AEI INCOME & GROWTH FUND 25 LLC - FORM 10-Q

Attached files

file	filename
EX-32 - SECTION 1350 CERTIFICATIONS - AEI INCOME & GROWTH FUND 25 LLC	ex32-25.htm
EX-31.2 - EX-31.2 - AEI INCOME & GROWTH FUND 25 LLC	ex31-225.htm
EX-31.1 - EX-31.1 - AEI INCOME & GROWTH FUND 25 LLC	ex31-125.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, 2020

Commission File Number: 000-50609

AEI INCOME & GROWTH FUND 25 LLC

(Exact name of registrant as specified in its charter)

State of Delaware		75-3074973
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30 East 7^th 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)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None		None		None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ 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.

☐ Large accelerated filer	☐ Accelerated filer
☐ Non-accelerated filer	☒ Smaller reporting company
☐ Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

AEI INCOME & GROWTH FUND 25 LLC

INDEX


				Page
Part I – Financial Information

	Item 1.	Financial Statements (unaudited):

		Balance Sheets as of September 30, 2020 and December 31, 2019		3

		Statements for the Periods ended September 30, 2020 and 2019:

			Operations	4

			Cash Flows	5

			Changes in Members' Equity (Deficit)	6

		Notes to Financial Statements		7 - 13

	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		21

	Item 4.	Controls and Procedures		21

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		22

	Item 3.	Defaults Upon Senior Securities		22

	Item 4.	Mine Safety Disclosures		22

	Item 5.	Other Information		22

	Item 6.	Exhibits		22

Signatures				23

AEI INCOME & GROWTH FUND 25 LLC

BALANCE SHEETS

ASSETS

		September 30,			December 31,
		2020			2019
		(unaudited)
Current Assets:
Cash	$	806,445		$	3,756,509
Rent Receivable		89,815			0
Total Current Assets		896,260			3,756,509

Real Estate Investments:
Land		7,101,677			6,376,366
Buildings		18,865,979			16,519,294
Acquired Intangible Lease Assets		2,712,159			2,217,140
Real Estate Held for Investment, at cost		28,679,815			25,112,800
Accumulated Depreciation and Amortization		(8,630,105	)		(7,934,356	)
Real Estate Held for Investment, Net		20,049,710			17,178,444
Real Estate Held for Sale		0			516,474
Total Real Estate Investments		20,049,710			17,694,918
Long-Term Rent Receivable		44,908			0
Total Assets	$	20,990,878		$	21,451,427

LIABILITIES AND MEMBERS’ EQUITY

Current Liabilities:
Payable to AEI Fund Management, Inc.	$	126,815	$	132,049
Distributions Payable		416,395		414,435
Unearned Rent		44,106		18,333
Total Current Liabilities		587,316		564,817

Long-term Liabilities:
Acquired Below-Market Lease Intangibles, Net		22,524		32,661

Members’ Equity (Deficit):
Managing Members		496		(96,493	)
Limited Members – 50,000 Units authorized; 38,962 Units issued and outstanding as of 9/30/2020 and 12/31/2019		20,380,542		20,950,442
Total Members’ Equity		20,381,038		20,853,949
Total Liabilities and Members’ Equity	$	20,990,878	$	21,451,427

The accompanying Notes to Financial Statements are an integral part of these statements.

AEI INCOME & GROWTH FUND 25 LLC

STATEMENTS OF OPERATIONS

(unaudited)


		Three Months Ended September 30					Nine Months Ended September 30
		2020		2019			2020		2019

Rental Income	$	442,549	$	481,972		$	1,358,599	$	1,487,771

Expenses:
LLC Administration – Affiliates		62,833		68,100			178,593		202,672
LLC Administration and Property Management – Unrelated Parties		34,358		45,990			103,472		152,248
Depreciation and Amortization		220,934		212,512			634,273		647,540
Real Estate Impairment		0		298,990			0		910,613
Total Expenses		318,125		625,592			916,338		1,913,073

Operating Income (Loss)		124,424		(143,620	)		442,261		(425,302	)

Other Income:
Gain on Sale of Real Estate		0		0			165,255		338,843
Interest Income		391		11,891			6,896		28,029
Total Other Income		391		11,891			172,151		366,872

Net Income (Loss)	$	124,815	$	(131,729	)	$	614,412	$	(58,430	)

Net Income (Loss) Allocated:
Managing Members	$	12,404	$	(3,952	)	$	129,609	$	(1,753	)
Limited Members		112,411		(127,777	)		484,803		(56,677	)
Total	$	124,815	$	(131,729	)	$	614,412	$	(58,430	)

Net Income (Loss) per LLC Unit	$	2.89	$	(3.26	)	$	12.44	$	(1.44	)

Weighted Average Units Outstanding – Basic and Diluted		38,962		39,252			38,962		39,442

The accompanying Notes to Financial Statements are an integral part of these statements.

