AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP	Financial_Report.xls
EX-32 - AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP	ex32-21.htm
EX-31.1 - AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP	ex31-121.htm
EX-31.2 - AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP	ex31-221.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2014

Commission File Number: 000-29274

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

State of Minnesota		41-1789725
(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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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). x Yes o No

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 Exchange Act). o Yes x No

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

INDEX

				Page
Part I – Financial Information

	Item 1.	Financial Statements:

		Balance Sheet as of September 30, 2014 and December 31, 2013		3

		Statements for the Periods ended September 30, 2014 and 2013:

			Income	4

			Cash Flows	5

			Changes in Partners’ Capital	6

		Notes to Financial Statements		7 - 14

	Item 2.	Management's Discussion and Analysis of Financial
			Condition and Results of Operations	14 - 20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20

	Item 4.	Controls and Procedures		20

Part II – Other Information

	Item 1.	Legal Proceedings		21

	Item 1A.	Risk Factors		21

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		21

	Item 3.	Defaults Upon Senior Securities		21

	Item 4.	Mine Safety Disclosures		21

	Item 5.	Other Information		21

	Item 6.	Exhibits		22

Signatures				22

Page 2 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

BALANCE SHEET

ASSETS

	September 30,			December 31,
	2014			2013
	(unaudited)
Current Assets:
Cash	$	4,041,018		$	5,553,960

Real Estate Held for Investment:
Land		3,484,216			2,866,183
Buildings and Equipment		10,126,971			8,809,264
Acquired Intangible Lease Assets		522,129			0
Real Estate Investments, at cost		14,133,316			11,675,447
Accumulated Depreciation and Amortization		(2,561,150	)		(2,533,686	)
Real Estate Held for Investment, Net		11,572,166			9,141,761
Equity Method Investments		995,375			0
Real Estate Held for Sale		0			1,508,930
Total Real Estate		12,567,541			10,650,691
Total Assets	$	16,608,559		$	16,204,651

LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
Payable to AEI Fund Management, Inc.	$	43,454	$	11,049
Distributions Payable		291,922		291,922
Unearned Rent		35,215		12,121
Total Current Liabilities		370,591		315,092

Long-term Liabilities:
Acquired Below-Market Lease Intangibles, Net		76,939		0

Partners’ Capital:
General Partners		13,920		11,205
Limited Partners – 24,000 Units authorized; 22,653 Units issued and outstanding		16,147,109		15,878,354
Total Partners' Capital		16,161,029		15,889,559
Total Liabilities and Partners' Capital	$	16,608,559	$	16,204,651

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

Page 3 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

STATEMENT OF INCOME

(unaudited)

	Three Months Ended September 30				Nine Months Ended September 30
	2014		2013		2014		2013

Rental Income	$	313,659	$	241,737	$	813,070	$	719,972

Expenses:
Partnership Administration – Affiliates		57,078		50,650		165,388		152,129
Partnership Administration and Property Management – Unrelated Parties		11,194		17,018		43,877		42,062
Property Acquisition		30,653		0		56,473		0
Depreciation and Amortization		120,510		88,093		303,500		264,279
Total Expenses		219,435		155,761		569,238		458,470

Operating Income		94,224		85,976		243,832		261,502

Other Income:
Income from Equity Method Investment		258,367		0		258,367		0
Interest Income		2,097		3,126		9,449		6,277
Total Other Income		260,464		3,126		267,816		6,277

Income from Continuing Operations		354,688		89,102		511,648		267,779

Income from Discontinued Operations		99,528		1,182,845		635,587		1,311,456

Net Income	$	454,216	$	1,271,947	$	1,147,235	$	1,579,235

Net Income Allocated:
General Partners	$	4,542	$	19,290	$	11,472	$	22,363
Limited Partners		449,674		1,252,657		1,135,763		1,556,872
Total	$	454,216	$	1,271,947	$	1,147,235	$	1,579,235

