As filed with the Securities Exchange Commission on , 1998
File No. 333-
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
AEI INCOME & GROWTH FUND 23 LLC
(Name of small business issuer in its charter)
Deleware 6500 41-1848181
(State of other (Primary Standard Industrial (IRS Employer
jurisdiction Classification Code Number) Identification Number)
incorporation)
1300 Minnesota World Robert P. Johnson Copies to:
Trade Center 1300 Minnesota World Trade Center Thomas O. Martin
30 East Seventh Street 30 East Seventh Street Dorsey & Whitney LLP
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Pillsbury Center South
(651) 227-7333 or (651) 227-7333 or 220 South Sixth Street
(800) 328-3519 (800) 328-3519 Minneapolis, Minnesota
(Address and telephone (Name, address, including 55402-1498
number of principal zip code and telephone
executive offices and number of agent for
intended principal place service of process)
of business)
Approximate date of proposed sale to public: As soon as
practical after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box.
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Amount to Offering Aggregated Amount of
Securities be Price Per Offering Registration
to be Registered Registered Share Price Fee
Limited Liability 24,000 $1,000 $24,000,00 $6,672
Company Units Units
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
AEI INCOME & GROWTH FUND 23
$24,000,000 (maximum)/ $1,500,000 (minimum)
Limited Liability Company Interests
THE FUND:
AEI Income & Growth Fund 23 LLC (referred to in this prospectus
as the "Fund") is a limited liability company organized to purchase
commercial properties. Most of these properties will be free-standing
and will be leased to single tenants under leases that require the
tenant to pay the operating costs of the property. Our objectives are
to acquire properties that provide (i) regular cash distributions of
lease income; (ii) growth in lease income through rent escalation
provisions; (iii) capital growth through appreciation in value; and
(iv) stable performance through long-term leases. We cannot, however,
assure you that these objectives will be achieved. The Fund is not a
mutual fund or any other type of investment company and is not
organized to shelter your taxable income from other sources.
THE OFFERING:
<BULLET> Security Offered: 24,000 units of LLC interest at $1,000 each
<BULLET> Minimum Purchase: 2.5 Units ($2,500); 2 Units ($2,000) for IRAs
and Keogh Plans (higher in certain states)
<BULLET> Minimum Offering Size: We will place all investment moneys in escrow
until we have received at least $1,500,000.
<BULLET> Offering Period: One year from the date of this Prospectus,
extendable to two years.
<BULLET> Dealer Manager: AEI Securities Incorporated, a company
affiliated with the managers, will act as
"Dealer-Manager" and coordinate sale of Units
on a "best efforts" basis. The Dealer-
Manager will contract with other Dealers that
are members of the NASD to offer the Units.
<BULLET> Commissions: The Fund will pay the Dealer-Manager
commissions of $100 per Unit (10%) and
expenses for due diligence of up to $5 per
Unit. After payment of these amounts, net
proceeds will be approximately $895 per Unit
(89.5%). The Dealer-Manager will "reallow"
(repay) a portion of these commissions and
expenses to the Dealers.
RISKS:
<BULLET> WE ENCOURAGE YOU TO READ THE "RISK FACTORS" BEGINNING ON PAGE 6 OF
THIS PROSPECTUS FOR INFORMATION ABOUT THE RISKS OF AN INVESTMENT IN
THE FUND. SOME OF THE RISKS INCLUDE THE FOLLOWING:
<BULLET> You may have difficulty selling your interest because there will
not be a public market for the Fund interests and because we
impose restrictions on transfer to avoid adverse tax issues;
<BULLET> The value of the Fund's properties and the rental income that
the properties generate will be affected by market conditions for
real estate, by the stability of tenants and by economic conditions;
<BULLET> You are taxed differently on limited liability company
investments, such as the interests in Fund, than on other
investments;
<BULLET> As managers of the Fund, we face a number of "conflicts of
interest," including conflicts arising out of the payments we may
receive from the Fund;
<BULLET> We may not be able to provide you with information about the
properties the Fund will purchase before you invest; and
<BULLET> If we accept subscriptions with only $1,500,000 of proceeds,
and do not raise more money, we may only be able to purchase a few
properties.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. NEITHER THE ATTORNEY
GENERAL OF THE STATE OF NEW JERSEY, THE BUREAU OF SECURITIES OF THE
STATE OF NEW JERSEY, THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR
THE SECURITIES ADMINISTRATOR OF ANY OTHER JURISDICTION HAS PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November , 1998
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THE USE OF PROJECTIONS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL,
AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR
TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS FUND IS A
VIOLATION OF THE LAW. HOWEVER, SUCH PROHIBITION SHOULD NOT BE
CONSTRUED TO PREVENT THE FUND FROM FILING SUPPLEMENTALLY ANY PRO-FORMA
FINANCIAL STATEMENTS REQUIRED BY THE FEDERAL SECURITIES LAWS AND
REGULATIONS THEREUNDER.