AEI INCOME & GROWTH FUND 25 LLC

STATEMENTS OF CASH FLOWS

(unaudited)


		Nine Months Ended September 30
		2020			2019
Cash Flows from Operating Activities:
Net Income (Loss)	$	614,412		$	(58,430	)

Adjustments to Reconcile Net Income To Net Cash Provided by Operating Activities:
Depreciation and Amortization		685,612			695,405
Real Estate Impairment		0			910,613
Gain on Sale of Real Estate		(165,255	)		(338,843	)
(Increase) Decrease in Rent Receivable		(134,723	)		(3,037	)
Increase (Decrease) in Payable to AEI Fund Management, Inc.		(5,234	)		(46,928	)
Increase (Decrease) in Unearned Rent		25,773			10,377
Total Adjustments		406,173			1,227,587
Net Cash Provided By (Used For) Operating Activities		1,020,585			1,169,157

Cash Flows from Investing Activities:
Investments in Real Estate		(3,567,015	)		(49,140	)
Proceeds from Sale of Real Estate		681,729			1,586,787
Net Cash Provided By (Used For) Investing Activities		(2,885,286	)		1,537,647

Cash Flows from Financing Activities:
Distributions Paid to Members		(1,085,363	)		(1,259,919	)
Repurchase of LLC Units		0			(350,617	)
Net Cash Provided By (Used For) Financing Activities		(1,085,363	)		(1,610,536	)

Net Increase (Decrease) in Cash		(2,950,064	)		1,096,268

Cash, beginning of period		3,756,509			2,217,588

Cash, end of period	$	806,445		$	3,313,856

The accompanying Notes to Financial Statements are an integral part of these statements.

AEI INCOME & GROWTH FUND 25 LLC

STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)

(unaudited)

		Managing Members			Limited Members			Total		Limited Member Units Outstanding

Balance, December 31, 2018	$	(46,882	)	$	22,953,817		$	22,906,935		39,820.36

Distributions Declared		(12,730	)		(411,598	)		(424,328	)

Net Loss		(441	)		(422,002	)		(422,443	)

Balance, March 31, 2019		(60,053	)		22,120,217			22,060,164		39,820.36

Distributions Declared		(5,065	)		(406,198	)		(411,263	)

Repurchase of LLC Units		(10,519	)		(340,098	)		(350,617	)	(568.29	)

Net Income		2,640			493,102			495,742

Balance, June 30, 2019		(72,997	)		21,867,023			21,794,026		39,252.07

Distributions Declared		(11,521	)		(406,197	)		(417,718	)

Net Loss		(3,952	)		(127,777	)		(131,729	)

Balance, September 30, 2019	$	(88,470	)	$	21,333,049		$	21,244,579		39,252.07



Balance, December 31, 2019	$	(96,493	)	$	20,950,442		$	20,853,949		38,961.72

Distributions Declared		(12,489	)		(403,799	)		(416,288	)

Net Income		109,594			219,907			329,501

Balance, March 31, 2020		612			20,766,550			20,767,162		38,961.72

Distributions Declared		(7,639	)		(247,001	)		(254,640	)

Net Income		7,611			152,485			160,096

Balance, June 30, 2020		584			20,672,034			20,672,618		38,961.72

Distributions Declared		(12,492	)		(403,903	)		(416,395	)

Net Income		12,404			112,411			124,815

Balance, September 30, 2020	$	496		$	20,380,542		$	20,381,038		38,961.72

The accompanying Notes to Financial Statements are an integral part of these statements.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(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 (US GAAP) 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 10K.

