Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - AEI Income & Growth Fund 26 LLC | Financial_Report.xls |
| EX-32 - AEI Income & Growth Fund 26 LLC | ex32-26.htm |
| EX-31.2 - AEI Income & Growth Fund 26 LLC | ex31-226.htm |
| EX-31.1 - AEI Income & Growth Fund 26 LLC | ex31-126.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: 000-51823
AEI INCOME & GROWTH FUND 26 LLC
(Exact name of registrant as specified in its charter)
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State of Delaware
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41-2173048
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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30 East 7th Street, Suite 1300
St. Paul, Minnesota 55101
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(651) 227-7333
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(Address of principal executive offices)
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(Registrant’s telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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None
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Limited Liability Company Units
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(Title of class)
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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.
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o Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer
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x Smaller reporting company
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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 1,827,736.0 Units of limited membership interest outstanding and owned by nonaffiliates of the registrant, which Units had an aggregate market value (based solely on the price at which they were sold since there is no ready market for such Units) of $18,277,360.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has not incorporated any documents by reference into this report.
PART I
ITEM 1. BUSINESS.
AEI Income & Growth Fund 26 LLC (the "Company" or the "Registrant") is a limited liability company which was organized pursuant to the laws of the State of Delaware on March 14, 2005. The registrant is comprised of AEI Fund Management XXI, Inc. (“AFM”), as the Managing Member, Robert P. Johnson, the President and sole director of AFM, as the Special Managing Member, and purchasers of LLC Units as Limited Members. The Company offered for sale up to $100,000,000 of limited membership interests (the "Units") (10,000,000 Units at $10 per Unit) pursuant to a registration statement effective October 20, 2005. The Company commenced operations on April 3, 2006 when minimum subscriptions of 150,000 LLC Units ($1,500,000) were accepted. The offering terminated October 19, 2007 when the extended offering period expired. The Company received subscriptions for 1,832,736 LLC Units. Under the terms of the Operating Agreement, the Limited Members and Managing Members contributed funds of $18,327,360 and $1,000, respectively.
The Company was organized to acquire existing and newly constructed commercial properties, to lease such properties to tenants under net leases, to hold such properties and to eventually sell such properties. From subscription proceeds, the Company purchased eight properties, including partial interests in five properties, at a total cost of $15,376,536. The balance of the subscription proceeds was applied to organization and syndication costs, working capital reserves and distributions, which represented a return of capital. The properties are commercial, single tenant buildings leased under net leases.
The Company's properties were purchased without any indebtedness. The Company will not finance properties in the future to obtain proceeds for new property acquisitions. If it is required to do so, the Company may incur short-term indebtedness to finance day-to-day cash flow requirements (including cash flow necessary to repurchase Units). The Company may borrow to finance the refurbishing of a property.
The Company will hold its properties until the Managing Members determine that the sale or other disposition of the properties is advantageous in view of the Company's investment objectives. In deciding whether to sell properties, the Managing Members will consider factors such as potential appreciation, net cash flow and income tax considerations. The Company expects to sell some or all of its properties prior to its final liquidation and to reinvest the proceeds from such sales in additional properties. The Company reserves the right, at the discretion of the Managing Members, to either distribute proceeds from the sale of properties to the Members or to reinvest such proceeds in additional properties, provided that sufficient proceeds are distributed to the Limited Members to pay federal and state income taxes related to any taxable gain recognized as a result of the sale. It is anticipated that the Company will commence liquidation through the sale of its remaining properties ten to twelve years after completion of the acquisition phase, depending upon the then current real estate and money markets, the economic climate and the income tax consequences to the Members.
Page 2 of 32
ITEM 1. BUSINESS. (Continued)
Leases
Although there are variations in the specific terms of the leases, the following is a summary of the general terms of the Company's leases. The properties are leased to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Company is responsible for repairs to the structural components of the building. At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with three to four five-year renewal options subject to the same terms and conditions as the primary term. The leases provide for base annual rental payments, payable in monthly installments, and contain rent clauses which entitle the Company to receive additional rent in future years based on stated rent increases.
Major Tenants
During 2011, five tenants each contributed more than ten percent of the Company's total rental revenue. The major tenants in aggregate contributed 87% of total rental revenue in 2011. It is anticipated that, based on minimum rental payments required under the leases, each major tenant, with one exception, will continue to contribute more than ten percent of rental revenue in 2012 and future years. The tenant of the Red Robin restaurant will not continue to be a major tenant as the property was sold in January 2012. Any failure of these major tenants could materially affect the Company's net income and cash distributions.
Competition
The Company is a minor factor in the commercial real estate business. There are numerous entities engaged in the commercial real estate business which have greater financial resources than the Company. At the time the Company elects to dispose of its properties, it will be in competition with other persons and entities to find buyers for its properties.
Employees
The Company has no direct employees. Management services are performed for the Company by AEI Fund Management, Inc., an affiliate of AFM.
ITEM 1A. RISK FACTORS.
Not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not required for a smaller reporting company.
Page 3 of 32
ITEM 2. PROPERTIES.
Investment Objectives
The Company's investment objectives are to acquire existing or newly-developed commercial properties that provide (i) regular rental income; (ii) growth in lease income through rent escalation provisions; (iii) capital growth through appreciation in the value of properties; (iv) reduced occupancy risks as a result of long-term leases with creditworthy corporate tenants; and (v) passive income that may be offset by eligible passive losses from other investments for tax purposes. The Company does not have a policy, and there is no limitation, as to the amount or percentage of assets that may be invested in any one property. However, to the extent possible, the Managing Members attempt to diversify the type and location of the properties.
Description of Properties
The Company's properties are commercial, single tenant buildings. The properties were acquired on a debt-free basis and are leased to various tenants under net leases, classified as operating leases. The Company holds an undivided fee simple interest in the properties.
The Company's properties are subject to the general competitive conditions incident to the ownership of single tenant investment real estate. Since each property is leased under a long-term lease, there is little competition until the Company decides to sell the property. At this time, the Company will be competing with other real estate owners, on both a national and local level, in attempting to find buyers for the properties. In the event of a tenant default, the Company would be competing with other real estate owners, who have property vacancies, to attract a new tenant to lease the property. The Company's tenants operate in industries that are very competitive and can be affected by factors such as changes in regional or local economies, seasonality and changes in consumer preference.
