICIT):
Managing Members (43,895) (31,521)
Limited Members, $10 per Unit;
10,000,000 Units authorized; 1,832,736 Units issued;
1,827,736 and 1,832,736 Units outstanding in
2010 and 2009, respectively 14,061,041 14,461,132
----------- -----------
Total Members' Equity 14,017,146 14,429,611
----------- -----------
Total Liabilities and Members' Equity $14,290,838 $14,713,975
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31
2010 2009
RENTAL INCOME $ 1,142,862 $ 1,144,072
EXPENSES:
LLC Administration - Affiliates 174,243 177,110
LLC Administration and Property
Management - Unrelated Parties 24,236 25,948
Depreciation 375,383 436,708
----------- -----------
Total Expenses 573,862 639,766
----------- -----------
OPERATING INCOME 569,000 504,306
OTHER INCOME:
Interest Income 2,367 2,513
----------- -----------
NET INCOME $ 571,367 $ 506,819
=========== ===========
NET INCOME ALLOCATED:
Managing Members $ 17,141 $ 15,205
Limited Members 554,226 491,614
----------- -----------
$ 571,367 $ 506,819
=========== ===========
NET INCOME PER LLC UNIT $ .30 $ .27
=========== ===========
Weighted Average Units Outstanding-Basic and Diluted 1,828,986 1,832,736
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
2010 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 571,367 $ 506,819
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating Activities:
Depreciation 375,383 436,708
Decrease in Receivables 0 2,283
Decrease in Payable to
AEI Fund Management, Inc. (10,578) (5,624)
----------- -----------
Total Adjustments 364,805 433,367
----------- -----------
Net Cash Provided By
Operating Activities 936,172 940,186
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid to Members (944,519) (953,187)
Redemption Payments (39,407) 0
----------- -----------
Net Cash Used For
Financing Activities (983,926) (953,187)
----------- -----------
NET DECREASE IN CASH (47,754) (13,001)
CASH, beginning of year 375,652 388,653
----------- -----------
CASH, end of year $ 327,898 $ 375,652
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31
Limited
Member
Managing Limited Units
Members Members Total Outstanding
BALANCE, December 31, 2008 $ (21,717) $14,885,886 $14,864,169 1,832,736.0
Distributions Declared (25,009) (916,368) (941,377)
Net Income 15,205 491,614 506,819
--------- ----------- ----------- -----------
BALANCE, December 31, 2009 (31,521) 14,461,132 14,429,611 1,832,736.0
Distributions Declared (28,333) (916,092) (944,425)
Redemption Payments (1,182) (38,225) (39,407) (5,000.0)
Net Income 17,141 554,226 571,367
--------- ----------- ----------- -----------
BALANCE, December 31, 2010 $ (43,895) $14,061,041 $14,017,146 1,827,736.0
========= =========== =========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(1) Organization -
AEI Income & Growth Fund 26 LLC ("Company"), a Limited
Liability Company, was formed on March 14, 2005 to acquire
and lease commercial properties to operating tenants. The
Company's operations are managed by AEI Fund Management XXI,
Inc. ("AFM"), the Managing Member. Robert P. Johnson, the
President and sole director of AFM, serves as the Special
Managing Member. AFM is a wholly owned subsidiary of AEI
Capital Corporation of which Mr. Johnson is the majority
shareholder. AEI Fund Management, Inc. ("AEI"), an
affiliate of AFM, performs the administrative and operating
functions for the Company.
The terms of the offering called for a subscription price of
$10 per LLC Unit, payable on acceptance of the offer. The
Company commenced operations on April 3, 2006 when minimum
subscriptions of 150,000 LLC Units ($1,500,000) were
accepted. The offering terminated October 19, 2007, when
the extended offering period expired. The Company received
subscriptions for 1,832,736 Units. Under the terms of the
Operating Agreement, the Limited Members and Managing
Members contributed funds of $18,327,360 and $1,000,
respectively. The Company shall continue until December 31,
2055, unless dissolved, terminated and liquidated prior to
that date.
During operations, any Net Cash Flow, as defined, which the
Managing Members determine to distribute will be distributed
97% to the Limited Members and 3% to the Managing Members.
Distributions to Limited Members will be made pro rata by
Units.