(2) Organization –

AEI Income & Growth Fund 25 LLC (“Company”), a Limited Liability Company, was formed on June 24, 2002 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 Chief Executive Officer and sole director of AFM, served as the Special Managing Member until his withdrawal date effective March 31, 2020. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson and his wife own a majority interest. 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 $1,000 per LLC Unit, payable on acceptance of the offer. The Company commenced operations on September 11, 2003 when minimum subscriptions of 1,500 LLC Units ($1,500,000) were accepted. The offering terminated May 12, 2005, when the extended offering period ended. The Company received subscriptions for 42,434.763 Units. Under the terms of the Operating Agreement, the Limited Members and Managing Members contributed funds of $42,434,763 and $1,000, respectively. The Company shall continue until December 31, 2053, 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.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(2) Organization – (Continued)

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 7% 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 7% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Members and 10% to the Managing Members. Losses will be allocated 99% to the Limited Members and 1% to the Managing Members.

The Managing Members are not required to currently fund a deficit capital balance. Upon liquidation of the Company or withdrawal by a Managing Member, the Managing Members will contribute to the Company an amount equal to the lesser of the deficit balances in their capital accounts or 1.01% of the total capital contributions of the Limited Members over the amount previously contributed by the Managing Members.

In July 2018, the Managing Member mailed a Consent Statement (Proxy) seeking the consent of the Limited Members to continue the Company for an additional 60 months or to initiate the final disposition, liquidation and distribution of all of the Company’s properties and assets. Approval of either proposal required the affirmative vote of holders of a majority of the outstanding units. On August 24, 2018, the votes were counted and neither proposal received the required majority vote. As a result, the Company will not liquidate and will continue in operation until the Limited Members vote to authorize the sale of all of the Company’s properties or December 31, 2053, as stated in the Operating Agreement. However, in approximately five years, the Managing Member expects to again submit the question to liquidate to a vote by the Limited Members.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(3) 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.

(4) Real Estate Investments –

The Company owns a 60% interest in a former Sports Authority store in Wichita, Kansas. On March 2, 2016, the tenant, TSA Stores, Inc., and its parent company, The Sports Authority, Inc., the guarantor of the lease, filed for Chapter 11 bankruptcy reorganization. In June 2016, the tenant filed a motion with the bankruptcy court to reject the lease for this store effective June 30, 2016, at which time the tenant returned possession of the property to the owners. As of September 30, 2020, the tenant owed $29,049 of past due rent, which was not accrued for financial reporting purposes. The owners listed the property for lease with a real estate broker in the Wichita area. While the property was vacant, the Company was responsible for its 60% share of real estate taxes and other costs associated with maintaining the property.

On September 21, 2017, the Company entered into a lease agreement with a primary term of 10 years with Biomat USA, Inc. (“Biomat”) as a replacement tenant for 28% of the square footage of the property. The tenant operates a Biomat USA Plasma Center in the space. The Company’s 60% share of annual rent, which commenced on June 18, 2018, is $55,607. Biomat agreed to pay for the costs to divide the building into two separate spaces, the costs of tenant improvements to remodel the Biomat space and 28% of the cost to replace the roof.

On August 27, 2019, the Company entered into a lease agreement with a primary term of 10 years with BigTime Fun Center, LLC as a replacement tenant for 57% of the square footage of the property. The tenant will operate an indoor sports entertainment center in the space. The Company’s 60% share of annual rent, which commenced on February 23, 2020, is $117,000. As part of the agreement, the Company will pay a tenant improvement allowance of $96,000 when certain conditions are met by the tenant. During the first quarter of 2020, the Company agreed to extend the rent commencement date to June 1, 2020. As part of the agreement, the tenant agreed to convert the tenant improvement allowance to a ten month rent abatement. Due to ongoing difficulties due to the COVID-19 Pandemic the Company is negotiating a rent commencement date of April 1, 2021. As a part of the negotiations the tenant improvement allowance will be replaced with a ten month rent abatement starting April 1, 2021. Additionally, this agreement would forebear rent and additional charges for the period from February 23, 2020 to March 31, 2021. In September 2019, the Company paid $49,140 to a real estate broker for its 60% share of the lease commission due as part of the lease transaction. This amount was capitalized and will be amortized over the term of the lease.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(4) Real Estate Investments – (Continued)

In January 2019, the Company decided to sell the Tractor Supply Company store in Yankton, South Dakota. In March 2019, the Company entered into an agreement to sell the property to an unrelated third party. On May 22, 2019, the sale closed with the Company receiving net proceeds of $1,586,787, which resulted in a net gain of $338,843. At the time of sale, the cost and related accumulated depreciation was $2,265,936 and $1,017,992, respectively.

