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EX-31.1 - AEI INCOME & GROWTH FUND XXII LTD PARTNERSHIPex31-122.htm

 
 

 


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, 2011

Commission file number:  000-24003

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

 
State of Minnesota
 
41-1848181
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
         
 
30 East 7th Street, Suite 1300
St. Paul, Minnesota 55101
 
(651) 227-7333
 
 
(Address of principal executive offices)
 
(Registrant’s telephone number)
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
None
 
None
 

Securities registered pursuant to Section 12(g) of the Act:
 
Limited Partnership 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.     o Yes    x No

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.     o Yes    x No

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.
x Yes    o 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).     o Yes    o 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.
o Large accelerated filer
o Accelerated filer
o Non-accelerated filer
x Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes    x No

As of June 30, 2011, there were 15,675.527 Units of limited partnership 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 $15,675,527.

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 XXII Limited Partnership (the "Partnership" or the "Registrant") is a limited partnership which was organized pursuant to the laws of the State of Minnesota on July 31, 1996.  The registrant is comprised of AEI Fund Management XXI, Inc. (“AFM”) as Managing General Partner, Robert P. Johnson, the President and sole director of AFM, as the Individual General Partner, and purchasers of partnership units as Limited Partners. The Partnership offered for sale up to $24,000,000 of limited partnership interests (the "Units") (24,000 Units at $1,000 per Unit) pursuant to a registration statement effective January 10, 1997.  The Partnership commenced operations on May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted.  The Partnership's offering terminated January 9, 1999 when the extended offering period expired.  The Partnership received subscriptions for 16,917.222 Limited Partnership Units ($16,917,222).

The Partnership was organized to acquire existing and newly constructed commercial properties located in the United States, to lease such properties to tenants under net leases, to hold such properties and to eventually sell such properties.  From subscription proceeds, the Partnership purchased twelve properties, including partial interests in three properties, at a total cost of $13,363,547.  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 Partnership's properties were purchased without any indebtedness.  The Partnership will not finance properties in the future to obtain proceeds for new property acquisitions.  If it is required to do so, the Partnership may incur short-term indebtedness, which may be secured by a portion of the Partnership's properties, to finance day-to-day cash flow requirements (including cash flow necessary to repurchase Units).  The amount of borrowings that may be secured by the properties is limited in the aggregate to 10% of the purchase price of all properties.  The Partnership will not incur borrowings prior to application of the proceeds from sale of the Units, will not incur borrowings to pay distributions, and will not incur borrowings while there is cash available for distributions.

The Partnership will hold its properties until the General Partners determine that the sale or other disposition of the properties is advantageous in view of the Partnership's investment objectives.  In deciding whether to sell properties, the General Partners will consider factors such as potential appreciation, net cash flow and income tax considerations.  The Partnership 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 Partnership reserves the right, at the discretion of the General Partners, to either distribute proceeds from the sale of properties to the Partners or to reinvest such proceeds in additional properties, provided that sufficient proceeds are distributed to the Limited Partners to pay federal and state income taxes related to any taxable gain recognized as a result of the sale.


 
 
 

 

ITEM 1.  BUSINESS.  (Continued)

The prospectus under which Units were initially sold indicated that the General Partners intended to liquidate the Partnership 12 to 15 years after formation, depending upon the then current real estate and money markets, the economic climate and the income tax consequences to the Limited Partners.  Although it has been almost 15 years since the first admission of Limited Partners to the Partnership, the General Partners do not believe that current market conditions are particularly favorable at this time.  As a result, the General Partners do not believe that sale of properties and liquidation of the Partnership is in the best interest of the Limited Partners.  Until the economic conditions improve, it is difficult to estimate when the Partnership may be able to commence its liquidation.

Leases

Although there are variations in the specific terms of the leases, the following is a summary of the general terms of the Partnership’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 Partnership is responsible for repairs to the structural components of the building, the roof, and the parking lot.  At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years, except for the Staples store, which had a remaining primary term of 8.4 years.  The leases provide the tenants with two 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 Partnership to receive additional rent in future years based on stated rent increases.

Property Activity During the Last Three Years

As of December 31, 2008, the Partnership owned a significant interest in nine properties and a minor interest in five properties with a total original cost of $12,762,299.  During the years ended December 31, 2010 and 2011, the Partnership sold three property interests and received net sale proceeds of $34,485 and $889,965, which resulted in net gains of $3,403 and $83,734, respectively.  During 2011, the Partnership expended $897,288 to purchase one additional property as it reinvested cash generated from property sales.  As of December 31, 2011, the Partnership owned a significant interest in nine properties and a minor interest in three properties with a total original cost of $12,278,964.

Major Tenants

During 2011, five tenants each contributed more than ten percent of the Partnership's total rental revenue.  The major tenants, in aggregate, contributed 80% of total rental revenue in 2011.  It is anticipated that, based on the minimum rental payments required under the leases, each major tenant, with one exception, will continue to contribute more than ten percent of rental income in 2012 and future years.  The tenant of the KinderCare daycare centers will not continue to be a major tenant as one of the daycare centers was sold in January 2012.  Any failure of these major tenants could materially affect the Partnership's net income and cash distributions.


Page 2 of 44
 
 

 

ITEM 1.  BUSINESS.  (Continued)

Competition

The Partnership 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 Partnership.  At the time the Partnership elects to dispose of its properties, the Partnership will be in competition with other persons and entities to find buyers for its properties.

Employees

The Partnership has no direct employees.  Management services are performed for the Partnership 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 Partnership's investment objectives are to acquire existing or newly-developed commercial properties throughout the United States that offer the potential for (i) regular cash distributions of lease income; (ii) growth in lease income through rent escalation provisions; (iii) preservation of capital through all-cash transactions; (iv) capital growth through appreciation in the value of properties; and (v) stable property performance through long-term lease contracts.  The Partnership 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 General Partners attempt to diversify the type and location of the Partnership's properties.

Description of Properties

The Partnership'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 Partnership holds an undivided fee simple interest in the properties.

The Partnership'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 Partnership decides to sell the property.  At this time, the Partnership 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 Partnership would be competing with other real estate owners, who have property vacancies, to attract a new tenant to lease the property.  The Partnership'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.

Page 3 of 44
 
 

 

ITEM 2.  PROPERTIES.  (Continued)

The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2011.
Property
Purchase
Date
Property
Cost
Tenant
Annual
Lease
Payment
Annual
Rent
Per Sq. Ft.
                   