Any Net Proceeds of Sale, as defined, from the sale or
financing of properties which the Managing Members determine
to distribute will, after provisions for debts and reserves,
be paid in the following manner: (i) first, 99% to the
Limited Members and 1% to the Managing Members until the
Limited Members receive an amount equal to: (a) their
Adjusted Capital Contribution plus (b) an amount equal to
6.5% of their Adjusted Capital Contribution per annum,
cumulative but not compounded, to the extent not previously
distributed from Net Cash Flow; (ii) any remaining balance
will be distributed 90% to the Limited Members and 10% to
the Managing Members. Distributions to the Limited Members
will be made pro rata by Units.
For tax purposes, profits from operations, other than
profits attributable to the sale, exchange, financing,
refinancing or other disposition of property, will be
allocated 97% to the Limited Members and 3% to the Managing
Members. Net losses from operations will be allocated 99%
to the Limited Members and 1% to the Managing Members.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(1) Organization - (Continued)
For tax purposes, profits arising from the sale, financing,
or other disposition of property will be allocated in
accordance with the Operating Agreement as follows: (i)
first, to those Members with deficit balances in their
capital accounts in an amount equal to the sum of such
deficit balances; (ii) second, 99% to the Limited Members
and 1% to the Managing Members until the aggregate balance
in the Limited Members' capital accounts equals the sum of
the Limited Members' Adjusted Capital Contributions plus an
amount equal to 6.5% of their Adjusted Capital Contributions
per annum, cumulative but not compounded, to the extent not
previously allocated; (iii) third, the balance of any
remaining gain will then be allocated 90% to the Limited
Members and 10% to the Managing Members. Losses will be
allocated 99% to the Limited Members and 1% to the Managing
Members.
The Managing Members are not required to currently fund a
deficit capital balance. Upon liquidation of the Company or
withdrawal by a Managing Member, the Managing Members will
contribute to the Company an amount equal to the lesser of
the deficit balances in their capital accounts or 1.01% of
the total capital contributions of the Limited Members over
the amount previously contributed by the Managing Members.
(2) Summary of Significant Accounting Policies -
Financial Statement Presentation
The accounts of the Company are maintained on the accrual
basis of accounting for both federal income tax purposes
and financial reporting purposes.
Accounting Estimates
Management uses estimates and assumptions in preparing
these financial statements in accordance with generally
accepted accounting principles. Those estimates and
assumptions may affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
Actual results could differ from those estimates.
Significant items, subject to such estimates and
assumptions, include the carrying value of investments in
real estate.
The Company regularly assesses whether market events and
conditions indicate that it is reasonably possible to
recover the carrying amounts of its investments in real
estate from future operations and sales. A change in
those market events and conditions could have a material
effect on the carrying amount of its real estate.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(2) Summary of Significant Accounting Policies - (Continued)
Cash Concentrations of Credit Risk
The Company's cash is deposited in one financial
institution and at times during the year it may exceed
FDIC insurance limits.
Receivables
Credit terms are extended to tenants in the normal course
of business. The Company performs ongoing credit
evaluations of its customers' financial condition and,
generally, requires no collateral.
Receivables are recorded at their estimated net
realizable value. The Company follows a policy of
providing an allowance for doubtful accounts; however,
based on historical experience, and its evaluation of the
current status of receivables, the Company is of the
belief that such accounts, if any, will be collectible in
all material respects and thus an allowance is not
necessary. Accounts are considered past due if payment
is not made on a timely basis in accordance with the
Company's credit terms. Receivables considered
uncollectible are written off.
Income Taxes
The income or loss of the Company for federal income tax
reporting purposes is includable in the income tax
returns of the Members. In general, no recognition has
been given to income taxes in the accompanying financial
statements.
The tax return and the amount of distributable Company
income or loss are subject to examination by federal and
state taxing authorities. If such an examination results
in changes to distributable Company income or loss, the
taxable income of the members would be adjusted
accordingly. Primarily due to its tax status as a
partnership, the Company has no significant tax
uncertainties that require recognition or disclosure.