NO PURCHASE OF UNITS BY AN INVESTOR MAY BE COMPLETED UNTIL AT
LEAST FIVE BUSINESS DAYS AFTER SUCH INVESTOR HAS RECEIVED A COPY OF
THIS PROSPECTUS.
CAPITALIZED TERMS--DEFINITIONS
We use capitalized terms throughout this prospectus. These
capitalized terms are used so that we do not have to repeat
information and so that the information we present is more easily
read. When this prospectus uses the term "we," "our" and similar
terms, we are referring to AEI Income & Growth Fund LLC. We also
refer to AEI Income & Growth Fund LLC as the "Fund." When we use the
term "you," "your," and similar terms, we are referring to a limited
member, or potential investor who may become a limited member, of the
Fund. We also refer to limited members as "Investors." When we refer
to the "Manager," we are referring to AEI Fund Management XXI, Inc., a
corporation that will serve as the managing member of the Fund. When
we refer to the "Managers," we are referring to AEI Fund Management
XXI, Inc. and Robert P. Johnson (the special managing member)
together.
A number of capitalized terms have very specialized meanings. These
meanings are defined, and required, by state securities laws. They
are defined in detail in the "definitions" section of the Operating
Agreement that is included with this prospectus as Exhibit A.
Although we will try to provide a general meaning of these terms in
the context of the discussion in this prospectus, please read section
2 of the Operating Agreement for a precise definition.
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SUMMARY OF THE OFFERING
This summary highlights important information about the Fund. It
is not intended to be complete and should be read with the more
detailed information contained in this prospectus and its exhibits.
THE FUND. AEI Income & Growth Fund 23 LLC (the "Fund") was
organized in __________, 1998 as a Delaware limited liability company.
In addition to Delaware law, the rights of Investors in the Fund are
governed by the operating agreement that is included with this
prospectus as Exhibit A. We refer to Exhibit A as the "Operating
Agreement" in this prospectus.
WHO MANAGES THE FUND? The Fund will be managed by AEI Fund
Management XXI, Inc., a Minnesota corporation wholly owned by Robert
P. Johnson, as managing member. AEI Fund Management XXI, Inc. is
referred to in this Prospectus as the "Manager." The principal office
of the Manager is 1300 Minnesota World Trade Center, 30 East Seventh
Street, Saint Paul, Minnesota 55101 and its telephone number is (651)
227-7333 (toll-free 800-328-3519). Robert P. Johnson will also serve
as Special Managing Member and will be responsible for overseeing the
Manager's activities. Robert P. Johnson and AEI Fund Management XXI,
Inc., when discussed together, are referred to in this Prospectus as
the "Managers."
WHAT IS THE FUND'S BUSINESS? The business of the Fund will be
(i) to acquire free-standing, single tenant, commercial properties
that are leased to tenants under "net" leases (leases that require the
tenant to pay for the property's real estate taxes, insurance,
maintenance, repairs and operating expenses), (ii) to generate rental
income from such properties, (iii) to sell such properties from time
to time, and (iv) to reinvest the proceeds in additional net leased
properties. We expect that most of the properties purchased by the
Fund will be single use properties and that many of the properties
will be leased to tenants in the restaurant or retail industry,
although the Fund may acquire commercial properties leased to tenants
in other industries. As part of the acquisition process, the Fund may
also lend money to some sellers of properties that are under
construction.
WHAT ARE THE OBJECTIVES OF THE FUND? Our objectives are to
acquire properties that provide: (i) regular cash distributions of
lease income; (ii) growth in lease income through rent escalation
provisions; (iii) capital growth through appreciation in value; and
(iv) stable performance through long-term leases. We cannot assure
you, however, that these objectives will be achieved. The Fund has
not been organized to shelter taxable income you may have from other
sources. We currently expect that cash distributions from rents will
begin in 1999, assuming offering proceeds are available and invested
in properties during 1999.