TGI Friday's Restaurant
   Greensburg, PA
   (.8729%)
12/10/97
$
14,580
 
Ohio Valley
Bistros, Inc.
$
1,563
$
39.70
                   
KinderCare Daycare Center
   Pearland, TX
7/14/99
$
943,416
 
KinderCare Learning Centers LLC
$
101,199
$
13.32
                   
KinderCare Daycare Center
   Golden, CO
   (1.9962%)
9/28/00
$
33,528
 
KinderCare Learning Centers LLC
$
4,006
$
23.42
                   
KinderCare Daycare Center
   Plainfield, IL
   (.3154%)
5/14/01
$
4,645
 
KinderCare Learning Centers LLC
$
538
$
19.06
                   
Johnny Carino’s Restaurant
   Longmont, CO
   (50%)
12/30/03
$
1,293,405
 
Kona Restaurant Group, Inc.
$
74,940
$
23.14
                   
Jared Jewelry Store
   Sugar Land, TX
   (40%)
7/15/04
$
1,533,966
 
Sterling
Jewelers Inc.
$
140,711
$
57.53
                   
Applebee’s Restaurant
   Johnstown, PA
   (38%)
9/21/06
$
1,031,187
 
B.T. Woodlipp, Inc.
$
79,948
$
40.51
                   
Advance Auto Parts Store
   Indianapolis, IN
   (65%)
12/21/06
$
1,244,173
 
Advance Stores
Company, Inc.
$
87,168
$
19.16
                   
Applebee’s Restaurant
   Crawfordsville, IN
   (60%)
12/29/06
$
1,856,656
 
Apple Indiana
II LLC
$
143,978
$
45.62
                   
Tractor Supply Company Store
   Grand Forks, ND
   (50%)
1/19/07
$
1,403,874
 
Tractor Supply
Company
$
108,697
$
9.86
                   
Best Buy Store
   Lake Geneva, WI
   (33%)
10/6/08
$
2,022,246
 
Best Buy
Stores, L.P.
$
144,325
$
14.40
                   
Staples Store
   Clermont, FL
   (28%)
10/21/11
$
897,288
(1)
Staples the
Office Superstore
East, Inc.
$
73,031
$
13.15

(1)  Does not include acquisition costs that were expensed.


Page 4 of 44
 
 

 

ITEM 2.  PROPERTIES.  (Continued)

The properties listed above with a partial ownership percentage are owned with the following affiliated entities:  Johnny Carino’s restaurant (AEI Accredited Investor Fund 2002 Limited Partnership); Jared Jewelry store (AEI Accredited Investor Fund 2002 Limited Partnership); Applebee’s restaurant in Johnstown, Pennsylvania (AEI Income & Growth Fund XXI Limited Partnership); Advance Auto Parts store (AEI Income & Growth Fund 25 LLC); Applebee’s restaurant in Crawfordsville, Indiana (AEI Income & Growth Fund 26 LLC); Tractor Supply Company store (AEI Income & Growth Fund 24 LLC); Best Buy store (AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 27 LLC); and Staples store (AEI Income & Growth Fund 25 LLC).  The remaining interests in the TGI Friday’s restaurant and the KinderCare daycare centers in Golden, Colorado and Plainfield, Illinois are owned by unrelated third parties.

The Partnership accounts for properties owned as tenants-in-common with affiliated entities and/or unrelated third parties 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 Partnership'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, except for the Staples store, which had a remaining primary term of 8.4 years.  The leases provide the tenants with two 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 General Partners believe the properties are adequately covered by insurance and consider the properties to be well-maintained and sufficient for the Partnership's operations.

For tax purposes, the Partnership's property costs include the value of intangible lease assets and acquisition expenses that were expensed for book purposes.  The 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 Partnership has tax-exempt Partners, the Partnership 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 is the same as the basis for book depreciation purposes except for properties purchased after January 1, 2009.  For those properties, acquisition expenses that were expensed for book purposes were capitalized and added to the basis of the property for tax depreciation purposes.

At December 31, 2011, all properties listed above were 100% occupied.


Page 5 of 44
 
 

 

ITEM 3.  LEGAL PROCEEDINGS.

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

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, 2011, there were 740 holders of record of the registrant's Limited Partnership 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 Partnership did not sell any equity securities that are not registered under the Securities Act of 1933.

Cash distributions of $21,367 and $22,373 were made to the General Partners and $738,006 and $784,001 were made to the Limited Partners for 2011 and 2010, respectively.  The distributions were made on a quarterly basis and represent Net Cash Flow, as defined, except as discussed below.  These distributions should not be compared with dividends paid on capital stock by corporations.

As part of the Limited Partnership distributions discussed above, the Partnership distributed net sale proceeds of $70,000 and $90,000 in 2011 and 2010, respectively.  The distributions reduced the Limited Partners' Adjusted Capital Contributions.

(b) Not applicable.

(c) Pursuant to Section 7.7 of the Partnership Agreement, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during January or July of each year.  The purchase price of the Units is equal to 90% 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 General Partner in accordance with the provisions of the Partnership Agreement.  Units tendered to the Partnership during January and July are redeemed on April 1st and October 1st, respectively, of each year subject to the following limitations.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.  During the last three months of 2011, the Partnership did not purchase any Units.

ITEM 6.  SELECTED FINANCIAL DATA.

Not required for a smaller reporting company.

Page 6 of 44
 
 

 

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 Partnership's financial condition and results of operations, including the following:

 
Market and economic conditions which affect the value of the properties the Partnership 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 the Partners;
 
resolution by the General Partners of conflicts with which they may be confronted;
 
the success of the General Partners 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 Partnership operate.

Application of Critical Accounting Policies

The Partnership’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).  Preparing the financial statements requires management to use judgment in the application of these accounting policies, including making estimates and assumptions.  These judgments will affect the reported amounts of the Partnership’s assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and will affect the reported amounts of revenue and expenses during the reporting periods.  It is possible that the carrying amount of the Partnership’s assets and liabilities, or the results of reported operations, will be affected if management’s estimates or assumptions prove inaccurate.

Management of the Partnership evaluates the following accounting estimates on an ongoing basis, and has discussed the development and selection of these estimates and the management discussion and analysis disclosures regarding them with managing partner of the Partnership.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Partnership records them in the financial statements at cost (not including acquisition expenses).  The purchase price is allocated to tangible assets, consisting of land and building, and to identified intangible assets and liabilities, which may include the value of above market and below market leases and the value of in-place leases.  The allocation of the purchase price is based upon the fair value of each component of the property.  Although independent appraisals may be used to assist in the determination of fair value, in many cases these values will be based upon management’s assessment of each property, the selling prices of comparable properties and the discounted value of cash flows from the asset.



Page 7 of 44
 
 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods.  The above market and below market lease values will be capitalized as intangible lease assets or liabilities.  Above market lease values will be amortized as an adjustment of rental income over the remaining terms of the respective leases.  Below market leases will be amortized as an adjustment of rental income over the remaining term of the respective leases, including any bargain renewal periods.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.
 