Revenue Recognition
The Company's real estate is leased under net leases,
classified as operating leases. The leases provide for
base annual rental payments payable in monthly
installments. The Company recognizes rental revenue
according to the terms of the individual leases. For
leases that contain stated rental increases, the
increases are recognized in the year in which they are
effective. Contingent rental payments are recognized
when the contingencies on which the payments are based
are satisfied and the rental payments become due under
the terms of the leases.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(2) Summary of Significant Accounting Policies - (Continued)
Investments in Real Estate
The Company purchases properties and records them at
cost. The Company tests real estate for recoverability
when events or changes in circumstances indicate that the
carrying value may not be recoverable. For properties
the Company will hold and operate, it compares the
carrying amount of the property to the estimated
probability-weighted future undiscounted cash flows
expected to result from the property and its eventual
disposition. If the sum of the expected future cash
flows is less than the carrying amount of the property,
the Company recognizes an impairment loss by the amount
by which the carrying amount of the property exceeds the
fair value of the property. For properties held for
sale, the Company determines whether impairment has
occurred by comparing the property's estimated fair value
less cost to sell to its current carrying value. If the
carrying value is greater than the net realizable value,
an impairment loss is recorded to reduce the carrying
value of the property to its net realizable value.
Prior to January 1, 2009, the Company capitalized as
Investments in Real Estate certain costs incurred in the
review and acquisition of the properties. The costs were
allocated to the land, buildings and equipment. For
acquisitions completed on or after January 1, 2009,
acquisition-related transaction costs will be expensed as
incurred as a result of the Company adopting new guidance
on business combinations that expands the scope of
acquisition accounting.
The buildings and equipment of the Company are
depreciated using the straight-line method for financial
reporting purposes based on estimated useful lives of 25
years and 5 years, respectively.
Upon complete disposal of a property or classification of
a property as Real Estate Held for Sale, the Company
includes the operating results and sale of the property
in discontinued operations. In addition, the Company
reclassifies the prior periods' operating results of the
property to discontinued operations.
The Company accounts for properties owned as tenants-in-
common with affiliated entities using the proportionate
consolidation method. Each tenant-in-common owns a
separate, undivided interest in the properties. Any
tenant-in-common that holds more than a 50% interest does
not control decisions over the other tenant-in-common
interests. The financial statements reflect only this
Company's percentage share of the properties' land,
building and equipment, liabilities, revenues and
expenses.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(2) Summary of Significant Accounting Policies - (Continued)
The Company's properties are subject to environmental
laws and regulations adopted by various governmental
entities in the jurisdiction in which the properties are
located. These laws could require the Company to
investigate and remediate the effects of the release or
disposal of hazardous materials at these locations if
found. For each property, an environmental assessment is
completed prior to acquisition. In addition, the lease
agreements typically strictly prohibit the production,
handling, or storage of hazardous materials (except where
incidental to the tenant's business such as use of
cleaning supplies) in violation of applicable law to
restrict environmental and other damage. Environmental
liabilities are recorded when it is determined the
liability is probable and the costs can reasonably be
estimated. There were no environmental issues noted or
liabilities recorded at December 31, 2010 and 2009.
Fair Value Measurements
As of December 31, 2010, the Company has no assets or
liabilities measured at fair value on a recurring basis
or nonrecurring basis.
Recently Issued Accounting Pronouncements
Management has reviewed recently issued, but not yet
effective, accounting pronouncements and does not expect
the implementation of these pronouncements to have a
significant effect on the Company's financial statements.
(3) Related Party Transactions -
The Company owns the percentage interest shown below in the
following properties as tenants-in-common with the
affiliated entities listed: Sports Authority store (40% -
AEI Income & Growth Fund 25 LLC); Advance Auto Parts store
(55% - AEI Income & Growth Fund 24 LLC); Applebee's
restaurant in Crawfordsville, Indiana (40% - AEI Income &
Growth Fund XXII Limited Partnership); Best Buy store (30% -
AEI Income & Growth Fund XXI Limited Partnership and AEI
Income & Growth Fund 23 LLC); and Dick's Sporting Goods
store in Fredericksburg, Virginia (27% - AEI Income & Growth
Fund 23 LLC, AEI Income & Growth Fund 24 LLC and AEI Income
& Growth Fund 25 LLC).