The following table is a summary of the properties that the Company acquired and owned as of December 31, 2011.
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Property
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Purchase
Date
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Property
Cost
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Tenant
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Annual
Lease
Payment
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Annual
Rent
Per Sq. Ft.
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Sports Authority Store
Wichita, KS
(40%)
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4/3/06 to
6/30/06
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$
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2,230,753
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TSA Stores, Inc.
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$
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204,665
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$
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9.79
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Advance Auto Parts Store
Middletown, OH
(55%)
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6/1/06
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$
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1,022,289
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Advance Stores
Company, Inc.
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$
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71,679
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$
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18.94
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Applebee’s Restaurant
Indianapolis, IN
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9/21/06 to
12/1/06
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$
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3,054,187
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Apple Indiana
II LLC
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$
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236,782
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$
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45.27
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Applebee’s Restaurant
Crawfordsville, IN
(40%)
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12/29/06
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$
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1,237,771
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Apple Indiana
II LLC
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$
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95,985
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$
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45.62
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Starbucks Store
Bluffton, IN
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8/10/07
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$
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1,150,116
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Starbucks
Corporation
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$
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79,800
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$
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44.16
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Page 4 of 32
ITEM 2. PROPERTIES. (Continued)
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Property
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Purchase
Date
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Property
Cost
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Tenant
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Annual
Lease
Payment
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Annual
Rent
Per Sq. Ft.
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Red Robin
Beavercreek, OH
(land only)
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12/28/07
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$
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1,533,655
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Red Robin
International, Inc.
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$
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115,500
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$
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1.30
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Best Buy Store
Eau Claire, WI
(30%)
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1/31/08
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$
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2,021,162
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Best Buy
Stores, L.P.
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$
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142,222
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$
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10.01
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Dick’s Sporting Goods
Fredericksburg, VA
(27%)
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5/8/08
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$
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3,126,603
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Dick’s Sporting
Goods, Inc.
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$
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219,445
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$
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16.69
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The properties listed above with a partial ownership percentage are owned with the following affiliated entities: Sports Authority store (AEI Income & Growth Fund 25 LLC); Advance Auto Parts store (AEI Income & Growth Fund 24 LLC); Applebee’s restaurant in Crawfordsville, Indiana (AEI Income & Growth Fund XXII Limited Partnership); Best Buy store (AEI Income & Growth Fund XXI Limited Partnership and AEI Income & Growth Fund 23 LLC); and Dick’s Sporting Goods store in Fredericksburg, Virginia (AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 25 LLC).
The Company accounts for properties owned as tenants-in-common with affiliated entities using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Company’s percentage share of the properties’ land, building and equipment, liabilities, revenues and expenses.
At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with three to four five-year renewal options subject to the same terms and conditions as the primary term.
Pursuant to the lease agreements, the tenants are required to provide proof of adequate insurance coverage on the properties they occupy. The Managing Members believe the properties are adequately covered by insurance and consider the properties to be well-maintained and sufficient for the Company's operations.
For tax purposes, the Company's properties are depreciated under the Modified Accelerated Cost Recovery System (MACRS). The largest depreciable component of a property is the building which is depreciated, using the straight-line method, over 39 years. The remaining depreciable components of a property are personal property and land improvements which are depreciated, using an accelerated method, over 5 and 15 years, respectively. Since the Company has tax-exempt Members, the Company is subject to the rules of Section 168(h)(6) of the Internal Revenue Code which requires a percentage of the properties' depreciable components to be depreciated over longer lives using the straight-line method. In general, the federal tax basis of the properties for tax depreciation purposes will be the same as the basis for book depreciation purposes.
At December 31, 2011, all properties listed above were 100% occupied.
Page 5 of 32
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 456 holders of record of the registrant's LLC Units. There is no other class of security outstanding or authorized. The registrant's Units are not a traded security in any market. During the period covered by this report, the Company did not sell any equity securities that are not registered under the Securities Act of 1933.
Cash distributions of $28,330 and $28,333 were made to the Managing Members and $916,000 and $916,092 were made to the Limited Members for 2011 and 2010, respectively. The distributions were made on a quarterly basis and represent Net Cash Flow, as defined. These distributions should not be compared with dividends paid on capital stock by corporations.
(b) Not Applicable.
(c) Pursuant to Section 7.7 of the Operating Agreement, each Limited Member has the right to present Units to the Company for purchase by submitting notice to the Managing Member during January or July of each year. The purchase price of the Units is equal to 85% of the net asset value per Unit, as of the first business day of January or July of each year, as determined by the Managing Member in accordance with the provisions of the Operating Agreement. The purchase price is equal to 100% of the net asset value per Unit in the case of Units of a deceased investor, who purchased the Units in the initial offering and who is a natural person, including Units held by an investor that is an IRA or other qualified plan for which the deceased person was the primary beneficiary, or Units held by an investor that is a grantor trust for which the deceased person was the grantor.
Units tendered to the Company during January and July are redeemed on April 1st and October 1st, respectively, of each year subject to the following limitations. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company. During the last three months of 2011, the Company did not purchase any Units.