WHAT PROPERTIES WILL THE FUND PURCHASE? At the date of this
prospectus, the Fund did not own any property. We will supplement
this Prospectus whenever it is reasonably probable that the Fund will
invest in a specific property. We will not acquire any property in
which the Managers or their Affiliates have any direct or indirect
interest, except that we may acquire interests in properties with an
affiliated program that has investment objectives and management
compensation substantially identical to the Fund.
WILL THE FUND BORROW MONEY TO ACQUIRE PROPERTIES? We will
initially buy all properties for cash (with no acquisition
indebtedness) unless an existing property is encumbered by existing
mortgage indebtedness that has favorable terms and is assumable. We
may finance properties with mortgage debt after the property is
acquired, except that we will not allow total borrowings to exceed 60%
of the lower of (i) the purchase price of all our properties, or (ii)
the fair market value of all Fund properties at the time of financing.
We intend to finance properties only if terms and rates are favorable.
WHEN WILL THE FUND TERMINATE? The Operating Agreement provides
that the Fund will continue in existence until 2048 unless the
Investors in the Fund, by majority vote, determine that it should be
dissolved earlier. Accordingly, absent a vote by a majority of the
Investors, you might be required to rely on the Fund's redemption
provisions to dispose of the your investment in the Fund.
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HOW ARE THE MANAGERS PAID FOR THEIR SERVICES? In addition to
their interests as members of the Fund, the Managers will be
reimbursed, subject to limitations in the Operating Agreement, for
direct costs incurred by them and their Affiliates in providing
services to the Fund. Among the services for which the Managers will
be reimbursed are (i) the organization of the Fund and this offering
("Organization and Offering Expenses"), (ii) the acquisition of
properties ("Acquisition Expenses"), (iii) the disposition of
properties, and (iv) the administration of the Fund, management of
properties, leasing and releasing of properties, and eventually
dissolution of the Fund and liquidation of its assets (collectively,
"Administrative Expenses"). We will not pay the Managers Organization
and Offering Expenses and Acquisition Expenses (which are together
called "Front-End Fees") which exceed 20% of capital contributions.
We will reimburse the Managers for Administrative Expenses at Cost,
which includes a portion of the Managers' overhead expenses and
expenses of controlling persons allocated on the basis of the number
of hours of services performed and the size of the Fund. The total
amount of Organization and Offering Expenses, Acquisition Expenses,
sales expenses, overhead expenses and controlling person expenses
reimbursed to the Managers may not exceed (i) a Front-End Fee equal to
20% of capital contributions, (ii) property management fees of up to
1% of net cash flow, except for a one time initial leasing fee of 3%
of the gross revenues on each lease payable over the first five full
years of the original term of the lease, (iii) sales commissions of up
to 3% of the sales price of properties, and (iv) the difference
between 10% of cash flow and the cash flow actually paid to the
Managers. Part of the Organization and Offering Expenses paid consists
of selling commissions and nonaccountable expense reimbursements of
10% of the proceeds of the Units paid to AEI Securities Incorporated,
an Affiliate of the Managers, a substantial majority of which will be
reallowed to Participating Dealers. See "Compensation to Managers and
Affiliates."
RISKS
An investment in the Fund involves a number of risks, including
risks related to (i) market and economic conditions which could affect
the value of the Fund's properties, (ii) the tax consequences of an
investment in the Fund, (iii) certain conflicts of interest which may
be faced by the Managers, (iv) the absence of a public market for the
Units and restrictions on transfer, and (v) the lack of information
regarding the properties that may be purchased. You should read the
more detailed description of these risks contained in the Risk Factors
section of this prospectus (page 7).
THE UNITS
WHAT IS A UNIT? A Unit is an interest of a limited member in the
Fund. Membership interests in the Fund are being offered in Units of
$1,000. A person or entity who purchases Units will become a "Limited
Member" of the Fund and is referred to in this Prospectus as an
"Investor."