Income per Limited Partnership Unit:
Continuing Operations	$	15.50	$	3.89	$	22.36	$	11.70
Discontinued Operations		4.35		51.41		27.78		57.03
Total – Basic and Diluted	$	19.85	$	55.30	$	50.14	$	68.73

Weighted Average Units Outstanding – Basic and Diluted		22,653		22,653		22,653		22,653

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

Page 4 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30
	2014			2013
Cash Flows from Operating Activities:
Net Income	$	1,147,235		$	1,579,235

Adjustments to Reconcile Net Income To Net Cash Provided by Operating Activities:
Depreciation and Amortization		299,836			344,262
Gain on Sale of Real Estate		0			(1,128,749	)
Income from Equity Method Investments		(870,359	)		0
Increase (Decrease) in Payable to AEI Fund Management, Inc.		32,405			85,555
Increase (Decrease) in Unearned Rent		23,094			21,211
Total Adjustments		(515,024	)		(677,721	)
Net Cash Provided By Operating Activities		632,211			901,514

Cash Flows from Investing Activities:
Investments in Real Estate		(4,335,000	)		0
Proceeds from Sale of Real Estate		0			3,781,399
Cash Paid for Equity Method Investments		(37,488	)		0
Proceeds from Equity Method Investments		3,103,100			0
Net Cash Provided By (Used For) Investing Activities		(1,269,388	)		3,781,399

Cash Flows from Financing Activities:
Distributions Paid to Partners		(875,765	)		(881,818	)

Net Increase (Decrease) in Cash		(1,512,942	)		3,801,095

Cash, beginning of period		5,553,960			2,259,911

Cash, end of period	$	4,041,018		$	6,061,006

Supplemental Disclosure of Non-Cash Investing Activities:
Contribution of Real Estate in Exchange for Equity Method Investment	$	3,190,628		$	0

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

Page 5 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

(unaudited)

	General Partners			Limited Partners			Total			Limited Partnership Units Outstanding

Balance, December 31, 2012	$	686		$	15,658,370		$	15,659,056			22,653.11

Distributions Declared		(11,828	)		(1,171,002	)		(1,182,830	)

Net Income		22,363			1,556,872			1,579,235

Balance, September 30, 2013	$	11,221		$	16,044,240		$	16,055,461			22,653.11


Balance, December 31, 2013	$	11,205		$	15,878,354		$	15,889,559			22,653.11

Distributions Declared		(8,757	)		(867,008	)		(875,765	)

Net Income		11,472			1,135,763			1,147,235

Balance, September 30, 2014	$	13,920		$	16,147,109		$	16,161,029			22,653.11

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

Page 6 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(unaudited)

(1) The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.

(2) Organization –

AEI Income & Growth Fund XXI 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 April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively.

During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. Distributions to Limited Partners will be made pro rata by Units.

Page 7 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(2) Organization – (Continued)

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 10% 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.

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 10% 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.

In January 2014, the Managing General Partner mailed a Consent Statement (Proxy) seeking the consent of the Limited Partners to continue the Partnership for an additional 60 months or to initiate the final disposition, liquidation and distribution of all of the Partnership’s properties and assets. On February 14, 2014, the proposal to continue the Partnership was approved with a majority of Units voted in favor of the continuation proposal. As a result, the Managing General Partner will continue the operations of the Partnership for an additional 60 months at which time it will again ask the Limited Partners to vote on the same two proposals.

Page 8 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(3) Summary of Significant Accounting Policies –

Real Estate

Upon acquisition of real properties, the Partnership records them in the financial statements at cost. 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.

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.

Page 9 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

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

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.

(4) Recently Adopted Accounting Standards –

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This topic amends the requirements for reporting discontinued operations. The disposal of a component must represent a strategic shift that will have a major effect on the Partnership’s operations and financial results in order to be reported as discontinued operations, and require certain additional interim and annual disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2014 with early adoption permitted. The Partnership has early adopted this standard effective January 1, 2014 and has applied the provisions prospectively. As a result, the Partnership anticipates that properties will not be considered discontinued operations when the properties are sold after January 1, 2014, with the exception of properties that were classified as Real Estate Held for Sale at December 31, 2013.