Page 6 of 32
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Other Information
The Company is required, pursuant to FINRA Rule 2810, to disclose in each annual report distributed to Limited Members a per Unit estimated value, the method by which it was developed and the date of the data used to develop the estimated value. At December 31, 2011, the Company’s Units were valued at $7.75. This value was the aggregate estimated value of the Company’s assets less the Company’s liabilities, and less the value attributable to the interest of the Managing Members, divided by the number of Units outstanding. The Company’s cash, receivables and liabilities were valued at face value. Each of the Company’s properties were valued by dividing their annual rental income as of December 1, 2011 by a capitalization rate the Managing Member believed to be representative of the retail market for the sale of each property. The resulting value for each property was reviewed to determine that it also reflected circumstances that may have been unique to each specific property. No independent property appraisals were obtained. The valuations performed by the Managing Member were estimates only, and were based on a number of assumptions which may not be accurate or complete. In addition, property values are subject to change and could decline after the date of the valuations. Accordingly, this estimated value, prepared by the Managing Member, should not be viewed as the amount at which a Limited Member may be able to sell his units, or the fair market value of the Company properties, nor does it represent the amount of net proceeds Limited Members would receive if the Company properties were sold and the proceeds distributed in a liquidation of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward-looking statements, should be evaluated in the context of a number of factors that may affect the Company’s financial condition and results of operations, including the following:
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—
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Market and economic conditions which affect the value of the properties the Company owns and the cash from rental income such properties generate;
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—
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the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for Members;
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—
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resolution by the Managing Members of conflicts with which they may be confronted;
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—
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the success of the Managing Members of locating properties with favorable risk return characteristics;
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—
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the effect of tenant defaults; and
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—
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the condition of the industries in which the tenants of properties owned by the Company operate.
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Page 7 of 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Application of Critical Accounting Policies
The preparation of the Company’s financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of investments in real estate and the allocation by AEI Fund Management, Inc. of expenses to the Company as opposed to other funds they manage.
The Company purchases properties and records them in the financial statements at cost (not including acquisition expenses). The Company tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Company will hold and operate, management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value. Changes in these assumptions or analysis may cause material changes in the carrying value of the properties.
AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs. They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage. The Company reimburses these expenses subject to detailed limitations contained in the Operating Agreement.
Management of the Company has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing member of the Company.
Results of Operations
For the years ended December 31, 2011 and 2010, the Company recognized rental income of $1,033,166 and $1,027,362, respectively. In 2011, rental income increased due to rent increases on two properties. Based on the scheduled rent for the properties owned as of February 29, 2012, the Company expects to recognize rental income from continuing operations of approximately $1,172,000 in 2012.
For the years ended December 31, 2011 and 2010, the Company incurred LLC administration expenses from affiliated parties of $163,551 and $174,243, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Members. During the same periods, the Company incurred LLC administration and property management expenses from unrelated parties of $33,413 and $23,889, 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.
Page 8 of 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
For the years ended December 31, 2011 and 2010, the Company recognized interest income of $1,685 and $2,367, respectively.
Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Company includes the operating results and sale of the property in discontinued operations. In addition, the Company reclassifies the prior periods’ operating results of the property to discontinued operations. For the year ended December 31, 2011, the Company recognized income from discontinued operations of $115,157, representing rental income less property management expenses. For the year ended December 31, 2010, the Company recognized income from discontinued operations of $115,153, representing rental income less property management expenses.
On January 31, 2012, the Company sold the land under the Red Robin restaurant in Beavercreek, Ohio to an unrelated third party. The Company received net sale proceeds of approximately $1,806,000, which resulted in a net gain of approximately $272,300. At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $1,533,655.
Management believes inflation has not significantly affected income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.
Liquidity and Capital Resources
During the year ended December 31, 2011, the Company's cash balances increased $18,949 as a result of cash generated from operating activities in excess of distributions paid to the Members. During the year ended December 31, 2010, the Company's cash balances decreased $47,754 as a result of distributions and redemption payments paid to the Members in excess of cash generated from operating activities.
Net cash provided by operating activities increased from $936,172 in 2010 to $963,279 in 2011 as a result of an increase in total rental and interest income in 2011, a decrease in LLC administration and property management expenses in 2011 and net timing differences in the collection of payments from the tenants and the payment of expenses.
On February 23, 2012, the Company purchased a 53% interest in a Tractor Supply Company store in Starkville, Mississippi for $1,510,500. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 15 years (as of the date of purchase) and annual rent of $115,542 for the interest purchased. The remaining interest in the property was purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Company.
The Company's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Members. The Company declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first week after the end of each quarter. The Company attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Members on a semi-annual basis.
Page 9 of 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
For the years ended December 31, 2011 and 2010, the Company declared distributions of $944,330 and $944,425, respectively. Pursuant to the Operating Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Members and 3% to the Managing Members. Distributions of Net Proceeds of Sale were allocated 99% to the Limited Members and 1% to the Managing Members. The Limited Members received distributions of $916,000 and $916,092 and the Managing Members received distributions of $28,330 and $28,333 for the periods, respectively.
The Company may acquire Units from Limited Members who have tendered their Units to the Company. Such Units may be acquired at a discount. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company.
During 2011, the Company did not redeem any Units from the Limited Members. During 2010, one Limited Member redeemed a total of 5,000 Units for $38,225 in accordance with the Operating Agreement. The Company acquired these Units using Net Cash Flow from operations. The redemptions increase the remaining Limited Members’ ownership interest in the Company. As a result of this redemption payment and pursuant to the Operating Agreement, the Managing Members received distributions of $1,182 in 2010.
The continuing rent payments from the properties should be adequate to fund continuing distributions and meet other obligations on both a short-term and long-term basis.
The Economy and Market Conditions
The impact of conditions in the 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 Company’s properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate investment funds. Nevertheless, a prolonged economic downturn may adversely affect the operations of the Company’s tenants and their cash flows. If a tenant were to default on its lease obligations, the Company’s income would decrease, its distributions would likely be reduced and the value of its properties might decline.
ITEM 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 10 of 32
AEI INCOME & GROWTH FUND 26 LLC
INDEX TO FINANCIAL STATEMENTS
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Page
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Report of Independent Registered Public Accounting Firm
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12
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Balance Sheet as of December 31, 2011 and 2010
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13
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Statements for the Years Ended December 31, 2011 and 2010:
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Income
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14
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Cash Flows
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15
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Changes in Members’ Equity (Deficit)
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16
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Notes to Financial Statements
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17 – 24
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Page 11 of 32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members:
AEI Income & Growth Fund 26 LLC
St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI Income & Growth Fund 26 LLC (a Delaware limited liability company) as of December 31, 2011 and 2010 and the related statements of income, cash flows and changes in members' equity (deficit) for the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AEI Income & Growth Fund 26 LLC as of December 31, 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.
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/s / Boulay, Heutmaker, Zibell & Co. P.L.L.P.