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(3) Related Party Transactions - (Continued)
AEI received the following reimbursements for costs and
expenses from the Company for the years ended December 31:
2010 2009
a.AEI is reimbursed for costs incurred in providing services
related to managing the Company's operations and
properties, maintaining the Company's books, and
communicating with the Limited Members. $ 174,243 $ 177,110
======== ========
b.AEI is reimbursed for all direct expenses it paid on the
Company's behalf to third parties related to Company
administration and property management. These
expenses included printing costs, legal and filing fees,
direct administrative costs, outside audit costs, taxes
insurance and other property costs. $ 24,236 $ 25,948
======== ========
The payable to AEI Fund Management, Inc. represents the
balance due for the services described in 3a and b. This
balance is non-interest bearing and unsecured and is to be
paid in the normal course of business.
(4) Investments in Real Estate -
The Company leases its properties to various tenants under
net leases, classified as operating leases. Under a net
lease, the tenant is responsible for real estate taxes,
insurance, maintenance, repairs and operating expenses for
the property. For some leases, the Company is responsible
for repairs to the structural components of the building.
At the time the properties were acquired, the remaining
primary lease terms varied from 10 to 20 years. The leases
provide the tenants with three to four five-year renewal
options subject to the same terms and conditions as the
primary term.
The Company's properties are commercial, single-tenant
buildings. The Sports Authority store was constructed in
1996, renovated in 2001 and acquired in 2006. The Advance
Auto Parts store was constructed in 2004 and acquired in
2006. The Applebee's restaurant in Indianapolis, Indiana
was constructed in 1997 and acquired in 2006. The
Applebee's restaurant in Crawfordsville, Indiana was
constructed in 1996 and acquired in 2006. The Starbucks
restaurant was constructed and acquired in 2007. The Best
Buy store was constructed in 1990, renovated in 1997 and
acquired in 2008. The land for the Dick's Sporting Goods
store was acquired in 2007 and construction of the store was
completed in 2008. There have been no costs capitalized as
improvements subsequent to the acquisitions.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(4) Investments in Real Estate - (Continued)
The cost of the properties and related accumulated
depreciation at December 31, 2010 are as follows:
Buildings and Accumulated
Property Land Equipment Total Depreciation
Sports Authority, Wichita, KS $ 697,617 $1,533,136 $ 2,230,753 $ 288,295
Advance Auto Parts,
Middletown, OH 112,315 909,974 1,022,289 166,829
Applebee's, Indianapolis, IN 889,340 2,164,847 3,054,187 365,174
Applebee's, Crawfordsville, IN 337,353 900,418 1,237,771 144,068
Starbucks, Bluffton, IN 344,008 806,108 1,150,116 108,824
Red Robin, Beavercreek, OH 1,533,655 0 1,533,655 0
Best Buy, Eau Claire, WI 474,137 1,547,025 2,021,162 180,486
Dick's Sporting Goods,
Fredericksburg, VA 1,603,559 1,523,044 3,126,603 159,920
---------- ---------- ----------- ----------
$5,991,984 $9,384,552 $15,376,536 $1,413,596
========== ========== =========== ==========
For properties owned as of December 31, 2010, the minimum
future rent payments required by the leases are as follows:
2011 $ 1,148,666
2012 1,189,119
2013 1,201,276
2014 1,225,858
2015 1,233,860
Thereafter 6,053,369
-----------
$12,052,148
===========
In 2009, the Company recognized contingent rents of $3,234.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(5) Major Tenants -
The following schedule presents rent revenue from individual
tenants, or affiliated groups of tenants, who each
contributed more than ten percent of the Company's total
rent revenue for the years ended December 31:
Tenants Industry 2010 2009
Apple American Group Restaurant $ 309,551 $ 309,551
Dick's Sporting Goods, Inc. Retail 219,445 219,445
TSA Stores, Inc. Retail 204,665 204,665
Best Buy Stores, L.P. Retail 142,222 142,223
Red Robin International, Inc. Restaurant 115,500 116,109
---------- ----------
Aggregate rent revenue of major tenants $ 991,383 $ 991,993
========== ==========
Aggregate rent revenue of major tenants as
a percentage of total rent revenue 87% 87%
========== ==========
(6) Members' Capital -
For the years ended December 31, 2010 and 2009, the Company
declared distributions of $944,425 and $941,377,
respectively. The Limited Members received distributions of
$916,092 and $916,368 and the Managing Members received
distributions of $28,333 and $25,009 for the years,
respectively. The Limited Members' distributions represent
$0.50 and $0.50 per LLC Unit outstanding using 1,828,986 and
1,832,736 weighted average Units in 2010 and 2009,
respectively. The distributions represent $0.30 and $0.27
per Unit of Net Income and $0.20 and $0.23 per Unit of
return of contributed capital in 2010 and 2009,
respectively.