(5) Reclassification –

Certain items related to discontinued operations in the prior year’s financial statements have been reclassified to conform to 2014 presentation. These reclassifications had no effect on Partners’ capital, net income or cash flows.

(6) Real Estate Held for Investment –

On May 29, 2014, the Partnership purchased a 50% interest in a Tractor Supply Company store in Canton, Georgia for $2,212,500. The Partnership allocated $185,920 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles and allocated $80,603 to Acquired Below-Market Lease Intangibles. The Partnership incurred $25,958 of acquisition expenses related to the purchase that were expensed. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 7.3 years (as of the date of purchase) and annual rent of $164,355 for the interest purchased. The remaining interest in the property was purchased by AEI Accredited Investor Fund V LP, an affiliate of the Partnership.

Page 10 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(6) Real Estate Held for Investment – (Continued)

On July 3, 2014, the Partnership purchased a 30% interest in a Gander Mountain store in Champaign, Illinois for $2,122,500. The Partnership allocated $336,209 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles. The Partnership incurred $30,515 of acquisition expenses related to the purchase that were expensed. The property is leased to Gander Mountain Company under a Lease Agreement with a remaining primary term of 14.9 years and annual rent of $167,772 for the interest purchased. The remaining interests in the property were purchased by AEI Accredited Investor Fund V LP and AEI National Income Property Fund VIII LP, affiliates of the Partnership.

For the nine months ended September 30, 2014 and 2013, the value of in-place lease intangibles amortized to expense was $12,229 and $0, and the increase to rental income for below-market leases was $3,664 and $0, respectively. For lease intangibles not held for sale as of September 30, 2014, the weighted average remaining life is 143 months for in-place lease intangibles and 84 months for below-market leases, the estimated amortization expense is $48,019 and the estimated increase to rental income is $10,991 for each of the next five succeeding years.

(7) Equity Method Investments –

In the fourth quarter of 2013, the Partnership decided to sell its 20% interest in the CarMax Auto Superstore in Lithia Springs, Georgia. At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $1,508,930. The remaining interests in the property were owned by three affiliated entities, AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership. On March 7, 2014, to facilitate the sale of the property, the Partnership and affiliated entities contributed their respective interests in the property via a limited liability company to CM Lithia Springs DST (“CMLS”), a Delaware statutory trust (“DST”), in exchange for Class B ownership interests in CMLS. In addition, a small amount of cash was contributed for working capital. A DST is a recognized mechanism for selling property to investors who are looking for replacement real estate to complete like-kind exchanges under Section 1031 of the Internal Revenue Code. As investors purchase Class A ownership interests in CMLS, the proceeds received will be used to redeem, on a one-for-one basis, the Class B ownership interests of the Partnership and affiliated entities. From March 13, 2014 to July 25, 2014, CMLS sold 100% of its Class A ownership interests to investors and redeemed 100% of the Class B ownership interests from the Partnership and affiliated entities.

Page 11 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(7) Equity Method Investments – (Continued)

On August 29, 2014, to facilitate the sale of its 63% interest in the Tractor Supply Company store in Rapid City, South Dakota, the Partnership contributed the property via a limited liability company to AEI Net Lease Portfolio DST (“ANLP”), a Delaware statutory trust (“DST”), in exchange for 16.95% of the Class B ownership interests in ANLP. The remaining interest in the property, owned by an affiliated entity, along with two other properties owned by two other affiliated entities, were also contributed to ANLP in exchange for 83.05% of the Class B ownership interests in ANLP. In addition, cash was contributed for working capital. From August 29, 2014 to September 30, 2014, ANLP sold 45.737% of its Class A ownership interests to investors and redeemed 45.737% of the Class B ownership interests from the Partnership and affiliated entities. During October 2014, ANLP sold the remaining 54.263% of its Class A ownership interests to investors and redeemed 54.263% of the Class B ownership interests from the Partnership and affiliated entities.