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Certified Public Accountants
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Minneapolis, Minnesota
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March 29, 2012
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Page 12 of 32
AEI INCOME & GROWTH FUND 26 LLC
BALANCE SHEET
ASSETS
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December 31,
|
December 31,
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2011
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2010
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Current Assets:
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||||
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Cash
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$
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346,847
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$
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327,898
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Real Estate Held for Investment:
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||||
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Land
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4,458,329
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5,991,984
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Buildings and Equipment
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9,384,552
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9,384,552
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Accumulated Depreciation
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(1,788,979)
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(1,413,596)
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Real Estate Held for Investment, Net
|
12,053,902
|
13,962,940
|
||
|
Real Estate Held for Sale
|
1,533,655
|
0
|
||
|
Total Real Estate
|
13,587,557
|
13,962,940
|
||
|
Total Assets
|
$
|
13,934,404
|
$
|
14,290,838
|
LIABILITIES AND MEMBERS’ EQUITY
|
Current Liabilities:
|
||||
|
Payable to AEI Fund Management, Inc.
|
$
|
20,114
|
$
|
11,813
|
|
Distributions Payable
|
236,083
|
236,083
|
||
|
Unearned Rent
|
27,730
|
25,796
|
||
|
Total Current Liabilities
|
283,927
|
273,692
|
||
|
Members’ Equity (Deficit):
|
||||
|
Managing Members
|
(54,895)
|
(43,895)
|
||
|
Limited Members, $10 per Unit;
10,000,000 Units authorized; 1,832,736 Units issued;
1,827,736 Units outstanding
|
13,705,372
|
14,061,041
|
||
|
Total Members’ Equity
|
13,650,477
|
14,017,146
|
||
|
Total Liabilities and Members’ Equity
|
$
|
13,934,404
|
$
|
14,290,838
|
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 13 of 32
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF INCOME
|
Year Ended December 31,
|
||||
|
2011
|
2010
|
|||
|
Rental Income
|
$
|
1,033,166
|
$
|
1,027,362
|
|
Expenses:
|
||||
|
LLC Administration – Affiliates
|
163,551
|
174,243
|
||
|
LLC Administration and Property
Management – Unrelated Parties
|
33,413
|
23,889
|
||
|
Depreciation
|
375,383
|
375,383
|
||
|
Total Expenses
|
572,347
|
573,515
|
||
|
Operating Income
|
460,819
|
453,847
|
||
|
Other Income:
|
||||
|
Interest Income
|
1,685
|
2,367
|
||
|
Income from Continuing Operations
|
462,504
|
456,214
|
||
|
Income from Discontinued Operations
|
115,157
|
115,153
|
||
|
Net Income
|
$
|
577,661
|
$
|
571,367
|
|
Net Income Allocated:
|
||||
|
Managing Members
|
$
|
17,330
|
$
|
17,141
|
|
Limited Members
|
560,331
|
554,226
|
||
|
Total
|
$
|
577,661
|
$
|
571,367
|
|
Income per LLC Unit:
|
||||
|
Continuing Operations
|
$
|
.25
|
$
|
.24
|
|
Discontinued Operations
|
.06
|
.06
|
||
|
Total
|
$
|
.31
|
$
|
.30
|
|
Weighted Average Units Outstanding –
Basic and Diluted
|
1,827,736
|
1,828,986
|
||
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 14 of 32
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CASH FLOWS
|
Year Ended December 31,
|
||||
|
2011
|
2010
|
|||
|
Cash Flows from Operating Activities:
|
||||
|
Net Income
|
$
|
577,661
|
$
|
571,367
|
|
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
|
||||
|
Depreciation
|
375,383
|
375,383
|
||
|
Increase (Decrease) in Payable to
AEI Fund Management, Inc.
|
8,301
|
(10,578)
|
||
|
Increase (Decrease) in Unearned Rent
|
1,934
|
0
|
||
|
Total Adjustments
|
385,618
|
364,805
|
||
|
Net Cash Provided By
Operating Activities
|
963,279
|
936,172
|
||
|
Cash Flows from Financing Activities:
|
||||
|
Distributions Paid to Members
|
(944,330)
|
(944,519)
|
||
|
Redemption Payments
|
0
|
(39,407)
|
||
|
Net Cash Used For
Financing Activities
|
(944,330)
|
(983,926)
|
||
|
Net Increase (Decrease) in Cash
|
18,949
|
(47,754)
|
||
|
Cash, beginning of year
|
327,898
|
375,652
|
||
|
Cash, end of year
|
$
|
346,847
|
$
|
327,898
|
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 15 of 32
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
|
Managing Members
|
Limited Members
|
Total
|
Limited Member Units Outstanding
|
|||||
|
Balance, December 31, 2009
|
$
|
(31,521)
|
$
|
14,461,132
|
$
|
14,429,611
|
1,832,736.0
|
|
|
Distributions Declared
|
(28,333)
|
(916,092)
|
(944,425)
|
|||||
|
Redemption Payments
|
(1,182)
|
(38,225)
|
(39,407)
|
(5,000.0)
|
||||
|
Net Income
|
17,141
|
554,226
|
571,367
|
|||||
|
Balance, December 31, 2010
|
(43,895)
|
14,061,041
|
14,017,146
|
1,827,736.0
|
||||
|
Distributions Declared
|
(28,330)
|
(916,000)
|
(944,330)
|
|||||
|
Net Income
|
17,330
|
560,331
|
577,661
|
|||||
|
Balance, December 31, 2011
|
$
|
(54,895)
|
$
|
13,705,372
|
$
|
13,650,477
|
1,827,736.0
|
|
The accompanying Notes to Financial Statements are an integral part of this statement.
Page 16 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(1) Organization –
AEI Income & Growth Fund 26 LLC (“Company”), a Limited Liability Company, was formed on March 14, 2005 to acquire and lease commercial properties to operating tenants. The Company's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing Member. Robert P. Johnson, the President and sole director of AFM, serves as the Special Managing Member. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Company.