The Company may acquire Units from Limited Members who have
tendered their Units to the Company. Such Units may be
acquired at a discount. The Company will not be obligated
to purchase in any year more than 2% of the total number of
Units outstanding on January 1 of such year. In no event
shall the Company be obligated to purchase Units if, in the
sole discretion of the Managing Members, such purchase would
impair the capital or operation of the Company.
During 2010, one Limited Member redeemed a total of 5,000
Units for $38,225 in accordance with the Operating
Agreement. The Company acquired these Units using Net Cash
Flow from operations. During 2009, the Company did not
redeem any Units from the Limited Members. The redemptions
increase the remaining Limited Members' ownership interest
in the Company. As a result of this redemption payment and
pursuant to the Operating Agreement, the Managing Members
received distributions of $1,182 in 2010.
After the effect of redemptions, the Adjusted Capital
Contribution, as defined in the Operating Agreement, is
$10.03 per original $10 invested.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
(7) Income Taxes -
The following is a reconciliation of net income for
financial reporting purposes to income reported for federal
income tax purposes for the years ended December 31:
2010 2009
Net Income for Financial Reporting Purposes $ 571,367 $ 506,819
Depreciation for Tax Purposes Under
Depreciation for Financial Reporting Purposes 107,685 165,015
---------- ----------
Taxable Income to Members $ 679,052 $ 671,834
========== ==========
The following is a reconciliation of Members' Equity for
financial reporting purposes to Members' Equity reported for
federal income tax purposes for the years ended December 31:
2010 2009
Members'Equity for Financial Reporting Purposes $14,017,146 $14,429,611
Depreciation for Tax Purposes Under
Depreciation for Financial Reporting Purposes 427,401 319,716
Income Accrued for Tax Purposes Over
Income for Financial Reporting Purposes 25,796 25,796
Syndication Costs Treated as Reduction of
Capital for Financial Reporting Purposes 2,691,997 2,691,997
----------- -----------
Members' Equity for Tax Reporting Purposes $17,162,340 $17,467,120
=========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures.
Under the supervision and with the participation of
management, including its President and Chief Financial Officer,
the Managing Member of the Company evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based upon that
evaluation, the President and Chief Financial Officer of the
Managing Member concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures
were effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms
and that such information is accumulated and communicated to
management, including the President and Chief Financial Officer
of the Managing Member, in a manner that allows timely decisions
regarding required disclosure.
(b) Internal Control Over Financial Reporting.
(i) Management's Report on Internal Control Over Financial
Reporting. The Managing Member, through its management, is
responsible for establishing and maintaining adequate internal
control over our financial reporting, as defined in Rule 13a-
15(f) under the Exchange Act, and for performing an assessment of
the effectiveness of our internal control over financial
reporting as of December 31, 2010. Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
system of internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management
of the Managing Member; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial statements.
Management of the Managing Member performed an assessment
of the effectiveness of our internal control over financial
reporting as of December 31, 2010 based upon criteria in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO").
Based on our assessment, management of the Managing Member
determined that our internal control over financial reporting was
effective as of December 31, 2010 based on the criteria in
Internal Control-Integrated Framework issued by the COSO.
ITEM 9A. CONTROLS AND PROCEDURES. (Continued)
This annual report does not include an attestation report
of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not
subject to attestation by our registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that
permit us to provide only management's report in this annual
report.