The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease.  Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management’s consideration of current market costs to execute a similar lease.  These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease.  These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

The determination of the fair values of the assets and liabilities acquired will require the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount and capitalization rates, interest rates and other variables.  If management’s estimates or assumptions prove inaccurate, the result would be an inaccurate allocation of purchase price, which could impact the amount of reported net income.

Carrying Value of Properties

The carrying value of the properties is initially recorded at cost, not including acquisition expenses.  The Partnership tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable.  For properties the Partnership 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.


Page 8 of 44
 
 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

Allocation of Expenses

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 Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement.

Results of Operations

For the years ended December 31, 2011 and 2010, the Partnership recognized rental income from continuing operations of $784,446 and $750,015, respectively.  In 2011, rental income increased due to additional rent received from one property acquisition in 2011 and rent increases on five properties.  Based on the scheduled rent for the properties owned as of February 29, 2012, the Partnership expects to recognize rental income from continuing operations of approximately $860,000 in 2012.

For the years ended December 31, 2011 and 2010, the Partnership incurred Partnership administration expenses from affiliated parties of $156,809 and $167,318, respectively.  These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Partners.  During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $26,537 and $22,306, 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 year ended December 31, 2011, the Partnership incurred property acquisition expenses of $18,941 related to the purchase of the Staples store.

For the years ended December 31, 2011 and 2010, the Partnership recognized interest income of $7,732 and $4,455, respectively.  In 2011, interest income increased due to the Partnership having more money invested in a money market account due to property sales.

Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations.  In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations.  For the year ended December 31, 2011, the Partnership recognized income from discontinued operations of $162,189, representing rental income less property management expenses and depreciation of $78,455 and gain on disposal of real estate of $83,734.  For the year ended December 31, 2010, the Partnership recognized a loss from discontinued operations of $116,675, representing a real estate impairment loss of $218,607, which was partially offset by rental income less property management expenses and depreciation of $98,529 and a gain on disposal of real estate of $3,403.


Page 9 of 44
 
 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

On February 2, 2010, Hollywood Entertainment Corporation (HEC), the tenant of the Hollywood Video stores in Minot, North Dakota (100% ownership interest) and Saraland, Alabama (3.08% ownership interest) filed for Chapter 11 bankruptcy reorganization for the second time.  In July 2010, HEC closed its remaining stores, filed a motion with the bankruptcy court to reject the Lease for the Minot store and returned possession of the property to the Partnership.  The Partnership listed the property for sale with a real estate broker in the Minot area.  While the property was vacant, the Partnership was responsible for real estate taxes and other costs associated with maintaining the property.  Based on an analysis of market conditions in the area, the Partnership determined the property was impaired.  As a result, in the second quarter of 2010, a charge to discontinued operations for real estate impairment of $218,607 was recognized, which was the difference between the carrying value at June 30, 2010 of $1,018,607 and the estimated fair value of $800,000.  The charge was recorded against the cost of the land and building.

In November 2010, the Partnership entered into an agreement to sell the Minot store to an unrelated third party.  On January 14, 2011, the sale closed with the Partnership receiving net proceeds of $881,953, which resulted in a net gain of $81,953.  At December 31, 2010, the property was classified as Real Estate Held for Sale.

In February 2010, HEC closed the Saraland store and filed a motion with the bankruptcy court to reject the Lease for this property.  The court approved the motion and HEC returned possession of the property to the Partnership.  The Partnership listed the property for sale or lease with a real estate broker in the Saraland area.  While the property was vacant, the Partnership was responsible for its 3.08% share of real estate taxes and other costs associated with maintaining the property.  In May 2010, the Partnership entered into an agreement to sell its interest in the Saraland store to an unrelated third party.  On August 20, 2010, the sale closed with the Partnership receiving net sale proceeds of $34,485, which resulted in a net gain of $3,403.  The cost and related accumulated depreciation of the interest sold was $42,439 and $11,357, respectively.

On March 17, 2011, the Partnership sold its remaining 0.5877% interest in the Arby’s restaurant in Homewood, Alabama to an unrelated third party.  The Partnership received net sale proceeds of $8,012, which resulted in a net gain of $1,781.  The cost and related accumulated depreciation of the interest sold was $8,184 and $1,953, respectively.

On January 6, 2012, the Partnership sold the KinderCare daycare center in Pearland, Texas to an unrelated third party.  The Partnership received net sale proceeds of approximately $854,000, which resulted in a net gain of approximately $271,600.  At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $582,390.

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.


Page 10 of 44
 
 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

Liquidity and Capital Resources

During the year ended December 31, 2011, the Partnership's cash balances decreased $99,506 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property.  During the year ended December 31, 2010, the Partnership's cash balances decreased $81,073 as a result of distributions paid to the Partners in excess of cash generated from operating and investing activities.

Net cash provided by operating activities decreased from $713,687 in 2010 to $667,596 in 2011 as a result of a decrease in total rental and interest income in 2011 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 Partnership administration and property management expenses in 2011.  During 2011, cash from operations was also reduced by $18,941 of acquisition expenses related to the purchase of real estate.  Pursuant to accounting guidance, these expenses were reflected as operating cash outflows.  However, pursuant to the Partnership Agreement, acquisition expenses were funded with proceeds from property sales.

The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate.  During the years ended December 31, 2011 and 2010, the Partnership generated cash flow from the sale of real estate of $889,965 and $34,485, respectively.  During the year ended December 31, 2011, the Partnership expended $897,288 to invest in real properties as the Partnership reinvested cash generated from property sales.

On October 21, 2011, the Partnership purchased a 28% interest in a Staples store in Clermont, Florida for $897,288.  The property is leased to Staples the Office Superstore East, Inc. under a Lease Agreement with a remaining primary term of 8.4 years (as of the date of purchase) and annual rent of $73,031 for the interest purchased.  The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership.

On March 16, 2012, the Partnership purchased a 34% interest in a PetSmart store in Galveston, Texas for $824,500.  The property is leased to PetSmart, Inc. under a Lease Agreement with a remaining primary term of 10.0 years and annual rent of $65,560 for the interest purchased.  The remaining interest in the property was purchased by AEI Accredited Investor Fund V LP, an affiliate of the Partnership.

The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners.  The Partnership 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 Partnership attempts to maintain a stable distribution rate from quarter to quarter.  Redemption payments are paid to redeeming Partners on a semi-annual basis.


Page 11 of 44
 
 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

For the years ended December 31, 2011 and 2010, the Partnership declared distributions of $759,373 and $806,374, respectively.  Pursuant to the Partnership Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Partners and 3% to the General Partners.  Distributions of Net Proceeds of Sale were allocated 99% to the Limited Partners and 1% to the General Partners.  The Limited Partners received distributions of $738,006 and $784,001 and the General Partners received distributions of $21,367 and $22,373 for the periods, respectively.  In 2011, distributions were lower due to a decrease in the distribution rate per Unit, effective July 1, 2010.