DO ALL MEMBERS HAVE THE SAME INTEREST IN THE FUND? All limited
members have interests in the Fund proportional to the amount of
capital that they contribute. For example, an Investor who buys ten
Units (for $10,000) will have twice the interest in the Fund as an
Investor who buys five Units (for $5,000). Investors, as limited
members of the Fund, have different interests in income, gain, loss
and deduction, and in distributions, than the Managers. The Operating
Agreement of the Fund provides that the cash that the Fund generates
will be allocated to Investors and Managers based on whether the cash
is from the sale or financing of properties (referred to in the
Operating Agreement as "Net Proceeds of Sale") or from rent and other
income (referred to in the Operating Agreement as "Net Cash Flow").
SHARE OF NET CASH FLOW. We will distribute net cash flow
(rent and other income, less any operating expenses, if any) 97% to
the Investors and 3% to the Managers.
SHARE OF NET PROCEEDS OF SALE OR FINANCING OF PROPERTIES We
will distribute net proceeds from the sale or refinancing of properties,
after provision for debts, reserves and operating expenses, 99% to the
Investors and 1% to the Managers until the Investors have received a
payout amount. To reach the payout amount, the Fund must distribute to
Investors a 7% cumulative, but not compounded return on their adjusted
investment, and must also have distributed from property sale proceeds,
a return of the Investors' entire initial investment. For purposes of
the cumulative return, the adjusted investment is the initial investment
less prior distributions of capital. After reaching this payout amount,
any remaining net proceeds from sale or refinancing of properties will be
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distributed 90% to the Investors and 10% to the Managers. See "Cash
Distributions and Tax Allocations."
CAN PROCEEDS FROM SALE OR FINANCING OF PROPERTIES BE REINVESTED
BY THE FUND? The Fund will have the right to reinvest net proceeds
from sale or financing of properties, after distribution to Investors
of sufficient proceeds to cover income tax liability (at a rate for
all Investors of seven percent above the individual capital gains
rate), in additional net lease properties meeting the Fund's
acquisition guidelines. The Manager intends that the Fund will sell
properties from time to time when conditions are favorable, distribute
the majority of the net gain from such sales, and reinvest the
remaining Net Proceeds of Sale in additional net lease properties.
The frequency of such sales and reinvestment will depend on the
performance of each individual property, on market conditions and, in
part, on the economic benefits of continued ownership. See
"Investment Objectives and Policies."
CAN I REINVEST THE DISTRIBUTIONS I RECEIVE FROM THE FUND?
Investors may, by indicating in the subscription agreement their
desire to do so, cause their share Net Cash Flow from operations of
the Fund to be automatically reinvested in additional Units of the
Fund during the period Units are being sold under this Prospectus
(which will not, in any event exceed two years from the date of this
Prospectus). After that time, Investors may direct the Manager to
reinvest distributions from the Fund in subsequent real estate
investment programs sponsored by the Managers or their Affiliates,
provided such purchases comply with applicable federal and state
securities requirements and such Investors purchase the minimum amount
of Program interests in the subsequent Programs. See "Summary of
Operating Agreement--Distribution Reinvestment Plan."
CAN I CASH OUT OF THE FUND WHEN I WANT? There will be no public
market for the Units and we will be required to place significant
restrictions on resale of the Units to preserve the Fund's status
under tax laws. Therefore, it will be difficult to sell your Units.
Under certain conditions, however, and in the discretion of the
Managers, commencing three years from the date of this Prospectus, the
Fund may, upon request by Investors, repurchase up to five percent of
the outstanding Units at prices equal to 80% of the per Unit net asset
value of the Fund (as determined by the Manager ). See "Summary of
Operating Agreement--Repurchase of Units."
THE OFFERING
HOW LONG WILL THE OFFERING LAST? The offering will begin on the
date of this Prospectus and end one year later. The Manager may extend
this period, however, for up to one more year in those states
permitting an extension.
WILL A MINIMUM AMOUNT OF PROCEEDS BE REQUIRED BEFORE MY MONEY IS
USED? Subscription funds will be deposited in an escrow account until
termination of the offering or formation of the Fund. If
subscriptions for at least 1,500 Units have not been received by one
year after the date of this Prospectus, no Units will be sold and all
funds will be returned to Investors with any interest actually earned
thereon. Upon admission to the Fund, each Investor will be paid the
investor's pro rata share of any interest earned on escrowed funds
based on the date his or her subscription payment was deposited.