(ii) Changes in Internal Control Over Financial
Reporting. During the most recent period covered by this report,
there has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The registrant is a limited liability company and has no
officers, directors, or direct employees. The Managing Members
manage and control the Company's affairs and have general
responsibility and the ultimate authority in all matters
affecting the Company's business. The Managing Members are AEI
Fund Management XXI, Inc. ("AFM"), the Managing Member, and
Robert P. Johnson, Chief Executive Officer, President and sole
director of AFM, the Special Managing Member. AFM is a wholly
owned subsidiary of AEI Capital Corporation of which Mr. Johnson
is the majority shareholder. AFM has only one senior financial
executive, its Chief Financial Officer. The Chief Financial
Officer reports directly to Mr. Johnson and is accountable for
his actions to Mr. Johnson. Although Mr. Johnson and AFM require
that all of their personnel, including the Chief Financial
Officer, engage in honest and ethical conduct, ensure full, fair,
accurate, timely, and understandable disclosure, comply with all
applicable governmental laws, rules and regulations, and report
to Mr. Johnson any deviation from these principles, because the
organization is composed of only approximately 35 individuals,
because the management of a company by an entity that has
different interests in distributions and income than investors
involves numerous conflicts of interest that must be resolved on
a daily basis, and because the ultimate decision maker in all
instances is Mr. Johnson, AFM has not adopted a formal code of
conduct. Instead, the materials pursuant to which investors
purchase Units disclose these conflicts of interest in detail and
Mr. Johnson, as the CEO and sole director of AFM, resolves
conflicts to the best of his ability, consistent with his
fiduciary obligations to AFM and the fiduciary obligations of AFM
to the Company. The director and officers of AFM are as follows:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(Continued)
Robert P. Johnson, age 66, is Chief Executive Officer,
President and sole director and has held these positions since
the formation of AFM in August 1994, and has been elected to
continue in these positions until December 2011. From 1970 to
the present, he has been employed exclusively in the investment
industry, specializing in limited partnership investments. In
that capacity, he has been involved in the development, analysis,
marketing and management of public and private investment
programs investing in net lease properties as well as public and
private investment programs investing in energy development.
Since 1971, Mr. Johnson has been the president, a director and a
registered principal of AEI Securities, Inc., which is registered
with the SEC as a securities broker-dealer, is a member of the
Financial Industry Regulatory Authority (FINRA) and is a member
of the Security Investors Protection Corporation (SIPC). Mr.
Johnson has been president, a director and the principal
shareholder of AEI Fund Management, Inc., a real estate
management company founded by him, since 1978. Mr. Johnson is
currently a general partner or principal of the general partner
in nine limited partnerships and a managing member in five LLCs.
Patrick W. Keene, age 51, is Chief Financial Officer,
Treasurer and Secretary and has held these positions since
January 22, 2003 and has been elected to continue in these
positions until December 2011. Mr. Keene has been employed by
AEI Fund Management, Inc. and affiliated entities since 1986.
Prior to being elected to the positions above, he was Controller
of the various entities. From 1982 to 1986, Mr. Keene was with
KPMG Peat Marwick Certified Public Accountants, first as an
auditor and later as a tax manager. Mr. Keene is responsible for
all accounting functions of AFM and the registrant.
Since Mr. Johnson serves as the Special Managing Member of
the Company, as well as the sole director of AFM, all of the
duties that might be assigned to an audit committee are assigned
to Mr. Johnson. Mr. Johnson is not an audit committee financial
expert, as defined. As an officer and majority owner, through a
parent company, of AFM, and as the Special Managing Member, Mr.
Johnson is not a "disinterested director" and may be subject to a
number of conflicts of interests in his capacity as sole director
of AFM.
Before the independent auditors are engaged, Mr. Johnson,
as the sole director of AFM, approves all audit-related fees, and
all permissible nonaudit fees, for services of our auditors.
Section 16(a) Beneficial Ownership Reporting Compliance
Under federal securities laws, the directors and officers
of the Managing Member of the Company, and any beneficial owner
of more than 10% of a class of equity securities of the Company,
are required to report their ownership of the Company's equity
securities and any changes in such ownership to the Securities
and Exchange Commission (the "Commission"). Specific due dates
for these reports have been established by the Commission, and
the Company is required to disclose in this Annual Report on 10-K
any delinquent filing of such reports and any failure to file
such reports during the fiscal year ended December 31, 2010.