During 2011 and 2010, the Partnership distributed net sale proceeds of $70,707 and $90,909 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $4.45 and $5.73 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership.  Such Units may be acquired at a discount.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.

During 2011, the Partnership did not redeem any Units from the Limited Partners.  During 2010, one Limited Partner redeemed 1.25 Partnership Units for $883 in accordance with the Partnership Agreement.  The Partnership acquired these Units using Net Cash Flow from operations.  In prior years, a total of 70 Limited Partners redeemed 1,218.44 Partnership Units for $974,262.  The redemptions increase the remaining Limited Partners’ ownership interest in the Partnership.  As a result of this redemption payment and pursuant to the Partnership Agreement, the General Partners received distributions of $27 in 2010.

The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.

The Economy and Market Conditions

The impact of conditions in the economy over the last few years, including the turmoil in the credit markets, has adversely affected many real estate investment funds.  However, the absence of mortgage financing on the Partnership'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 Partnership's tenants and their cash flows.  If a tenant were to default on its lease obligations, the Partnership's income would decrease, its distributions would likely be reduced and the value of its properties might decline.


Page 12 of 44
 
 

 

ITEM 7A.  QUANTITATIVE & 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.

Page 13 of 44
 
 

 






AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP

INDEX TO FINANCIAL STATEMENTS




 
Page
   
Report of Independent Registered Public Accounting Firm
16
   
Balance Sheet as of December 31, 2011 and 2010
17
   
Statements for the Years Ended December 31, 2011 and 2010:
 
   
 
Income
18
     
 
Cash Flows
19
     
 
Changes in Partners’ Capital
20
   
Notes to Financial Statements
21 – 32



Page 14 of 44
 
 

 




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Partners:
AEI Income & Growth Fund XXII Limited Partnership
St. Paul, Minnesota



We have audited the accompanying balance sheet of AEI Income & Growth Fund XXII Limited Partnership (a Minnesota limited partnership) as of December 31, 2011 and 2010, and the related statements of income, cash flows and changes in partners' capital (deficit) for the years then ended.  The Partnership'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 Partnership 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 Partnership’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 XXII Limited Partnership as of December 31, 2011 and 2010, 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 29, 2012
 


Page 15 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
BALANCE SHEET

ASSETS

   
December 31,
 
December 31,
   
2011
 
2010
Current Assets:
       
Cash
$
410,261
$
509,767
         
Real Estate Held for Investment:
       
Land
 
3,201,246
 
3,170,347
Buildings and Equipment
 
8,017,349
 
8,219,513
Acquired Intangible Lease Assets
 
116,953
 
0
Real Estate Investments, at cost
 
11,335,548
 
11,389,860
Accumulated Depreciation and Amortization
 
(1,588,855)
 
(1,623,752)
Real Estate Held for Investment, Net
 
9,746,693
 
9,766,108
Real Estate Held for Sale
 
582,390
 
800,000
Total Real Estate
 
10,329,083
 
10,566,108
Total Assets
$
10,739,344
$
11,075,875

LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
       
Payable to AEI Fund Management, Inc.
$
35,544
$
52,734
Distributions Payable
 
190,208
 
190,614
Unearned Rent
 
29,457
 
35,225
Total Current Liabilities
 
255,209
 
278,573
         
Partners’ Capital (Deficit):
       
General Partners
 
572
 
(16,055)
Limited Partners, $1,000 per Unit;
   24,000 Units authorized; 16,917 Units issued;
   15,698 Units outstanding
 
10,483,563
 
10,813,357
Total Partners' Capital
 
10,484,135
 
10,797,302
Total Liabilities and Partners' Capital
$
10,739,344
$
11,075,875





The accompanying Notes to Financial Statements are an integral part of this statement.

Page 16 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF INCOME


   
Year Ended December 31,
   
2011
 
2010
         
Rental Income
$
784,446
$
750,015
         
Expenses:
       
Partnership Administration – Affiliates
 
156,809
 
167,318
Partnership Administration and Property
   Management – Unrelated Parties
 
26,537
 
22,306
Property Acquisition
 
18,941
 
0
Depreciation and Amortization
 
305,874
 
299,050
Total Expenses
 
508,161
 
488,674
         
Operating Income
 
276,285
 
261,341
         
Other Income:
       
Interest Income
 
7,732
 
4,455
         
Income from Continuing Operations
 
284,017
 
265,796
         
Income (Loss) from Discontinued Operations
 
162,189
 
(116,675)
         
Net Income
$
446,206
$
149,121
         
Net Income Allocated:
       
General Partners
$
37,994
$
9,961
Limited Partners
 
408,212
 
139,160
Total
$
446,206
$
149,121
         
Income (Loss) per Limited Partnership Unit:
       
Continuing Operations
$
17.54
$
16.42
Discontinued Operations
 
8.46
 
(7.56)
Total
$
26.00
$
8.86
         
Weighted Average Units Outstanding –
      Basic and Diluted
 
15,698
 
15,698
         



The accompanying Notes to Financial Statements are an integral part of this statement.

Page 17 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS


   
Year Ended December 31,
   
2011
 
2010
         
Cash Flows from Operating Activities:
       
Net Income
$
446,206
$
149,121
         
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
       
Depreciation and Amortization
 
328,082
 
343,464
Real Estate Impairment
 
0
 
218,607
Gain on Sale of Real Estate
 
(83,734)
 
(3,403)
Increase (Decrease) in Payable to
   AEI Fund Management, Inc.
 
(17,190)
 
5,338
Increase (Decrease) in Unearned Rent
 
(5,768)
 
560
Total Adjustments
 
221,390
 
564,566
Net Cash Provided By
   Operating Activities
 
667,596
 
713,687
         
Cash Flows from Investing Activities:
       
Investments in Real Estate
 
(897,288)
 
0
Proceeds from Sale of Real Estate
 
889,965
 
34,485
Net Cash Provided By (Used For)
   Investing Activities
 
(7,323)
 
34,485
         
Cash Flows from Financing Activities:
       
Distributions Paid to Partners
 
(759,779)
 
(828,335)
Redemption Payments
 
0
 
(910)
Net Cash Used For
   Financing Activities
 
(759,779)
 
(829,245)
         
Net Increase (Decrease) in Cash
 
(99,506)
 
(81,073)
         
Cash, beginning of year
 
509,767
 
590,840
         
Cash, end of year
$
410,261
$
509,767
         


The accompanying Notes to Financial Statements are an integral part of this statement.