The terms of the offering called for a subscription price of $10 per LLC Unit, payable on acceptance of the offer. The Company commenced operations on April 3, 2006 when minimum subscriptions of 150,000 LLC Units ($1,500,000) were accepted. The offering terminated October 19, 2007, when the extended offering period expired. The Company received subscriptions for 1,832,736 Units. Under the terms of the Operating Agreement, the Limited Members and Managing Members contributed funds of $18,327,360 and $1,000, respectively. The Company shall continue until December 31, 2055, unless dissolved, terminated and liquidated prior to that date.
During operations, any Net Cash Flow, as defined, which the Managing Members determine to distribute will be distributed 97% to the Limited Members and 3% to the Managing Members. Distributions to Limited Members will be made pro rata by Units.
Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the Managing Members determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Members and 1% to the Managing Members until the Limited Members receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 6.5% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow; (ii) any remaining balance will be distributed 90% to the Limited Members and 10% to the Managing Members. Distributions to the Limited Members will be made pro rata by Units.
For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated 97% to the Limited Members and 3% to the Managing Members. Net losses from operations will be allocated 99% to the Limited Members and 1% to the Managing Members.
For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Operating Agreement as follows: (i) first, to those Members with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Members and 1% to the Managing Members until the aggregate balance in the Limited Members' capital accounts equals the sum of the Limited Members' Adjusted Capital Contributions plus an amount equal to 6.5% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Members and 10% to the Managing Members. Losses will be allocated 99% to the Limited Members and 1% to the Managing Members.
Page 17 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(1) Organization – (Continued)
The Managing Members are not required to currently fund a deficit capital balance. Upon liquidation of the Company or withdrawal by a Managing Member, the Managing Members will contribute to the Company an amount equal to the lesser of the deficit balances in their capital accounts or 1.01% of the total capital contributions of the Limited Members over the amount previously contributed by the Managing Members.
(2) Summary of Significant Accounting Policies –
Financial Statement Presentation
The accounts of the Company are maintained on the accrual basis of accounting for both federal income tax purposes and financial reporting purposes.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant items, subject to such estimates and assumptions, include the carrying value of investments in real estate.
The Company regularly assesses whether market events and conditions indicate that it is reasonably possible to recover the carrying amounts of its investments in real estate from future operations and sales. A change in those market events and conditions could have a material effect on the carrying amount of its real estate.
Cash Concentrations of Credit Risk
The Company's cash is deposited in one financial institution and at times during the year it may exceed FDIC insurance limits.
Receivables
Credit terms are extended to tenants in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.
Receivables are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Company is of the belief that such accounts, if any, will be collectible in all material respects and thus an allowance is not necessary. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Receivables considered uncollectible are written off.
Page 18 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(2) Summary of Significant Accounting Policies – (Continued)
Income Taxes
The income or loss of the Company for federal income tax reporting purposes is includable in the income tax returns of the Members. In general, no recognition has been given to income taxes in the accompanying financial statements.
The tax return and the amount of distributable Company income or loss are subject to examination by federal and state taxing authorities. If such an examination results in changes to distributable Company income or loss, the taxable income of the members would be adjusted accordingly. Primarily due to its tax status as a partnership, the Company has no significant tax uncertainties that require recognition or disclosure.
Revenue Recognition
The Company's real estate is leased under net leases, classified as operating leases. The leases provide for base annual rental payments payable in monthly installments. The Company recognizes rental revenue according to the terms of the individual leases. For leases that contain stated rental increases, the increases are recognized in the year in which they are effective. Contingent rental payments are recognized when the contingencies on which the payments are based are satisfied and the rental payments become due under the terms of the leases.
Investments in Real Estate
The Company purchases properties and records them at cost. The Company tests real estate for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Company will hold and operate, it compares the carrying amount of the property to the estimated probability-weighted future undiscounted cash flows expected to result from the property and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the property, the Company recognizes an impairment loss by the amount by which the carrying amount of the property exceeds the fair value of the property. For properties held for sale, the Company determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value.
Prior to January 1, 2009, the Company capitalized as Investments in Real Estate certain costs incurred in the review and acquisition of the properties. The costs were allocated to the land, buildings and equipment. For acquisitions completed on or after January 1, 2009, acquisition-related transaction costs were expensed as incurred as a result of the Company adopting accounting guidance on business combinations that expands the scope of acquisition accounting.
Page 19 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(2) Summary of Significant Accounting Policies – (Continued)
The buildings and equipment of the Company are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 25 years and 5 years, respectively.
Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Company includes the operating results and sale of the property in discontinued operations. In addition, the Company reclassifies the prior periods’ operating results of the property to discontinued operations.
The Company accounts for properties owned as tenants-in-common with affiliated entities using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Company's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses.
The Company’s properties are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which the properties are located. These laws could require the Company to investigate and remediate the effects of the release or disposal of hazardous materials at these locations if found. For each property, an environmental assessment is completed prior to acquisition. In addition, the lease agreements typically strictly prohibit the production, handling, or storage of hazardous materials (except where incidental to the tenant’s business such as use of cleaning supplies) in violation of applicable law to restrict environmental and other damage. Environmental liabilities are recorded when it is determined the liability is probable and the costs can reasonably be estimated. There were no environmental issues noted or liabilities recorded at December 31, 2011 and 2010.
Fair Value Measurements
As of December 31, 2011, the Company has no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.
Recently Issued Accounting Pronouncements
Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Company’s financial statements.
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 Members’ capital, net income or cash flows.
Page 20 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(3) Related Party Transactions –
The Company owns the percentage interest shown below in the following properties as tenants-in-common with the affiliated entities listed: Sports Authority store (40% – AEI Income & Growth Fund 25 LLC); Advance Auto Parts store (55% – AEI Income & Growth Fund 24 LLC); Applebee’s restaurant in Crawfordsville, Indiana (40% – AEI Income & Growth Fund XXII Limited Partnership); Best Buy store (30% – AEI Income & Growth Fund XXI Limited Partnership and AEI Income & Growth Fund 23 LLC); Dick’s Sporting Goods store in Fredericksburg, Virginia (27% – AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 25 LLC); and Tractor Supply Company store (53% – AEI Net Lease Income & Growth Fund XX Limited Partnership).