WHAT IS THE MINIMUM AMOUNT I MAY INVEST? Individuals and most
other legal entities must purchase at least two and one-half ($2,500)
Units. An IRA, Keogh Plan or other Qualified Plan may, purchase two
($2,000) Units. Investors may purchase any dollar amount above the
minimum investment. All purchases are subject to acceptance by the
Managers, in their discretion, and to certain state requirements.
See Exhibit C.
TAX CONSEQUENCES.
The Fund will elect to be treated as a partnership for income tax
purposes and Investors may be subject to special consequences as a
result of this election. See "Risks and Other Important Factors--
Federal Income Tax Risks" and "Income Tax Aspects" with their tax
advisor.
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WHO MAY INVEST
To purchase Units you must be able to represent in writing that
you have either (i) a net worth (exclusive of homes, home furnishings
and automobiles) of at least $45,000 and an annual gross income of at
least $45,000 or (ii) irrespective of annual gross income, a net worth
of at least $150,000 (determined with the same exclusions). You will
be required to purchase a minimum of two and one-half Units ($2,500)
unless you are investing through an IRA, Keough or other qualified
plan (subject to the requirements of certain states--see Exhibit C).
The minimum investment for Individual Retirement Accounts, Keogh Plans
and other Qualified Plans is two Units ($2,000) (subject to the
requirements of certain states--see Exhibit C), provided that the
person who established the account or plan meets the standards for an
individual investor. An investment in the Fund will not create an
Individual Retirement Account or Keogh Plan or other Qualified Plan
for any Investor. In order to create such a plan, an Investor must
engage a qualified trustee or custodian, comply with all applicable
provisions of the Internal Revenue Code, and decide whether an
investment in the Fund is suitable for such plan.
The Managers and the Dealers are required to make every
reasonable effort to determine that the purchase of Units is an
appropriate investment for each Investor. In addition to the net
worth and income standards described in the previous paragraph, the
Dealers are required to determine whether you can reasonably benefit
from an investment in the Units based on whether the Units match your
investment objectives, whether you can bear the risk of the investment
based on your investment situation, and whether you have an apparent
understanding of the risks of the investment, the lack of liquidity of
the Units, the restrictions on transferability of the Units, the
background and qualifications of the Managers, and the tax
consequences of the investment.
ADDITIONAL REQUIREMENTS APPLICABLE TO RESIDENTS OF CERTAIN STATES
ARE SET FORTH IN EXHIBIT C ATTACHED HERETO. For the form of written
representation required of Investors, see the Subscription Agreement
attached as Exhibit D to this Prospectus.
If you wish to transfer your Units after your initial investment,
you may be required to comply with the securities laws of the state in
which the transfer is to take place, including, in some cases,
"suitability standards."
Trustees and custodians of Qualified Plans should consider the
following, among other things, when making a decision to invest in the
Fund:
(i) If the Fund borrows money to purchase a property, a portion of
the Fund's income may be unrelated business taxable income. A
Qualified Plan, although generally exempt from federal income
taxation, may be subject to income taxation if its unrelated business
taxable income, after investment in the Fund, exceeds $1,000 in any
taxable year.
(ii) Section 404(a) of the Employee Retirement Income Security Act
of 1974 establishes certain diversification requirements that should
be considered when investing in the Fund.
(iii) Section 404(a) should also be considered in light of the
nature of an investment in, and the compensation structure of, the
Fund and the potential lack of liquidity of the Units.
The prudence of a particular investment must be determined by the
responsible fiduciary taking into account all the facts and
circumstances of the tax-qualified retirement plan and of the
investment. See "Income Tax Aspects--Personal Tax Consequences--
Investment by Qualified Plans."
BECAUSE IT IS POSSIBLE THAT THE FUND WILL GENERATE UNRELATED
BUSINESS TAXABLE INCOME, THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR
A CHARITABLE REMAINDER TRUST.
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RISK FACTORS
An investment in the Units involves a number of risks. In
addition to the risk factors discussed in other parts of this
prospectus, Investors should carefully consider the following:
GENERAL RISKS
You may not be able to evaluate properties before your
investment. We have not identified specific properties that will be
purchased, but will supplement this prospectus whenever it is
reasonably probable that the Fund will purchase a property. You
likely will not have an opportunity to evaluate the properties in
which the proceeds of the offering are invested prior to your
investment in the Fund, and will not have a right to return of your
investment if you do not like a property. We are hiring and will rely
on the Managers to choose and manage the Fund's properties. We cannot
assure you that the Fund will find suitable properties or that the
objectives of the Fund will be achieved. Further, if there is a long
delay between the date Units are purchased and the date the offering
proceeds are invested, there may be a corresponding delay in your
receipt of any benefits from an investment in the Units.