Page 18 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)


   
General Partners
 
Limited Partners
 
Total
 
Limited Partnership Units Outstanding
                 
                 
Balance, December 31, 2009
$
(3,616)
$
11,459,081
$
11,455,465
 
15,698.78
                 
Distributions Declared
 
(22,373)
 
(784,001)
 
(806,374)
   
                 
Redemption Payments
 
(27)
 
(883)
 
(910)
 
(1.25)
                 
Net Income
 
9,961
 
139,160
 
149,121
   
                 
Balance, December 31, 2010
 
(16,055)
 
10,813,357
 
10,797,302
 
15,697.53
                 
Distributions Declared
 
(21,367)
 
(738,006)
 
(759,373)
   
                 
Net Income
 
37,994
 
408,212
 
446,206
   
                 
Balance, December 31, 2011
$
572
$
10,483,563
$
10,484,135
 
15,697.53
                 





















The accompanying Notes to Financial Statements are an integral part of this statement.

Page 19 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(1)  Organization –

AEI Income & Growth Fund XXII Limited Partnership (“Partnership”) was formed to acquire and lease commercial properties to operating tenants.  The Partnership's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner.  Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner.  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 Partnership.

The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer.  The Partnership commenced operations on May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted.  The offering terminated January 9, 1999 when the extended offering period expired.  The Partnership received subscriptions for 16,917.222 Limited Partnership Units.  Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $16,917,222 and $1,000, respectively.

During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 97% to the Limited Partners and 3% to the General Partners.  Distributions to Limited Partners will be made pro rata by Units.

Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 9% 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 Partners and 10% to the General Partners.  Distributions to the Limited Partners 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 first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year.  Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed.  Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners.


Page 20 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(1)  Organization – (Continued)

For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 9% 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 Partners and 10% to the General Partners.  Losses will be allocated 98% to the Limited Partners and 2% to the General Partners.

The General Partners are not required to currently fund a deficit capital balance.  Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions.

(2)  Summary of Significant Accounting Policies –

Financial Statement Presentation

The accounts of the Partnership 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 Partnership 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.

Cash Concentrations of Credit Risk

The Partnership's cash is deposited in one financial institution and at times during the year it may exceed FDIC insurance limits.


Page 21 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(2)  Summary of Significant Accounting Policies – (Continued)

Receivables

Credit terms are extended to tenants in the normal course of business.  The Partnership performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.

Receivables are recorded at their estimated net realizable value.  The Partnership 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 Partnership 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 Partnership’s credit terms.  Receivables considered uncollectible are written off.

Income Taxes

The income or loss of the Partnership for federal income tax reporting purposes is includable in the income tax returns of the partners.  In general, no recognition has been given to income taxes in the accompanying financial statements.

The tax return and the amount of distributable Partnership income or loss are subject to examination by federal and state taxing authorities.  If such an examination results in changes to distributable Partnership income or loss, the taxable income of the partners would be adjusted accordingly.  Primarily due to its tax status as a partnership, the Partnership has no significant tax uncertainties that require recognition or disclosure.

Revenue Recognition

The Partnership'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 Partnership 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.

Investments in Real Estate

Upon acquisition of real properties, the Partnership records them in the financial statements at cost (not including acquisition expenses).  The purchase price is allocated to tangible assets, consisting of land and building, and to identified intangible assets and liabilities, which may include the value of above market and below market leases and the value of in-place leases.  The allocation of the purchase price is based upon the fair value of each component of the property.  Although independent appraisals may be used to assist in the determination of fair value, in many cases these values will be based upon management’s assessment of each property, the selling prices of comparable properties and the discounted value of cash flows from the asset.

Page 22 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(2)  Summary of Significant Accounting Policies – (Continued)

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods.  The above market and below market lease values will be capitalized as intangible lease assets or liabilities.  Above market lease values will be amortized as an adjustment of rental income over the remaining terms of the respective leases.  Below market leases will be amortized as an adjustment of rental income over the remaining term of the respective leases, including any bargain renewal periods.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.
 
The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease.  Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management’s consideration of current market costs to execute a similar lease.  These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease.  These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

The Partnership tests real estate for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable.  For properties the Partnership 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 Partnership 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 Partnership 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 Partnership 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 were expensed as incurred as a result of the Partnership adopting accounting guidance on business combinations that expands the scope of acquisition accounting.

Page 23 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(2)  Summary of Significant Accounting Policies – (Continued)

The buildings and equipment of the Partnership are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 25 years and 5 years, respectively.  Intangible lease assets are amortized using the straight-line method for financial reporting purposes based on the remaining life of the lease.

Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations.  In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations.

The Partnership accounts for properties owned as tenants-in-common with affiliated entities and/or unrelated third parties 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 Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses.

The Partnership'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 Partnership 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, 2011 and 2010.

Fair Value Measurements

Fair value, as defined by United States Generally Accepted Accounting Principles (“US GAAP”), is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  US GAAP establishes a hierarchy in determining the fair value of an asset or liability.  The fair value hierarchy has three levels of inputs, both observable and unobservable. US GAAP requires the utilization of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities.  Level 2 inputs are market data, other than Level 1 inputs, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.


Page 24 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(2)  Summary of Significant Accounting Policies – (Continued)

The Hollywood Video store in Minot, North Dakota, with a carrying amount of $1,018,607 at June 30, 2010, was written down to its fair value of $800,000 after completing our long-lived asset valuation analysis.  The fair value of the property was based upon comparable sales of similar properties, which are considered Level 2 inputs in the valuation hierarchy.  The resulting impairment charge of $218,607 was included in earnings for the second quarter of 2010.  The property was sold on January 14, 2011.

As of December 31, 2011, the Partnership had 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 Partnership’s financial statements.

Reclassification

Certain items related to discontinued operations in the prior year’s financial statements have been reclassified to conform to 2011 presentation.  These reclassifications had no effect on Partners’ capital, net income or cash flows.

(3)  Related Party Transactions –

The Partnership owns the percentage interest shown below in the following properties as tenants-in-common with the affiliated entities listed:  Johnny Carino’s restaurant (50% ­­– AEI Accredited Investor Fund 2002 Limited Partnership); Jared Jewelry store (40% – AEI Accredited Investor Fund 2002 Limited Partnership); Applebee’s restaurant in Johnstown, Pennsylvania (38% ­­– AEI Income & Growth Fund XXI Limited Partnership); Advance Auto Parts store (65% ­­– AEI Income & Growth Fund 25 LLC); Applebee’s restaurant in Crawfordsville, Indiana (60% – AEI Income & Growth Fund 26 LLC); Tractor Supply Company store (50% – AEI Income & Growth Fund 24 LLC); Best Buy store (33% – AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 27 LLC); Staples store (28% ­­– AEI Income & Growth Fund 25 LLC); and PetSmart store (34% – AEI Accredited Investor Fund V LP).