AEI received the following reimbursements for costs and expenses from the Company for the years ended December 31:
|
2011
|
2010
|
||||
|
a.
|
AEI is reimbursed for costs incurred in providing services related to managing the Company’s operations and properties, maintaining the Company’s books, and communicating with the Limited Members.
|
$
|
163,551
|
$
|
174,243
|
|
b.
|
AEI is reimbursed for all direct expenses it paid on the Company’s behalf to third parties related to Company administration and property management. These expenses included printing costs, legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs. These amounts included $343 and $347 of expenses related to Discontinued Operations in 2011 and 2010, respectively.
|
$
|
33,756
|
$
|
24,236
|
The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a and b. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.
(4) Investments in Real Estate –
The Company leases its properties to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Company is responsible for repairs to the structural components of the building. At the time the properties were acquired, the remaining primary lease terms varied from 10 to 20 years. The leases provide the tenants with three to four five-year renewal options subject to the same terms and conditions as the primary term.
Page 21 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(4) Investments in Real Estate – (Continued)
The Company's properties are commercial, single-tenant buildings. The Sports Authority store was constructed in 1996, renovated in 2001 and acquired in 2006. The Advance Auto Parts store was constructed in 2004 and acquired in 2006. The Applebee’s restaurant in Indianapolis, Indiana was constructed in 1997 and acquired in 2006. The Applebee’s restaurant in Crawfordsville, Indiana was constructed in 1996 and acquired in 2006. The Starbucks restaurant was constructed and acquired in 2007. The Best Buy store was constructed in 1990, renovated in 1997 and acquired in 2008. The land for the Dick’s Sporting Goods store was acquired in 2007 and construction of the store was completed in 2008. There have been no costs capitalized as improvements subsequent to the acquisitions.
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
|
||||
|
Sports Authority, Wichita, KS
|
$
|
697,617
|
$
|
1,533,136
|
$
|
2,230,753
|
$
|
349,621
|
|
Advance Auto Parts, Middletown, OH
|
112,315
|
909,974
|
1,022,289
|
203,228
|
||||
|
Applebee’s, Indianapolis, IN
|
889,340
|
2,164,847
|
3,054,187
|
451,768
|
||||
|
Applebee’s, Crawfordsville, IN
|
337,353
|
900,418
|
1,237,771
|
180,085
|
||||
|
Starbucks, Bluffton, IN
|
344,008
|
806,108
|
1,150,116
|
141,068
|
||||
|
Best Buy, Eau Claire, WI
|
474,137
|
1,547,025
|
2,021,162
|
242,367
|
||||
|
Dick’s Sporting Goods, Fredericksburg, VA
|
1,603,559
|
1,523,044
|
3,126,603
|
220,842
|
||||
|
$
|
4,458,329
|
$
|
9,384,552
|
$
|
13,842,881
|
$
|
1,788,979
|
|
On February 23, 2012, the Company purchased a 53% interest in a Tractor Supply Company store in Starkville, Mississippi for $1,510,500. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 15 years (as of the date of purchase) and annual rent of $115,542 for the interest purchased.
For properties owned as of December 31, 2011, the minimum future rent payments required by the leases are as follows:
|
2012
|
$
|
1,189,119
|
|
2013
|
1,201,276
|
|
|
2014
|
1,225,858
|
|
|
2015
|
1,233,860
|
|
|
2016
|
1,240,100
|
|
|
Thereafter
|
4,813,269
|
|
|
$
|
10,903,482
|
|
There were no contingent rents recognized in 2011 and 2010.
Page 22 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 Company's total rent revenue for the years ended December 31:
|
Tenants
|
Industry
|
2011
|
2010
|
|||
|
Apple American Group
|
Restaurant
|
$
|
315,355
|
$
|
309,551
|
|
|
Dick’s Sporting Goods, Inc.
|
Retail
|
219,445
|
219,445
|
|||
|
TSA Stores, Inc.
|
Retail
|
204,665
|
204,665
|
|||
|
Best Buy Stores, L.P.
|
Retail
|
142,222
|
142,222
|
|||
|
Red Robin International, Inc.
|
Restaurant
|
115,500
|
115,500
|
|||
|
Aggregate rent revenue of major tenants
|
$
|
997,187
|
$
|
991,383
|
||
|
Aggregate rent revenue of major tenants as a percentage of total rent revenue
|
87%
|
87%
|
||||
(6) Discontinued Operations –
On January 31, 2012, the Company sold the land under the Red Robin restaurant in Beavercreek, Ohio to an unrelated third party. The Company received net sale proceeds of approximately $1,806,000, which resulted in a net gain of approximately $272,300. At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $1,533,655.
The financial results for this property 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
|
$
|
115,500
|
$
|
115,500
|
|
Property Management Expenses
|
(343)
|
(347)
|
||
|
Income from Discontinued Operations
|
$
|
115,157
|
$
|
115,153
|
(7) Members’ Capital –
For the years ended December 31, 2011 and 2010, the Company declared distributions of $944,330 and $944,425, respectively. The Limited Members received distributions of $916,000 and $916,092 and the Managing Members received distributions of $28,330 and $28,333 for the years, respectively. The Limited Members' distributions represent $0.50 and $0.50 per LLC Unit outstanding using 1,827,736 and 1,828,986 weighted average Units in 2011 and 2010, respectively. The distributions represent $0.31 and $0.30 per Unit of Net Income and $0.19 and $0.20 per Unit of return of contributed capital in 2011 and 2010, respectively.
Page 23 of 32
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
(7) Members’ Capital – (Continued)
The Company may acquire Units from Limited Members who have tendered their Units to the Company. Such Units may be acquired at a discount. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Members, such purchase would impair the capital or operation of the Company.
During 2011, the Company did not redeem any Units from the Limited Members. During 2010, one Limited Member redeemed a total of 5,000 Units for $38,225 in accordance with the Operating Agreement. The Company acquired these Units using Net Cash Flow from operations. The redemptions increase the remaining Limited Members’ ownership interest in the Company. As a result of this redemption payment and pursuant to the Operating Agreement, the Managing Members received distributions of $1,182 in 2010.