There will not be a market for your Units and there will be
restrictions on transfer of Units. We do not expect that a public
market for the Units will develop. Therefore, you might not be able
to sell your Units even if you have a financial emergency. It is also
unlikely that you will be able to use the Units as collateral for a
loan. Further, we are required under tax law to place significant
restrictions on the transfer of your Units to avoid characterization
of the Fund as a "publicly traded partnership." Section 9.1 of the
Operating Agreement requires Investors to give notice to the Manager
and receive its approval before transferring Units. The Manager is
required to refuse transfer when it would affect the Fund's tax
status. See "Income Tax Aspects-Publicly Traded Partnerships."
Further, the transfer of a Unit may result in adverse tax consequences
for the transferor. See "Income Tax Aspects--Sale of Units."
You will not have a right to an early return of your capital.
The Operating Agreement provides that the Fund will terminate and
liquidate its assets in 2048, unless the Investors have elected by
majority vote to terminate the Fund earlier. Although the Fund will
maintain a repurchase program, you will not have a right to an early
return of your capital and the repurchase program is limited to 5% of
outstanding Units per year. Further, the repurchase program is not
available if the Fund does not have adequate capital to pay for
repurchases.
The Fund may not be able to diversify its investments. We will
not form the Fund unless we raise $1,500,000 and we will not raise
more than $24,000,000 in the Fund. The profitability of the Fund
could be affected by the amount of capital at its disposal. If we
raise only $1,500,000, the Fund will be able to purchase fewer
properties and the percentage of offering proceeds used in
organizational and offering costs will be higher. Further, although
we intend to diversify the Fund's investment in properties, we are not
under an obligation to do so and may, in our sole discretion, invest
in a single property. See "Estimated Use of Proceeds" and "Plan of
Distribution." PENNSYLVANIA INVESTORS: Because the minimum closing
amount is less than $2,400,000, you are cautioned to carefully
evaluate the Fund's ability to accomplish its objectives and to
inquire as to the current amount of Fund subscriptions.
The Fund has no history of operations. The Fund has been formed
only recently and has no history of operations.
The Managers have a number of conflicts of interest in managing
the Fund. The Managers and their Affiliates will provide
substantially all of the management services to the Fund and will also
have an interest in the Fund. In addition, the Managers manage a
number of other funds that in invest in net leased real estate, some
of which may purchase joint interests in the properties the Fund
acquires. The Dealer-Manager is also an Affiliate of the Managers and
the Fund is not represented by separate counsel. The organization and
operation of the Fund involves various conflicts of interest for the
Managers. See "Conflicts of Interest."
You will generally be dependent on the Managers to manage the
Fund. Except for certain voting rights afforded Investors by the
Operating Agreement, the Investors have no control over the management
of the Fund or its properties, but must rely almost exclusively on the
Managers. See "Summary of Operating Agreement."
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The Managers net worth may fluctuate throughout the life of the
Fund. AEI Fund Management XXI, Inc., the Manager, was formed in 1994
to serve as the general partner of AEI Income & Growth Fund XXI
Limited Partnership, an affiliated limited partnership with structure
and investment objectives similar to the Fund. The Manager does not
have substantial net worth. The Special Managing Member, Robert P.
Johnson, represents that he has a net worth of more than $2,400,000,
and has been involved as a general partner in public and private net
lease real estate funds and energy funds for more than twenty-five
years. A substantial portion of the assets of the Special Managing
Member consist of illiquid investments that were valued using
valuation formulae established by, and which are believed reasonable
by, the Special Managing Member. There can be no assurance that such
assets could be sold at their estimated value.
The Fund may dissolve if both Managers die or withdraw. If both
of the Managers die, are removed, withdraw, or are declared bankrupt,
the Fund will be dissolved. Although the Investors can continue the
Fund and its business with a new manager, the Investors may not be
able to find, or agree upon, an entity willing to act as manager. The
Fund will be liquidated if a new manager cannot be found. Sale of
properties under such circumstances might not produce an advantageous
price and Investors might suffer adverse tax and economic
consequences. The Fund will not carry insurance on the life of the
Special Managing Member.