AEI received the following reimbursements for costs and expenses from the Partnership for the years ended December 31:
     
2011
 
2010
           
a.
AEI is reimbursed for costs incurred in providing services related to managing the Partnership's operations and properties, maintaining the Partnership's books, and communicating with the Limited Partners.  These amounts included $4,086 of expenses related to Discontinued Operations in 2010.
$
156,809
$
171,404
           

Page 25 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(3)  Related Party Transactions – (Continued)
     
2011
 
2010
           
b.
AEI is reimbursed for all direct expenses it paid on the Partnership's behalf to third parties related to Partnership 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.  These amounts included $2,848 and $37,727 of expenses related to Discontinued Operations in 2011 and 2010, respectively.
$
29,385
$
60,033
           
c.
AEI is reimbursed for costs incurred in providing services and direct expenses related to the acquisition of properties on behalf of the Partnership.
$
18,941
$
0
           
d.
AEI is reimbursed for costs incurred in providing services related to the sale of property.
$
15,256
$
203
           

The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a, b, c and d.  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 Partnership 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 Partnership is responsible for repairs to the structural components of the building, the roof, and the parking lot.  At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years, except for the Staples store, which had a remaining primary term of 8.4 years.  The leases provide the tenants with two to four five-year renewal options subject to the same terms and conditions as the primary term.

The Partnership's properties are commercial, single-tenant buildings.  The TGI Friday’s restaurant was constructed and acquired in 1997.  The KinderCare daycare center in Pearland, Texas was constructed in 1997 and acquired in 1999.  The KinderCare daycare center in Golden, Colorado was constructed and acquired in 2000.  The KinderCare daycare center in Plainfield, Illinois was constructed and acquired in 2001.  The Johnny Carino’s restaurant was constructed in 1999 and acquired in 2003.  The Jared Jewelry store was constructed in 2001 and acquired in 2004.  The Applebee’s restaurants were constructed in 1996 and acquired in 2006.  The Advance Auto Parts store was constructed in 2005 and acquired in 2006.  The Tractor Supply Company store was constructed in 2005 and acquired in 2007.  The Best Buy store was constructed and acquired in 2008.  The Staples store was constructed in 2010 and acquired in 2011.  There have been no costs capitalized as improvements subsequent to the acquisitions.


Page 26 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(4)  Investments in Real Estate – (Continued)

The cost of the properties not held for sale and related accumulated depreciation at December 31, 2011 are as follows:
Property
Land
Buildings and
Equipment
Total
Accumulated
Depreciation
                 
TGI Friday's, Greensburg, PA
$
6,439
$
8,141
$
14,580
$
4,642
KinderCare, Golden, CO
 
7,684
 
25,844
 
33,528
 
11,632
KinderCare, Plainfield, IL
 
1,313
 
3,332
 
4,645
 
1,414
Johnny Carino’s, Longmont, CO
 
560,383
 
733,022
 
1,293,405
 
234,568
Jared Jewelry, Sugar Land, TX
 
503,837
 
1,030,129
 
1,533,966
 
307,321
Applebee’s, Johnstown, PA
 
264,557
 
766,630
 
1,031,187
 
162,269
Advance Auto Parts, Indianapolis, IN
 
537,914
 
706,259
 
1,244,173
 
142,426
Applebee’s, Crawfordsville, IN
 
506,030
 
1,350,626
 
1,856,656
 
270,125
Tractor Supply, Grand Forks, ND
 
238,547
 
1,165,327
 
1,403,874
 
231,123
Best Buy, Lake Geneva, WI
 
335,142
 
1,687,104
 
2,022,246
 
216,511
Staples, Clermont, FL
 
239,400
 
540,935
 
780,335
 
4,508
 
$
3,201,246
$
8,017,349
$
11,218,595
$
1,586,539
                 

On October 21, 2011, the Partnership purchased a 28% interest in a Staples store in Clermont, Florida for $897,288.  The Partnership allocated $116,953 of the purchase price to Acquired Intangible Lease Assets and incurred $18,941 of acquisition expenses related to the purchase that were expensed.  The property is leased to Staples the Office Superstore East, Inc. under a Lease Agreement with a remaining primary term of 8.4 years (as of the date of purchase) and annual rent of $73,031 for the interest purchased.

On March 16, 2012, the Partnership purchased a 34% interest in a PetSmart store in Galveston, Texas for $824,500.  The property is leased to PetSmart, Inc. under a Lease Agreement with a remaining primary term of 10.0 years and annual rent of $65,560 for the interest purchased.

The cost of Acquired Intangible Lease Assets not held for sale and related accumulated amortization at December 31, 2011 are as follows:
   
In-Place Lease
 
Accumulated Amortization
         
Acquired Intangibles (with a weighted average life of 101 months)
$
116,953
$
2,316

For the years ended December 31, 2011 and 2010, the amortization expense was $2,316 and $0, respectively.  For in-place leases owned as of December 31, 2011, the estimated amortization expense is $13,895 for each of the next five succeeding years.

At December 31, 2011, the Partnership owned a .8729% interest in a TGI Friday’s restaurant, a 1.9962% interest in a KinderCare daycare center in Golden, Colorado and a .3154% interest in a KinderCare daycare center in Plainfield, Illinois.  The remaining interests in these properties are owned by unrelated third parties, who own the properties with the Partnership as tenants-in-common.

Page 27 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(4)  Investments in Real Estate – (Continued)

For properties owned as of December 31, 2011, the minimum future rent payments required by the leases are as follows:
 
2012
$
961,059
2013
 
962,215
2014
 
925,784
2015
 
873,308
2016
 
888,022
Thereafter
 
4,432,654
 
$
9,043,042
     

There were no contingent rents recognized in 2011 and 2010.

(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 Partnership's total rent revenue for the years ended December 31:

Tenants
 
Industry
 
2011
 
2010
             
Apple American Group.
 
Restaurant
$
212,209
$
208,303
Best Buy Stores, L.P.
 
Retail
 
144,325
 
144,325
Sterling Jewelers Inc.
 
Retail
 
136,873
 
127,919
Tractor Supply Company
 
Retail
 
108,697
 
102,881
KinderCare Learning Centers LLC
 
Child Care
 
105,723
 
105,421
Aggregate rent revenue of major tenants
   
$
707,827
$
688,849
Aggregate rent revenue of major tenants as a percentage of total rent revenue
     
80%
 
74%
             

(6)  Discontinued Operations –

On February 2, 2010, Hollywood Entertainment Corporation (HEC), the tenant of the Hollywood Video stores in Minot, North Dakota (100% ownership interest) and Saraland, Alabama (3.08% ownership interest) filed for Chapter 11 bankruptcy reorganization for the second time.  In July 2010, HEC closed its remaining stores, filed a motion with the bankruptcy court to reject the Lease for the Minot store and returned possession of the property to the Partnership.  The Partnership listed the property for sale with a real estate broker in the Minot area.  While the property was vacant, the Partnership was responsible for real estate taxes and other costs associated with maintaining the property.  Based on an analysis of market conditions in the area, the Partnership determined the property was impaired.  As a result, in the second quarter of 2010, a charge to discontinued operations for real estate impairment of $218,607 was recognized, which was the difference between the carrying value at June 30, 2010 of $1,018,607 and the estimated fair value of $800,000.  The charge was recorded against the cost of the land and building.