Based upon information provided by officers and directors of the
Managing Member, all officers, directors and 10% owners filed all
reports on a timely basis in the 2010 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The Managing Member and affiliates are reimbursed at cost
for all services performed on behalf of the registrant and for
all third party expenses paid on behalf of the registrant. The
cost for services performed on behalf of the registrant is based
on actual time spent performing such services plus an overhead
burden. These services include organizing the registrant and
arranging for the offer and sale of Units, reviewing properties
for acquisition and rendering administrative, property management
and property sales services. The amount and nature of such
payments are detailed in Item 13 of this annual report on Form 10-
K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information pertaining to
the ownership of the Units by each person known by the Company to
beneficially own 5% or more of the Units, by each Managing
Member, and by each officer or director of the Managing Member as
of February 28, 2011:
Name and Address Number of Percent
of Beneficial Owner Units Held of Class
AEI Fund Management XXI, Inc. 0 0%
Robert P. Johnson 0 0%
Patrick W. Keene 0 0%
Address for all:
1300 Wells Fargo Place
30 East 7th Street, St. Paul, Minnesota 55101
The Managing Members know of no holders of more than 5% of the
outstanding Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
The registrant, AFM and its affiliates have common
management and utilize the same facilities. As a result, certain
administrative expenses are allocated among these related
entities. All of such activities and any other transactions
involving the affiliates of the Managing Member of the registrant
are governed by, and are conducted in conformity with, the
limitations set forth in the Operating Agreement of the
registrant. Reference is made to Note 3 of the Financial
Statements, as presented, and is incorporated herein by
reference, for details of related party transactions for the
years ended December 31, 2010 and 2009.
Neither the registrant, nor the Managing Member of the
registrant, has a board of directors consisting of any members
who are "independent." The sole director of the Managing Member,
Robert P. Johnson, is also the Special Managing Member of the
registrant, and is the Chief Executive Officer, and indirectly
the principal owner, of the Managing Member. Accordingly, there
is no disinterested board, or other functioning body, that
reviews related party transactions, or the transactions between
the registrant and the Managing Members, except as performed in
connection with the audit of its financial statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE. (Continued)
The limitations included in the Operating Agreement
require that the cumulative reimbursements to the Managing
Members and their affiliates for certain expenses will not exceed
an amount equal to the sum of (i) 20% of capital contributions,
(ii) 1% of gross revenues, plus an initial leasing fee of 3% of
gross revenues for the first five years of the original term of
each lease, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net
Cash Flow less the Net Cash Flow actually distributed to the
Managing Members. The cumulative reimbursements subject to this
limitation are reimbursements for (i) organization and offering
expenses, including commissions and an Organization Fee, (ii)
acquisition expenses paid with proceeds from the initial offering
of Units, (iii) services provided in the sales effort of
properties, and (iv) expenses of controlling persons and overhead
expenses directly attributable to the forgoing services or
attributable to administrative services. As of December 31,
2010, these cumulative reimbursements to the Managing Members and
their affiliates did not exceed the limitation amount.
The following table sets forth the forms of compensation,
distributions and cost reimbursements paid by the registrant to
the Managing Members or their Affiliates in connection with the
operation of the Fund and its properties for the period from
inception through December 31, 2010.
Person or Entity Amount Incurred From
Receiving Form and Method Inception (March 14, 2005)
Compensation of Compensation To December 31, 2010
AEI Securities, Inc. Selling Commissions equal to 10% of $1,790,447
proceeds, excluding proceeds from
distribution reinvestments, most of
which were reallowed to Participating
Dealers.
Managing Members Reimbursement at Cost for other $ 916,368
and Affiliates Organization and Offering Costs.
Managing Members Reimbursement at Cost for all $ 278,726
and Affiliates Acquisition Expenses.
Managing Members Reimbursement at Cost for providing $ 704,818
Affiliates administrative services to the Fund,
including all expenses related to
management of the Fund's properties
and all other transfer agency,
reporting, partner relations and other
administrative functions.
Managing Members Reimbursement at Cost for providing $ 0
and Affiliates services related to the disposition
of the Fund's properties.