The Company owned a 27% interest in a Dick’s Sporting Goods store in Fredericksburg, Virginia. The remaining interests in the property were owned by three affiliates of the Company. On January 31, 2019, the lease term ended, and the tenant returned possession of the property to the owners. While the property was vacant, the Company was responsible for its 27% share of real estate taxes and other costs associated with maintaining the property. The owners listed the property for lease with a real estate broker in the Fredericksburg area. The annual rent from this property represented approximately 10% of the total annual rent of the Company’s property portfolio. The loss of rent and increased expenses related to this property decreased the Company’s cash flow.

Based on its long-lived asset valuation analysis, the Company determined the former Dick’s Sporting Goods store was impaired. As a result, in the first quarter of 2019, the Company recognized real estate impairment of $611,623 to decrease the carrying value to the estimated fair value of $972,000. The charge was recorded against the cost of the land and building.

In October 2019, after marketing the property for lease for many months, the Company decided to sell its 27% interest in the former Dick’s Sporting Goods store. In the third quarter of 2019, as a result of deciding to sell the property, the Company recognized an additional real estate impairment of $298,990 to decrease the carrying value to the estimated fair value of $661,500. The charges were recorded against the cost of the land and building. In November 2019, the Company entered into an agreement to sell the property to an unrelated third party. On December 27, 2019, the sale closed with the Company receiving net proceeds of $663,277, which resulted in a net gain of $1,777. At the time of sale, the cost and related accumulated depreciation was $1,385,017 and $723,517, respectively.

In March 2019, the Company entered into an agreement with the tenant of the Jared Jewelry store in Auburn Hills, Michigan to extend the lease term five years to end on December 31, 2024. As part of the agreement, the annual rent decreased from $186,074 to $158,340 effective January 1, 2020.

In March 2020, the Company entered into an agreement with the tenant of the Jared Jewelry store in Aurora, Illinois to extend the lease term five years to end on April 30, 2025. As part of the agreement, the annual rent decreased from $370,686 to $235,989 effective May 1, 2020.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(4) Real Estate Investments – (Continued)

In January 2020, the Company entered into an agreement to sell its 21% interest in the Jared Jewelry store in Madison Heights, Michigan to an unrelated third party. On March 4, 2020, the sale closed with the Company receiving net proceeds of $681,729, which resulted in a net gain of $165,255. At the time of sale, the cost and related accumulated depreciation was $852,592 and $336,118, respectively. At December 31, 2019, the property was classified as Real Estate Held for Sale with a carrying value of $516,474.

On January 17, 2020, the Company purchased an additional 27% interest in the PetSmart store in Gonzales, Louisiana for $831,455 from AEI Income & Growth Fund 24 LLC (“Fund 24”), an affiliate of the Company. The purchase price of the property interest was based upon the property’s fair market value as determined by an independent, third-party, commercial property appraiser. The property interest became available because Fund 24 is in the process of liquidating its property portfolio. The Company now owns 100% of the PetSmart property. The annual rent for the additional 27% interest that was purchased is $66,468.

On July 31, 2020, the Company purchased a 50% interest in a Talecris plasma facility in Dallas, Texas for $2,735,560. The Company allocated $452,929 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles of $284,439 and above-market lease intangibles of $168,490. The property is leased to Talecris Plasma Resources, Inc. under a lease agreement with a remaining primary term of 8.1 years (as of the date of purchase) and annual rent of $182,035. The remaining interest in this property was purchased by AEI Income & Growth Fund XXII Limited Partnership, an affiliate of the Company.

The Company owns a 72% interest in a Staples store in Clermont, Florida. The remaining interest in the property is owned by an affiliate of the Company. On July 17, 2020, the lease term ended, and the tenant returned possession of the property to the owners. While the property is vacant, the Company is responsible for its 72% share of real estate taxes and other costs associated with maintaining the property. The owners have listed the property for lease with a real estate broker in the Clermont area. The annual rent from this property represented approximately 10% of the total annual rent of the Company’s property portfolio. The loss of rent and increased expenses related to this property will decrease the Company’s cash flow.

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

AEI Fund Management, Inc. performs the administrative and operating functions for the Company. 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.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(6) Members’ Equity –

For the nine months ended September 30, 2020 and 2019, the Company declared distributions of $1,087,323 and $1,253,309, respectively. The Limited Members received distributions of $1,054,703 and $1,223,993 and the Managing Members received distributions of $32,620 and $29,316 for the periods, respectively. The Limited Members' distributions represented $27.07 and $31.03 per LLC Unit outstanding using 38,962 and 39,442 weighted average Units in 2020 and 2019, respectively. The distributions represented $12.44 and $0.00 per Unit of Net Income and $14.63 and $31.03 per Unit of return of contributed capital in 2020 and 2019, respectively.