Page 28 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(6)  Discontinued Operations – (Continued)

In November 2010, the Partnership entered into an agreement to sell the Minot store to an unrelated third party.  On January 14, 2011, the sale closed with the Partnership receiving net proceeds of $881,953, which resulted in a net gain of $81,953.  At December 31, 2010, the property was classified as Real Estate Held for Sale.

In February 2010, HEC closed the Saraland store and filed a motion with the bankruptcy court to reject the Lease for this property.  The court approved the motion and HEC returned possession of the property to the Partnership.  The Partnership listed the property for sale or lease with a real estate broker in the Saraland area.  While the property was vacant, the Partnership was responsible for its 3.08% share of real estate taxes and other costs associated with maintaining the property.  In May 2010, the Partnership entered into an agreement to sell its interest in the Saraland store to an unrelated third party.  On August 20, 2010, the sale closed with the Partnership receiving net sale proceeds of $34,485, which resulted in a net gain of $3,403.  The cost and related accumulated depreciation of the interest sold was $42,439 and $11,357, respectively.

On March 17, 2011, the Partnership sold its remaining 0.5877% interest in the Arby’s restaurant in Homewood, Alabama to an unrelated third party.  The Partnership received net sale proceeds of $8,012, which resulted in a net gain of $1,781.  The cost and related accumulated depreciation of the interest sold was $8,184 and $1,953, respectively.

On January 6, 2012, the Partnership sold the KinderCare daycare center in Pearland, Texas to an unrelated third party.  The Partnership received net sale proceeds of approximately $854,000, which resulted in a net gain of approximately $271,600.  At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $582,390.

During 2011 and 2010, the Partnership distributed net sale proceeds of $70,707 and $90,909 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $4.45 and $5.73 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements.  The following are the results of discontinued operations for the years ended December 31:
   
2011
 
2010
         
Rental Income
$
103,511
$
184,756
Property Management Expenses
 
(2,848)
 
(41,813)
Depreciation
 
(22,208)
 
(44,414)
Real Estate Impairment
 
0
 
(218,607)
Gain on Disposal of Real Estate
 
83,734
 
3,403
Income (Loss) from Discontinued Operations
$
162,189
$
(116,675)
         

Page 29 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(7)  Partners’ Capital –

For the years ended December 31, 2011 and 2010, the Partnership declared distributions of $759,373 and $806,374, respectively.  The Limited Partners received distributions of $738,006 and $784,001 and the General Partners received distributions of $21,367 and $22,373 for the years, respectively.  The Limited Partners' distributions represent $47.01 and $49.94 per Limited Partnership Unit outstanding in 2011 and 2010, respectively, using 15,698 weighted average Units for both years.  The distributions represent $26.00 and $8.80 per Unit of Net Income and $21.01 and $41.14 per Unit of return of capital in 2011 and 2010, respectively.

As part of the Limited Partners' distributions discussed above, the Partnership distributed net sale proceeds of $70,000 and $90,000 in 2011 and 2010, respectively.  The distributions reduced the Limited Partners’ Adjusted Capital Contributions.

The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.

During 2011, the Partnership did not redeem any Units from the Limited Partners.  During 2010, one Limited Partner redeemed 1.25 Partnership Units for $883 in accordance with the Partnership Agreement.  The Partnership acquired these Units using Net Cash Flow from operations.  The redemptions increase the remaining Limited Partners’ ownership interest in the Partnership.  As a result of this redemption payment and pursuant to the Partnership Agreement, the General Partners received distributions of $27 in 2010.

After the effect of redemptions and the return of capital from the sale of property, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $909.24 per original $1,000 invested.


Page 30 of 44
 
 

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(8)  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:

   
2011
 
2010
         
Net Income for Financial Reporting Purposes
$
446,206
$
149,121
         
Depreciation for Tax Purposes Under Depreciation
    and Amortization for Financial Reporting Purposes
 
99,296
 
98,840
         
Income Accrued for Tax Purposes Over (Under)
    Income for Financial Reporting Purposes
 
(7,643)
 
945
         
Acquisition Costs Expensed for Financial Reporting
    Purposes, Capitalized for Tax Purposes
 
18,941
 
0
         
Property Expenses for Tax Purposes (Over) Under
    Expenses for Financial Reporting Purposes
 
(267)
 
267
         
Real Estate Impairment
    Not Recognized for Tax Purposes
 
0
 
218,607
         
Gain/Loss on Sale of Real Estate for Tax Purposes
    Under Gain for Financial Reporting Purposes
 
(322,726)
 
(1,843)
Taxable Income to Partners
$
233,807
$
465,937
         

The following is a reconciliation of Partners' capital for financial reporting purposes to Partners' capital reported for federal income tax purposes for the years ended December 31:

   
2011
 
2010
         
Partners' Capital for Financial Reporting Purposes
$
10,484,135
$
10,797,302
         
Adjusted Tax Basis of Investments in Real Estate
    Over Net Investments in Real Estate
    for Financial Reporting Purposes
 
656,702
 
861,191
         
Income Accrued for Tax Purposes Over
    Income for Financial Reporting Purposes
 
29,457
 
37,100
         
Property Expenses for Tax Purposes Under
    Expenses for Financial Reporting Purposes
 
0
 
267
         
Syndication Costs Treated as Reduction
    of Capital For Financial Reporting Purposes
 
2,418,726
 
2,418,726
Partners' Capital for Tax Reporting Purposes
$
13,589,020
$
14,114,586
         


Page 31 of 44
 
 

 

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 General Partner of the Partnership 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 General Partner 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 General Partner, 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 General Partner, 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, 2011.  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 Partnership; (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 Partnership are being made only in accordance with authorizations of management of the Managing General Partner; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Partnership's assets that could have a material effect on the financial statements.

Management of the Managing General Partner performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011 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 General Partner determined that our internal control over financial reporting was effective as of December 31, 2011 based on the criteria in Internal Control-Integrated Framework issued by the COSO.