The investments in CMLS and ANLP are recorded using the equity method of accounting in the accompanying financial statements. Under the equity method, the investments are stated at cost and adjusted for the Partnership’s share of net income or losses and reduced by proceeds received from the sale of the Class B ownership interests of the DSTs as well as distributions from net rental income. As of September 30, 2014, the investment balances consist of the following:

		CMLS		ANLP		Total
Real Estate Contributed	$	1,508,930	$	1,681,698	$	3,190,628
Cash Contributed		12,169		25,319		37,488
Net Income – Rental Activity		32,956		9,148		42,104
Net Income – Gain on Sale of Real Estate		579,036		249,219		828,255
Distributions from Net Rental Income		(32,956)		(9,148)		(42,104)
Proceeds from Sale of Class B Interests		(2,087,044)		(973,952)		(3,060,996)
Equity Method Investments	$	13,091	$	982,284	$	995,375

(8) Payable to AEI Fund Management, Inc. –

AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.

(9) Discontinued Operations –

On August 2, 2013, the Partnership sold its 39% interest in the Scott & White Clinic in College Station, Texas to an unrelated third party. The Partnership received net sale proceeds of $1,822,494, which resulted in a net gain of $512,842. At the time of sale, the cost and related accumulated depreciation was $1,433,468 and $123,816, respectively.

Page 12 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(9) Discontinued Operations – (Continued)

In June 2013, the Partnership entered into an agreement to sell its 62% interest in the Applebee’s restaurant in Johnstown, Pennsylvania to an unrelated third party. On August 23, 2013, the sale closed with the Partnership receiving net sale proceeds of $1,958,905, which resulted in a net gain of $615,907. At the time of sale, the cost and related accumulated depreciation was $1,682,887 and $339,889, respectively.

During the first nine months of 2014 and 2013, the Partnership distributed net sale proceeds of $200,478 and $388,083, respectively. The Limited Partners received distributions of $198,473 and $384,202 and the General Partners received distributions of $2,005 and $3,881 for the periods, respectively. The Limited Partners’ distributions represented $8.76 and $16.95 per Unit for the periods, respectively.

The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations:

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013

Rental Income	$	0		$	65,138		$	26,740		$	263,561
Property Management Expenses		(117	)		(341	)		(3,145	)		(871	)
Depreciation		0			(10,701	)		0			(79,983	)
Income from Equity Method Investment Held for Sale		99,645			0			611,992			0
Gain on Disposal of Real Estate		0			1,128,749			0			1,128,749
Income from Discontinued Operations	$	99,528		$	1,182,845		$	635,587		$	1,311,456

	Three Months Ended September 30					Nine Months Ended September 30
	2014			2013		2014		2013
Cash Flows from Discontinued Operations:
Operating Activities	$	(117	)	$	64,797	$	23,595	$	262,690
Investing Activities	$	520,000		$	3,781,399	$	2,107,831	$	3,781,399

Page 13 of 22

AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(10) Fair Value Measurements –

As of September 30, 2014 and December 31, 2013, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.

ITEM 2. 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 United States generally accepted accounting principles (US 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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

Allocation of Purchase Price of Acquired Properties

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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

Carrying Value of Properties

Properties are carried at original cost, less accumulated depreciation and amortization. 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.

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 nine months ended September 30, 2014 and 2013, the Partnership recognized rental income from continuing operations of $813,070 and $719,972, respectively. In 2014, rental income increased due to additional rent received from two property acquisitions in 2014 and rent increases on two properties. Based on the scheduled rent for the properties as of October 31, 2014, the Partnership expects to recognize rental income from continuing operations of approximately $1,105,000 and $1,180,000 in 2014 and 2015, respectively.