The Managers will be indemnified by the Fund for their good faith
actions. Under the Operating Agreement, the Managers are not liable
to the Fund or to the Investors for any act or omission that they
determine, in good faith, is in the best interest of the Fund, except
for acts of negligence or misconduct. Under certain circumstances the
Managers will be entitled to indemnification from the Fund for certain
losses. See "Managers--Fiduciary Responsibility."
The Fund is not a Real Estate Investment Trust or Investment
Company. The Fund is not a mutual fund or a real estate investment
trust and will not operate in a manner that would cause it to be
classified as an "investment company" for purposes of the Investment
Company Act of 1940. The management and the investment practices and
policies of the Fund are not supervised or regulated by any federal or
state authority.
We are not providing Investors with representation by Attorneys
and Accountants. The Fund, its Investors and the Managers are not
represented by separate counsel. See "Conflicts of Interest--Lack of
Separate Representation." The legal counsel and accountants for the
Fund have not been retained, and will not be available, to provide
legal counsel or tax advice to Investors. Therefore, prospective
Investors should retain their own legal and tax advisors.
There are some actions that can effect your limited liability as
an Investor. It is possible that a failure on the part of the Fund to
file certain documents in some jurisdictions in which it operates may
jeopardize the limited liability of Investors. Nevertheless, as an
Investor you should liable only for the amount you commit but fail to
pay for your units and for amounts you receive in liquidation if the
Fund does not pay off its creditors before distributing to you.
The Fund's repurchase program has a number of limitations. The
Operating Agreement provides that you may tender Units for repurchase
by the Fund starting three years from the date of this Prospectus.
The repurchase price will be equal to 80% of the net asset value of
the Fund per Unit, as calculated by the Manager. See "Summary of
Operating Agreement--Repurchase of Units." The Fund is not required,
however, to repurchase more than five percent of the Units outstanding
in any year and is not required to repurchase Units if the repurchase
would impair the Fund's ability to continue operations. The repurchase
price for any Units must be paid out of either (i) Fund revenues
otherwise distributable to Investors or (ii) Fund borrowings.
Accordingly, if the Fund repurchases Units, distributions to remaining
Investors may initially be reduced. Moreover, if Fund revenues and
borrowings are not adequate, it may refuse to repurchase Units.
Distributions in the early stages of the Fund may be a return of
capital. During the offering and acquisition phase of the Fund's
operations, we intend to maintain a rate of distribution that is at
least equal to money market rates. If net operating revenues are not
sufficient to fund all these distributions, they may constitute a
return of capital.
Proceeds that are temporarily invested may not be fully insured.
Until invested in properties, the offering proceeds will be invested
in short-term government securities or in insured deposits with a
financial institution and will earn interest at short-term deposit
rates. The amount invested in insured accounts may periodically
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exceed insurance limits. We cannot assure you that the Fund would
recover the full amount of the account if the financial institution in
which they are deposited were placed in receivership. No such funds,
however, will be invested in the accounts of an institution with less
than $100 million in assets or capital of less than seven percent of
assets.
RISKS INVOLVED IN REAL ESTATE TRANSACTIONS
There are risks in owning of real estate. Our investment in non-
residential commercial properties will be subject to the risks
generally incident to the ownership of real property. These risks
include risks related to national economic conditions, changes in the
investment climate for real estate, changes in local market
conditions, changes in interest rates, changes in real estate tax
rates, other operating expenses, governmental rules and fiscal
policies, uninsured losses, the financial condition of tenants, and
other factors beyond the control of the Managers. These and other
factors could cause our properties to decrease in value or cause
tenants to default on leases or be late in lease payments, causing our
cash flow to decrease or fluctuate.
The properties we purchase may not appreciate in value or
generate the rent we expected. We cannot assure you that the
properties we acquire will operate at a profit, will appreciate in
value, or will be sold at a profit. The marketability and value of
each property will depend upon many factors beyond our control. Since
investments in real property are generally illiquid, we also cannot
assure you that there will be a market at the time we decide to sell a
property.