Page 32 of 44
 
 

 

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 partnership and has no officers, directors, or direct employees.  The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business.  The General Partners are AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner, and Robert P. Johnson, Chief Executive Officer, President and sole director of AFM, the Individual General Partner.  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 partnership 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 Partnership.  The director and officers of AFM are as follows:


Page 33 of 44
 
 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
                 (Continued)

Robert P. Johnson, age 67, 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 2012.  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 52, 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 2012.  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 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 Individual General Partner of the Partnership, 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 Individual General Partner, 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 General Partner of the Partnership, and any beneficial owner of more than 10% of a class of equity securities of the Partnership, are required to report their ownership of the Partnership'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 Partnership 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, 2011.  Based upon information provided by officers and directors of the General Partner, all officers, directors and 10% owners filed all reports on a timely basis in the 2011 fiscal year.


Page 34 of 44
 
 

 

ITEM 11.  EXECUTIVE COMPENSATION.

The General Partner 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 Partnership to beneficially own 5% or more of the Units, by each General Partner, and by each officer or director of the Managing General Partner as of February 29, 2012:

Name and Address
of Beneficial Owner
Number of
Units Held
Percent
of Class
     
AEI Fund Management XXI, Inc.
22
0.14%
Robert P. Johnson
0
0.00%
Patrick W. Keene
0
0.00%
Address for all:  1300 Wells Fargo Place, 30 East 7th Street, St. Paul, Minnesota 55101
     
Andrea B. Currier
824.74227
5.25%
P.O. Box E, The Plains, Virginia 20198
   

The persons set forth in the preceding table hold sole voting power and power of disposition with respect to all of the Units set forth opposite their names.

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 General Partner of the registrant are governed by, and are conducted in conformity with, the limitations set forth in the Limited Partnership 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, 2011 and 2010.

Neither the registrant, nor the Managing General Partner of the registrant, has a board of directors consisting of any members who are “independent.”  The sole director of the Managing General Partner, Robert P. Johnson, is also the Individual General Partner of the registrant, and is the Chief Executive Officer, and indirectly the principal owner, of the Managing General Partner.  Accordingly, there is no disinterested board, or other functioning body, that reviews related party transactions, or the transactions between the registrant and the General Partners, except as performed in connection with the audit of its financial statements.

Page 35 of 44
 
 

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE.  (Continued)

The limitations included in the Partnership Agreement require that the cumulative reimbursements to the General Partners and their affiliates for certain expenses will not exceed an amount equal to the sum of (i) 20% of gross offering proceeds, (ii) 5% of Net Cash Flow for property management, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the General Partners. The cumulative reimbursements subject to this limitation are reimbursements for (i) organization and offering expenses, including commissions, (ii) acquisition expenses, (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, 2011, these cumulative reimbursements to the General Partners 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 General Partners or their Affiliates in connection with the operation of the Fund and its properties for the period from inception through December 31, 2011.

Person or Entity
Receiving
Compensation
Form and Method
of Compensation
Amount Incurred From
Inception (July 31, 1996)
To December 31, 2011
       
AEI Securities, Inc.
Selling Commissions equal to 8% of proceeds plus a 2% nonaccountable expense allowance, most of which was reallowed to Participating Dealers.
$
1,691,722
       
General Partners and Affiliates
Reimbursement at Cost for other Organization and Offering Costs.
$
762,880
       
General Partners and Affiliates
Reimbursement at Cost for all Acquisition Expenses.
$
522,938
       
General Partners and Affiliates
Reimbursement at Cost for providing 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.
$
2,516,053
       
General Partners and Affiliates
Reimbursement at Cost for providing services related to the disposition of the Fund's properties.
$
547,452
       
General Partners
3% of Net Cash Flow in any fiscal year.
$
399,556
       
General Partners
1% of distributions of Net Proceeds of Sale until Limited Partners have received an amount equal to (a) their Adjusted Capital Contributions, plus (b) an amount equal to 9% 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.
$
26,711


Page 36 of 44
 
 

 

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.

The following is a summary of the fees billed to the Partnership by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services rendered for the years ended December 31, 2011 and 2010:

Fee Category
 
2011
 
2010
         
Audit Fees
$
14,961
$
14,770
Audit-Related Fees
 
0
 
0
Tax Fees
 
0
 
0
All Other Fees
 
0
 
0
Total Fees
$
14,961
$
14,770
         

Audit Fees - Consists of fees billed for professional services rendered for the audit of the Partnership’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 Partnership to render audit or non-audit services, the engagement is approved by Mr. Johnson acting as the Partnership’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 15.

(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.


Page 37 of 44
 
 

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.  (Continued)

3.1
Certificate of Limited Partnership (incorporated by reference to Exhibit 3.1 of the registrant's Registration Statement on Form SB-2 filed September 13, 1996 [File No. 333-5604]).

3.2
Restated Limited Partnership Agreement to the Prospectus (incorporated by reference to Exhibit A of Amendment No. 2 of the registrant's Registration Statement on Form SB-2 filed August 21, 1997 [File No. 333-5604]).

10.1
Net Lease Agreement dated December 30, 2003 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and Kona Restaurant Group, Inc. relating to the Property at 2033 Ken Pratt Boulevard., Longmont, Colorado (incorporated by reference to Exhibit 10.23 of Form 10-KSB filed March 30, 2004).

10.2
Assignment and Assumption of Lease dated July 15, 2004 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and Transugar Limited Partnership relating to the Property at 16010 Kensington Drive, Sugar Land, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed July 30, 2004).

10.3
Net Lease Agreement dated September 21, 2006 between the Partnership, AEI Income & Growth Fund XXI Limited Partnership and B.T. Woodlipp, Inc. relating to the Property at 425 Galleria Drive, Johnstown, Pennsylvania (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed November 14, 2006).

10.4
Assignment and Assumption of Lease dated December 29, 2006 between the Partnership, AEI Income & Growth Fund 26 LLC 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).

10.5
Assignment and Assumption of Lease dated January 19, 2007 between the Partnership, AEI Income & Growth Fund 24 LLC and AEI Fund Management, Inc. relating to the Property at 4460 32nd Avenue South, Grand Forks, North Dakota (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 25, 2007).

10.6
Assignment and Assumption of Lease dated October 6, 2008 between the Partnership, AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 27 LLC and Ryan Companies US, Inc. relating to the Property at 700 North Edwards Boulevard, Lake Geneva, Wisconsin (incorporated by reference to Exhibit 10.2 of Form 8-K filed October 10, 2008).

31.1
Certification of Chief Executive Officer of General Partner 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 General Partner 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 General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




Page 38 of 44
 
 

 

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 XXII
 
Limited Partnership
 
By:
AEI Fund Management XXI, Inc.
   
Its Managing General Partner
     
     
March 29, 2012
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 29, 2012
Robert P. Johnson
 
and Sole Director of Managing General
   
   
Partner
   
         
  /s/ PATRICK W KEENE  
Chief Financial Officer and Treasurer
 
March 29, 2012
Patrick W. Keene
 
(Principal Accounting Officer)
   


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