As part of the distributions discussed above, the Company distributed net sale proceeds of $414,141 in 2019. The Limited Members received distributions of $410,000 and the Managing Members received distributions of $4,141. The Limited Members’ distributions represented $10.44 per Unit.

For the nine months ended September 30, 2020, the Company did not repurchase any Units from the Limited Members. For the nine months ended September 30, 2019, the Company repurchased a total of 568.29 Units for $340,098 from nine Limited Members in accordance with the Operating Agreement. The Company acquired these Units using Net Cash Flow from operations. The repurchases increase the remaining Limited Members’ ownership interest in the Company. As a result of these repurchases and pursuant to the Operating Agreement, the Managing Members received distributions of $10,519 in 2019.

(7) Fair Value Measurements –

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

At September 30, 2020 and December 31, 2019, the Company had no financial assets or liabilities measured at fair value on a recurring basis or nonrecurring basis that would require disclosure. The Company had the following nonfinancial assets measured on a nonrecurring basis that were recorded at fair value during 2019.

AEI INCOME & GROWTH FUND 25 LLC

NOTES TO FINANCIAL STATEMENTS

(7) Fair Value Measurements – (Continued)

The Dick’s Sporting Goods store in Fredericksburg, Virginia with a carrying amount of $1,583,623 at March 31, 2019, was written down to its estimated fair value of $972,000 after completing our long-lived asset valuation analysis. The resulting impairment charge of $611,623 was included in earnings for the first quarter of 2019. The fair value of the property was based upon an appraisal prepared by an independent commercial property appraiser. The appraisal is considered a Level 3 input in the valuation hierarchy. At September 30, 2019, the property was written down to its estimated fair value of $661,500 after completing our long-lived asset valuation analysis. The resulting impairment charge of $298,990 was included in earnings for the third quarter of 2019. The fair value of the property was based upon a signed purchase agreement, which is considered a Level 3 input in the valuation hierarchy.

(8) Coronavirus Outbreak –

During the first quarter of 2020, there was a global outbreak of a new strain of coronavirus, COVID-19 which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines, placing restrictions on travel, and limiting hours of operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as retail, restaurants and transportation. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the coronavirus. Nevertheless, the coronavirus presents material uncertainty and risk with respect to the Company’s performance and financial results, such as the potential negative impact to the tenants of its properties, the potential closure of certain of its properties, increased costs of operations, decrease in values of its properties, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Up to the date of this filing, the Company has entered into rent deferral agreements with three tenants of the eleven properties owned by the Company. In June 2020, the Company entered into an agreement with the tenant of the Jared Jewelry stores in Concord, New Hampshire, Aurora, IL, and Auburn Hills, Michigan to defer base rent in April and May 2020. The tenant shall pay the deferred amounts in twelve equal monthly installments beginning on February 1, 2021.

The Company has elected not to account for these deferrals of rent as a lease modification under COVID-19 guidance issued by the Financial Accounting Standards Board. Deferred rent of $134,723 was recognized as rental income during the nine months ended September 30, 2020 and a corresponding rent receivable was recorded. The Company continues to work closely with tenants to determine the best course of action to meet the tenants short-term rental needs during these unprecedented times.

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 Company’s financial condition and results of operations, including the following:

—

Market and economic conditions which affect the value of the properties the Company owns and the cash from rental income such properties generate;

—

the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for Members;

—

resolution by the Managing Members of conflicts with which they may be confronted;

—

the success of the Managing Members of locating properties with favorable risk return characteristics;

—

the effect of tenant defaults; and

—

the condition of the industries in which the tenants of properties owned by the Company operate.

Application of Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with 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 Company’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 Company’s assets and liabilities, or the results of reported operations, will be affected if management’s estimates or assumptions prove inaccurate.

Management of the Company 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 the managing member of the Company.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Company 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.

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

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods. The above market and below market lease values will be capitalized as intangible lease assets or liabilities. Above market lease values will be amortized as an adjustment of rental income over the remaining term of the respective leases. Below market lease values will be amortized as an adjustment of rental income over the remaining term of the respective leases, including any bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.