For the nine months ended September 30, 2014 and 2013, the Partnership incurred Partnership administration expenses from affiliated parties of $165,388 and $152,129, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communication with the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $43,877 and $42,062, 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 nine months ended September 30, 2014, the Partnership incurred property acquisition expenses of $25,958 related to the purchase of the Tractor Supply Company store in Canton, Georgia and $30,515 related to the Gander Mountain store in Champaign, Illinois.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

On August 29, 2014, to facilitate the sale of its 63% interest in the Tractor Supply Company store in Rapid City, South Dakota, the Partnership contributed the property via a limited liability company to AEI Net Lease Portfolio DST (“ANLP”), a Delaware statutory trust (“DST”), in exchange for 16.95% of the Class B ownership interests in ANLP. The remaining interest in the property, owned by an affiliated entity, along with two other properties owned by two other affiliated entities, were also contributed to ANLP in exchange for 83.05% of the Class B ownership interests in ANLP. In addition, cash was contributed for working capital. A DST is a recognized mechanism for selling property to investors who are looking for replacement real estate to complete like-kind exchanges under Section 1031 of the Internal Revenue Code. As investors purchase Class A ownership interests in CMLS, the proceeds received will be used to redeem, on a one-for-one basis, the Class B ownership interests of the Partnership and affiliated entities. From August 29, 2014 to September 30, 2014, ANLP sold 45.737% of its Class A ownership interests to investors and redeemed 45.737% of the Class B ownership interests from the Partnership and affiliated entities. During October 2014, ANLP sold the remaining 54.263% of its Class A ownership interests to investors and redeemed 54.263% of the Class B ownership interests from the Partnership and affiliated entities.

The investment in ANLP is recorded using the equity method of accounting in the accompanying financial statements. Under the equity method, the investment is stated at cost and adjusted for the Partnership’s share of net income or losses and reduced by proceeds received from the sale of the Class B ownership interests of the DST as well as distributions from net rental income. For the nine months ended September 30, 2014, the Partnership’s share of net income of ANLP was $258,367.

For the nine months ended September 30, 2014 and 2013, the Partnership recognized interest income of $9,449 and $6,277, respectively. In 2014, interest income increased primarily due to the Partnership having more money invested in a money market account due to two property sales in 2013.

Prior to January 1, 2014, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership included the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassified the prior periods’ operating results of the property to discontinued operations. For the nine months ended September 30, 2014, the Partnership recognized income from discontinued operations of $635,587, representing rental income less property management expenses of $23,595 and income from an equity method investment held for sale of $611,992. For the nine months ended September 30, 2013, the Partnership recognized income from discontinued operations of $1,311,456, representing rental income less property management expenses and depreciation of $182,707 and gain on disposal of real estate of $1,128,749.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

In the fourth quarter of 2013, the Partnership decided to sell its 20% interest in the CarMax Auto Superstore in Lithia Springs, Georgia. At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $1,508,930. The remaining interests in the property were owned by three affiliated entities, AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership. On March 7, 2014, to facilitate the sale of the property, the Partnership and affiliated entities contributed their respective interests in the property via a limited liability company to CM Lithia Springs DST (“CMLS”), a Delaware statutory trust (“DST”), in exchange for Class B ownership interests in CMLS. In addition, a small amount of cash was contributed for working capital. From March 13, 2014 to July 25, 2014, CMLS sold 100% of its Class A ownership interests to investors and redeemed 100% of the Class B ownership interests from the Partnership and affiliated entities. The investment in CMLS is recorded using the equity method of accounting in the accompanying financial statements. For the nine months ended September 30, 2014, the Partnership’s share of net income of CMLS was $611,992.