After the effect of redemptions, the Adjusted Capital Contribution, as defined in the Operating Agreement, is $10.03 per original $10 invested.
(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
|
$
|
577,661
|
$
|
571,367
|
|
Depreciation for Tax Purposes Under
Depreciation for Financial Reporting Purposes
|
111,270
|
107,685
|
||
|
Income Accrued for Tax Purposes Over
Income for Financial Reporting Purposes
|
1,935
|
0
|
||
|
Taxable Income to Members
|
$
|
690,866
|
$
|
679,052
|
The following is a reconciliation of Members’ Equity for financial reporting purposes to Members’ Equity reported for federal income tax purposes for the years ended December 31:
|
2011
|
2010
|
|||
|
Members’ Equity for Financial Reporting Purposes
|
$
|
13,650,477
|
$
|
14,017,146
|
|
Depreciation for Tax Purposes Under
Depreciation for Financial Reporting Purposes
|
538,671
|
427,401
|
||
|
Income Accrued for Tax Purposes Over
Income for Financial Reporting Purposes
|
27,731
|
25,796
|
||
|
Syndication Costs Treated as Reduction
of Capital For Financial Reporting Purposes
|
2,691,997
|
2,691,997
|
||
|
Members’ Equity for Tax Reporting Purposes
|
$
|
16,908,876
|
$
|
17,162,340
|
Page 24 of 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures.
Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing Member of the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the President and Chief Financial Officer of the Managing Member concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing Member, in a manner that allows timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting.
(i) Management’s Report on Internal Control Over Financial Reporting. The Managing Member, through its management, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, and for performing an assessment of the effectiveness of our internal control over financial reporting as of December 31, 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 Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management of the Managing Member; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management of the Managing Member performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 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 Member 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 25 of 32
ITEM 9A. CONTROLS AND PROCEDURES. (Continued)
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
(ii) Changes in Internal Control Over Financial Reporting. During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The registrant is a limited liability company and has no officers, directors, or direct employees. The Managing Members manage and control the Company’s affairs and have general responsibility and the ultimate authority in all matters affecting the Company’s business. The Managing Members are AEI Fund Management XXI, Inc. (“AFM”), the Managing Member, and Robert P. Johnson, Chief Executive Officer, President and sole director of AFM, the Special Managing Member. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AFM has only one senior financial executive, its Chief Financial Officer. The Chief Financial Officer reports directly to Mr. Johnson and is accountable for his actions to Mr. Johnson. Although Mr. Johnson and AFM require that all of their personnel, including the Chief Financial Officer, engage in honest and ethical conduct, ensure full, fair, accurate, timely, and understandable disclosure, comply with all applicable governmental laws, rules and regulations, and report to Mr. Johnson any deviation from these principles, because the organization is composed of only approximately 35 individuals, because the management of a company by an entity that has different interests in distributions and income than investors involves numerous conflicts of interest that must be resolved on a daily basis, and because the ultimate decision maker in all instances is Mr. Johnson, AFM has not adopted a formal code of conduct. Instead, the materials pursuant to which investors purchase Units disclose these conflicts of interest in detail and Mr. Johnson, as the CEO and sole director of AFM, resolves conflicts to the best of his ability, consistent with his fiduciary obligations to AFM and the fiduciary obligations of AFM to the Company. The director and officers of AFM are as follows:
Page 26 of 32
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 Special Managing Member of the Company, as well as the sole director of AFM, all of the duties that might be assigned to an audit committee are assigned to Mr. Johnson. Mr. Johnson is not an audit committee financial expert, as defined. As an officer and majority owner, through a parent company, of AFM, and as the Special Managing Member, Mr. Johnson is not a "disinterested director" and may be subject to a number of conflicts of interests in his capacity as sole director of AFM.
Before the independent auditors are engaged, Mr. Johnson, as the sole director of AFM, approves all audit-related fees, and all permissible nonaudit fees, for services of our auditors.
Section 16(a) Beneficial Ownership Reporting Compliance
Under federal securities laws, the directors and officers of the Managing Member of the Company, and any beneficial owner of more than 10% of a class of equity securities of the Company, are required to report their ownership of the Company's equity securities and any changes in such ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established by the Commission, and the Company is required to disclose in this Annual Report on 10-K any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 2011. Based upon information provided by officers and directors of the Managing Member, all officers, directors and 10% owners filed all reports on a timely basis in the 2011 fiscal year.
Page 27 of 32
ITEM 11. EXECUTIVE COMPENSATION.
The Managing Member and affiliates are reimbursed at cost for all services performed on behalf of the registrant and for all third party expenses paid on behalf of the registrant. The cost for services performed on behalf of the registrant is based on actual time spent performing such services plus an overhead burden. These services include organizing the registrant and arranging for the offer and sale of Units, reviewing properties for acquisition and rendering administrative, property management and property sales services. The amount and nature of such payments are detailed in Item 13 of this annual report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information pertaining to the ownership of the Units by each person known by the Company to beneficially own 5% or more of the Units, by each Managing Member, and by each officer or director of the Managing Member as of February 29, 2012:
|
Name and Address
of Beneficial Owner
|
Number of
Units Held
|
Percent
of Class
|
|
AEI Fund Management XXI, Inc.
|
0
|
0.00%
|
|
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
|
The Managing Members know of no holders of more than 5% of the outstanding Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The registrant, AFM and its affiliates have common management and utilize the same facilities. As a result, certain administrative expenses are allocated among these related entities. All of such activities and any other transactions involving the affiliates of the Managing Member of the registrant are governed by, and are conducted in conformity with, the limitations set forth in the Operating Agreement of the registrant. Reference is made to Note 3 of the Financial Statements, as presented, and is incorporated herein by reference, for details of related party transactions for the years ended December 31, 2011 and 2010.
Neither the registrant, nor the Managing Member of the registrant, has a board of directors consisting of any members who are “independent.” The sole director of the Managing Member, Robert P. Johnson, is also the Special Managing Member of the registrant, and is the Chief Executive Officer, and indirectly the principal owner, of the Managing Member. Accordingly, there is no disinterested board, or other functioning body, that reviews related party transactions, or the transactions between the registrant and the Managing Members, except as performed in connection with the audit of its financial statements.