The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management’s consideration of current market costs to execute a similar lease. These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

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

Carrying Value of Properties

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

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

Allocation of Expenses

AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs. They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage. The Company reimburses these expenses subject to detailed limitations contained in the Operating Agreement.

Factors Which May Influence Results of Operations

The Company is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues and investment property value. However, due to the recent outbreak of the coronavirus (COVID-19) in the U.S. and globally, our tenants and operating partners may be impacted. The impact of the coronavirus on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus, the success of actions taken to contain or treat the coronavirus, and reactions by consumers, companies, governmental entities and capital markets.

Results of Operations

For the nine months ended September 30, 2020 and 2019, the Company recognized rental income of $1,358,599 and $1,487,771, respectively. In 2020, rental income decreased due to the sale of two properties in 2019 and one property in 2020 and rent decreases related to the Jared Jewelry store in Auburn Hills, Michigan and Aurora, Illinois, as discussed below. These decreases were partially offset by additional rent received from two property acquisitions in 2020 and a rent increase on one property. Based on the scheduled rent for the properties owned as of October 31, 2020, the Company expects to recognize rental income of approximately $1,728,000 and $1,732,000 in 2020 and 2021, respectively.

For the nine months ended September 30, 2020 and 2019, the Company incurred LLC administration expenses from affiliated parties of $178,593 and $202,672, 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 $103,472 and $152,248, 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. These expenses were higher in 2019, when compared to 2020, due to expenses related to the Dick’s Sporting Goods store.

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

For the nine months ended September 30, 2020 and 2019, the Company recognized interest income of $6,896 and $28,029, respectively.

Management believes inflation has not significantly affected income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.

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

Liquidity and Capital Resources

During the nine months ended September 30, 2020, the Company's cash balances decreased $2,950,064 as a result of cash used to purchase property and distributions paid to the Members in excess of cash generated from operating activities, which was partially offset by cash generated from the sale of property. During the nine months ended September 30, 2019, the Company's cash balances increased $1,096,268 as a result of cash generated from the sale of property, which was partially offset by cash paid for a lease commission, and distributions paid to the Members and cash used to repurchase Units in excess of cash generated from operating activities.

Net cash provided by operating activities decreased from $1,169,157 in 2019 to $1,020,585 in 2020 as a result of a decrease in total rental and interest income in 2020 and net timing differences in the collection of payments from the tenants and the payment of expenses, which were partially offset by a decrease in LLC administration and property management expenses in 2020.

The major components of the Company's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the nine months ended September 30, 2020 and 2019, the Company generated cash flow from the sale of real estate of $681,729 and $1,586,787, respectively. During the same periods, the Company expended $3,567,015 and $49,140, respectively, to invest in real properties as the Company reinvested cash generated from property sales.

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

The Company's primary use of cash flow, other than investment in real estate, is distribution payments to Members and cash used to repurchase Units. 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. The Company may repurchase tendered Units on April 1st and October 1st of each year subject to limitations.

For the nine months ended September 30, 2020 and 2019, the Company declared distributions of $1,087,323 and $1,253,309, 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 $1,054,703 and $1,223,993 and the Managing Members received distributions of $32,620 and $29,316 for the periods, respectively. The Company temporarily reduced distribution rates for the period ended June 30, 2020 due to rent deferral agreements entered with tenants and concerns regarding the ongoing COVID-19 situation.

The Company may repurchase 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.

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

Off-Balance Sheet Arrangements

As of September 30, 2020 and December 31, 2019, the Company 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 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) 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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Company is a party or of which the Company'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 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 80% 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. Units tendered to the Company during January and July may be repurchased on April 1^st and October 1^st, 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 period covered by this report, the Company did not purchase any Units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

31.1

Certification of President 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.

Certification of President and Chief Financial Officer of Managing Member 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: November12, 2020	AEI Income & Growth Fund 25 LLC
	By:	AEI Fund Management XXI, Inc.
	Its:	Managing Member



	By:	/s/ MARNI J NYGARD
		Marni J. Nygard
		President
		(Principal Executive Officer)



	By:	/s/ KEITH E PETERSEN
		Keith E. Petersen
		Chief Financial Officer
		(Principal Accounting Officer)

AEI INCOME & GROWTH FUND 25 LLC - FORM 10-Q - November 12, 2020

Attached files

AEI INCOME & GROWTH FUND 25 LLC Reports