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 nine months ended September 30, 2014, the Partnership's cash balances decreased $1,512,942 as a result of cash used to purchase property, distributions paid to the Partners in excess of cash generated from operating activities, and cash paid for equity method investments, which were partially offset by proceeds received from equity method investments. During the nine months ended September 30, 2013, the Partnership's cash balances increased $3,801,095 as a result of cash generated from the sale of property and cash generated from operating activities in excess of distributions paid to the Partners.

Net cash provided by operating activities decreased from $901,514 in 2013 to $632,211 in 2014 as a result of a decrease in total rental and interest income in 2014, an increase in Partnership administration and property management expenses in 2014 and net timing differences in the collection of payments from the tenants and the payment of expenses. During 2014, cash from operations was reduced by $56,473 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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

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, including proceeds from equity method investments. During the nine months ended September 30, 2014, the Partnership expended $4,335,000 to invest in real properties as the Partnership reinvested cash generated from property sales. During the nine months ended September 30, 2014, the Partnership paid cash for equity method investments of $37,488. During the nine months ended September 30, 2013, the Partnership generated cash flow from the sale of real estate of $3,781,399. During the nine months ended September 30, 2014, the Partnership received proceeds from equity method investments of $3,103,100. All but a small portion of these proceeds were generated from the sales of the CarMax Auto Superstore and the Tractor Supply Company store as discussed above.

On May 29, 2014, the Partnership purchased a 50% interest in a Tractor Supply Company store in Canton, Georgia for $2,212,500. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 7.3 years (as of the date of purchase) and annual rent of $164,355 for the interest purchased. The remaining interest in the property was purchased by AEI Accredited Investor Fund V LP, an affiliate of the Partnership.

On July 3, 2014, the Partnership purchased a 30% interest in a Gander Mountain store in Champaign, Illinois for $2,122,500. The property is leased to Gander Mountain Company under a Lease Agreement with a remaining primary term of 14.9 years and annual rent of $167,772 for the interest purchased. The remaining interests in the property were purchased by AEI Accredited Investor Fund V LP and AEI National Income Property Fund VIII LP, affiliates 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.

For the nine months ended September 30, 2014 and 2013, the Partnership declared distributions of $875,765 and $1,182,830, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $867,008 and $1,171,002 and the General Partners received distributions of $8,757 and $11,828 for the periods, respectively. In September 2013, the Partnership declared a special distribution of net sale proceeds of $303,030, which resulted in higher distributions declared in 2013.

As part of the distributions discussed above, the Partnership distributed net sale proceeds of $200,478 and $388,083 in 2014 and 2013, respectively. The Limited Partners received distributions of $198,473 and $384,202 and the General Partners received distributions of $2,005 and $3,881 for the periods, respectively. The Limited Partners’ distributions represented $8.76 and $16.95 per Unit for the periods, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

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 more than 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 nine months ended September 30, 2014 and 2013, the Partnership did not redeem any Units from the Limited Partners.

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.

Off-Balance Sheet Arrangements

As of September 30, 2014 and December 31, 2013, the Partnership had no material off-balance sheet arrangements that had or are reasonably likely to have current or future effects on its financial condition, results of operations, liquidity or capital resources.

ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for a smaller reporting company.

ITEM 4. 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) 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.

Page 20 of 22

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject.

ITEM 1A. RISK FACTORS.

Not required for a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES & USE OF PROCEEDS.

(a) None.

(b) Not applicable.

(c) Pursuant to Section 7.7 of the Partnership Agreement, as amended, 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 95% 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 more than 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 period covered by this report, the Partnership did not purchase any Units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 12, 2014	AEI Income & Growth Fund XXI
	Limited Partnership
	By:	AEI Fund Management XXI, Inc.
	Its:	Managing General Partner



	By:	/s/ ROBERT P JOHNSON
		Robert P. Johnson
		President
		(Principal Executive Officer)



	By:	/s/ PATRICK W KEENE
		Patrick W. Keene
		Chief Financial Officer
		(Principal Accounting Officer)

Page 22 of 22

AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP - FORM 10-Q - November 12, 2014

Attached files

AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP Reports