Managing Members 3% of Net Cash Flow in any fiscal year. $ 110,494
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE. (Continued)
Person or Entity Amount Incurred From
Receiving Form and Method Inception (March 14, 2005)
Compensation of Compensation To December 31, 2010
Managing Members 1% of distributions of Net Proceeds $ 0
of Sale until Limited Members have
received an amount equal to (a) their
Adjusted Capital Contributions, plus
(b) an amount equal to 6.5% of their
Adjusted Capital Contributions per
annum, cumulative but not compounded,
to the extent not previously distributed.
10% of distributions of Net Proceeds of
Sale thereafter.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following is a summary of the fees billed to the
Company by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for
professional services rendered for the years ended December 31,
2010 and 2009:
Fee Category 2010 2009
Audit Fees $ 15,470 $ 15,225
Audit-Related Fees 0 0
Tax Fees 0 0
All Other Fees 0 0
--------- --------
Total Fees $ 15,470 $ 15,225
========= ========
Audit Fees - Consists of fees billed for professional services
rendered for the audit of the Company's annual financial
statements and review of the interim financial statements
included in quarterly reports, and services that are normally
provided by Boulay, Heutmaker, Zibell & Co. P.L.L.P. in
connection with statutory and regulatory filings or engagements.
Audit-Related Fees - Consists of fees billed for assurance and
related services that are reasonably related to the performance
of the audit or review of financial statements and are not
reported under "Audit Fees." These services include consultations
concerning financial accounting and reporting standards.
Tax Fees - Consists of fees billed for professional services for
federal and state tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services other
than the services reported above.
Policy for Preapproval of Audit and Permissible Non-Audit
Services of Independent Auditors
Before the Independent Auditors are engaged by the Company
to render audit or non-audit services, the engagement is approved
by Mr. Johnson acting as the Company's audit committee.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) (1) A list of the financial statements contained
herein is set forth on page 12.
(a) (2) Schedules are omitted because of the absence of
conditions under which they are required or because
the required information is presented in the
financial statements or related notes.
(a) (3) The Exhibits filed in response to Item 601 of
Regulation S-K are listed below.
3.1 Certificate of Limited Liability Company (incorporated
by reference to Exhibit 3.1 of the registrant's Registration
Statement on Form SB-2 filed on May 26, 2005 [File No. 333-
125266]).
3.2 Operating Agreement to the Prospectus (incorporated by
reference to Exhibit A of the registrant's Registration
Statement on Form SB-2 filed on October 14, 2005 [File No.
333-125266]).
10.1 Assignment and Assumption of Lease and Guaranty dated
April 3, 2006 between the Company and AEI Fund Management
XVII, Inc. relating to the Property at 6959 East 21st
Street, Wichita, Kansas (incorporated by reference to
Exhibit 10.1 of Form 8-K filed April 5, 2006).
10.2 Assignment and Assumption of Lease dated May 31, 2006
between the Company, AEI Income & Growth Fund 24 LLC and
Blue Bell Partners, LLC relating to the Property at 65 North
University Boulevard, Middletown, Ohio (incorporated by
reference to Exhibit 10.2 of Form 8-K filed June 7, 2006).
10.3 Net Lease Agreement dated September 21, 2006 between
the Company, AEI Fund Management XVII, Inc. and Apple
Indiana II LLC relating to the Property at 7345 E.
Washington Street, Indianapolis, Indiana (incorporated by
reference to Exhibit 10.2 of Form 8-K filed September 26,
2006).
10.4 Assignment and Assumption of Lease dated December 29,
2006 between the Company, AEI Income & Growth Fund XXII
Limited Partnership and AEI Fund Management XVII, Inc.
relating to the Property at 1516 South Washington Street,
Crawfordsville, Indiana (incorporated by reference to
Exhibit 10.1 of Form 8-K filed January 8, 2007).
31.1 Certification of Chief Executive Officer of Managing
Member pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of Managing
Member pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer of Managing Member pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AEI INCOME & GROWTH FUND 26
Limited Liability Company
By: AEI Fund Management XXI, Inc.
Its Managing Member
March 25, 2011 By:/s/ ROBERT P JOHNSON
Robert P. Johnson,
President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
/s/ROBERT P JOHNSON President (Principal Executive Officer) March 25, 2011
Robert P.Johnson and Sole Director of Managing Member
/s/PATRICK W KEENE Chief Financial Officer and Treasurer March 25, 2011
Patrick W.Keene (Principal Accounting Officer)