Page 28 of 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued)
The limitations included in the Operating Agreement require that the cumulative reimbursements to the Managing Members and their affiliates for certain expenses will not exceed an amount equal to the sum of (i) 20% of capital contributions, (ii) 1% of gross revenues, plus an initial leasing fee of 3% of gross revenues for the first five years of the original term of each lease, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the Managing Members. The cumulative reimbursements subject to this limitation are reimbursements for (i) organization and offering expenses, including commissions and an Organization Fee, (ii) acquisition expenses paid with proceeds from the initial offering of Units, (iii) services provided in the sales effort of properties, and (iv) expenses of controlling persons and overhead expenses directly attributable to the forgoing services or attributable to administrative services. As of December 31, 2011, these cumulative reimbursements to the Managing Members and their affiliates did not exceed the limitation amount.
The following table sets forth the forms of compensation, distributions and cost reimbursements paid by the registrant to the Managing Members or their Affiliates in connection with the operation of the Fund and its properties for the period from inception through December 31, 2011.
|
Person or Entity
Receiving
Compensation
|
Form and Method
of Compensation
|
Amount Incurred From
Inception (March 14, 2005)
To December 31, 2011
|
||
|
AEI Securities, Inc.
|
Selling Commissions equal to 10% of proceeds, excluding proceeds from distribution reinvestments, most of which were reallowed to Participating Dealers.
|
$
|
1,790,447
|
|
|
Managing Members and Affiliates
|
Reimbursement at Cost for other Organization and Offering Costs.
|
$
|
916,368
|
|
|
Managing Members and Affiliates
|
Reimbursement at Cost for all Acquisition Expenses.
|
$
|
278,726
|
|
|
Managing Members 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.
|
$
|
868,369
|
|
|
Managing Members and Affiliates
|
Reimbursement at Cost for providing services related to the disposition of the Fund's properties.
|
$
|
0
|
|
|
Managing Members
|
3% of Net Cash Flow in any fiscal year.
|
$
|
138,824
|
|
|
Managing Members
|
1% of distributions of Net Proceeds of Sale until Limited Members have received an amount equal to (a) their Adjusted Capital Contributions, plus (b) an amount equal to 6.5% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously distributed. 10% of distributions of Net Proceeds of Sale thereafter.
|
$
|
0
|
|
Page 29 of 32
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following is a summary of the fees billed to the Company by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services rendered for the years ended December 31, 2011 and 2010:
|
Fee Category
|
2011
|
2010
|
||
|
Audit Fees
|
$
|
15,661
|
$
|
15,470
|
|
Audit-Related Fees
|
0
|
0
|
||
|
Tax Fees
|
0
|
0
|
||
|
All Other Fees
|
0
|
0
|
||
|
Total Fees
|
$
|
15,661
|
$
|
15,470
|
Audit Fees - Consists of fees billed for professional services rendered for the audit of the Company’s annual financial statements and review of the interim financial statements included in quarterly reports, and services that are normally provided by Boulay, Heutmaker, Zibell & Co. P.L.L.P. in connection with statutory and regulatory filings or engagements.
Audit-Related Fees - Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of financial statements and are not reported under "Audit Fees." These services include consultations concerning financial accounting and reporting standards.
Tax Fees - Consists of fees billed for professional services for federal and state tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services other than the services reported above.
Policy for Preapproval of Audit and Permissible Non-Audit Services of Independent Auditors
Before the Independent Auditors are engaged by the Company to render audit or non-audit services, the engagement is approved by Mr. Johnson acting as the Company’s audit committee.
Page 30 of 32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) (1) A list of the financial statements contained herein is set forth on page 11.
(a) (2) Schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or related notes.
(a) (3) The Exhibits filed in response to Item 601 of Regulation S-K are listed below.
|
3.1
|
Certificate of Limited Liability Company (incorporated by reference to Exhibit 3.1 of the registrant's Registration Statement on Form SB-2 filed on May 26, 2005 [File No. 333-125266]).
|
|
3.2
|
Operating Agreement to the Prospectus (incorporated by reference to Exhibit A of the registrant's Registration Statement on Form SB-2 filed on October 14, 2005 [File No. 333-125266]).
|
|
10.1
|
Assignment and Assumption of Lease and Guaranty dated April 3, 2006 between the Company and AEI Fund Management XVII, Inc. relating to the Property at 6959 East 21st Street, Wichita, Kansas (incorporated by reference to Exhibit 10.1 of Form 8-K filed April 5, 2006).
|
|
10.2
|
Assignment and Assumption of Lease dated May 31, 2006 between the Company, AEI Income & Growth Fund 24 LLC and Blue Bell Partners, LLC relating to the Property at 65 North University Boulevard, Middletown, Ohio (incorporated by reference to Exhibit 10.2 of Form 8-K filed June 7, 2006).
|
|
10.3
|
Net Lease Agreement dated September 21, 2006 between the Company, AEI Fund Management XVII, Inc. and Apple Indiana II LLC relating to the Property at 7345 E. Washington Street, Indianapolis, Indiana (incorporated by reference to Exhibit 10.2 of Form 8-K filed September 26, 2006).
|
|
10.4
|
Assignment and Assumption of Lease dated December 29, 2006 between the Company, AEI Income & Growth Fund XXII Limited Partnership and AEI Fund Management XVII, Inc. relating to the Property at 1516 South Washington Street, Crawfordsville, Indiana (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 8, 2007).
|
|
31.1
|
Certification of Chief Executive Officer of Managing Member pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of Chief Financial Officer of Managing Member pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer of Managing Member pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Page 31 of 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
AEI INCOME & GROWTH FUND 26
|
||
|
Limited Liability Company
|
||
|
By:
|
AEI Fund Management XXI, Inc.
|
|
|
Its Managing Member
|
||
|
March 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 Member
|
|||
| /s/ PATRICK W KEENE |
Chief Financial Officer and Treasurer
|
March 29, 2012
|
||
|
Patrick W. Keene
|
(Principal Accounting Officer)
|
Page 32 of 32