The reserves we retain may not be adequate. We will utilize only
a relatively small portion of the proceeds of this offering for the
Fund's working capital reserve. We cannot assure you that the
reserves will be adequate to cover unforseen contingencies.
Defaults by tenants may interrupt cash flow or cause decline in
property values. Defaults by tenants may cause a decline in the cash
flow of the Fund and a decline in the value of the property leased to
the tenant. We cannot assure you that the Fund would be able to find
a new tenant for a property at the same rental, or to sell a property
without incurring a loss, if a tenant defaults. Like most entities
that invest in real estate, prior funds sponsored by Affiliates of the
Managers have owned properties that have been leased to tenants who
have defaulted on lease obligations. If a tenant files for
bankruptcy, we cannot assure you that the Fund could rapidly recover
leased property from the trustee in bankruptcy proceedings or that the
Fund could receive rent in such proceedings sufficient to cover its
expenses with respect to the property. Bankruptcies have caused
interruption in rental payments from lessees of properties in some
affiliated partnerships. See "Prior Performance."
Net leases give tenants significant control over our properties.
Net leases frequently give the tenant greater discretion in the use of
the property than do ordinary property leases (e.g., with respect to
rights to sublease, to make alterations in the leased premises and to
terminate the lease in certain circumstances).
Some of the properties we buy may not be suitable for more than
one use. The properties which we purchase may be designed or built
primarily for a particular tenant such as a specific restaurant
franchisee. If we hold such a property until termination of the lease
and the tenant elects not to renew, or if the tenant otherwise
defaults on its lease obligations, the property might not be readily
marketable to a new tenant without substantial capital improvements or
remodeling. Such improvements might require expenditure of funds
otherwise available for distribution, or the sale of the property at a
lower price.
There are unique risks in the restaurant and retail industry. We
expect that many of the Fund's properties will be leased to operators
in the restaurant industry or in the retail industry. Both of these
industries are highly competitive and can be affected by factors such
as changes in regional or local economies, seasonality and changes in
consumer preference. Although we will attempt to limit these risks by
emphasizing acquisition of properties that are leased to established
national and regional companies (see "Properties"), we cannot assure
you that a downturn in these industries would not have an adverse
effect on operations of the Fund.
Construction lending may involve risk. We intend to lend money
to some seller/lessees prior to purchase of properties to help finance
the construction of the properties. We will not, however, use more
than 30% of offering proceeds for construction lending. Although all
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construction loans will be secured by property and improvements, and
although none of the twelve public funds previously sponsored by the
Managers have ever experienced a default on a construction loan, there
are a number of risks in construction lending. Risks incurred by
owners during construction, including cost overruns, nonperforming
contractors, changes in construction codes and changes in cost, can
cause financial difficulty and increase the likelihood of default on a
construction loan. If a borrower defaults on a loan during
construction, our primary recourse is to foreclose on the property.
Foreclosure is normally subject to a period of redemption of up to one
year (depending upon the applicable laws of the jurisdiction in which
the property is located) during which we would not be able to sell the
property or lease the property. In addition, if we acquire title to a
property through foreclosure, we will not be able to guarantee that
the property can be resold at a price equal to the principal amount of
the loan. If, as is likely, the property is only partially complete
at the time of foreclosure, the Fund might be required to spend more
money to complete the property so that it can be sold. Although we
might have recourse against a guarantor in the event of a default, we
cannot assure you that the ability of the guarantor to satisfy the
default would not be impaired by the same financial circumstances that
caused the default.
Borrowings can increase the risk of loss to the Fund. Although
we intend to purchase properties for cash, we might assume outstanding
indebtedness on operating properties if it is on favorable terms, and
might finance properties that are initially purchased for cash. This
practice is known as "Leveraging." Leveraging increases the capital
available to the Fund but may also increase the risk of loss. If we
were to default on secured indebtedness, we could lose our interest in
the properties securing such indebtedness. We will not, however,
allow total borrowings to exceed the lesser of 60% of the purchase
price of all Fund properties or 60% of the fair market value of Fund
properties on the date of financing.
The reinvestment of proceeds from the sale of a property will be
subject to the same risks as the initial investment. We may, from
time to time, sell properties and reinvest the proceeds in additional
net lease properties. You will not have the right to receive cash
upon sale of these properties other than cash necessary to cover
income tax on the gain (at a rate of 7% over the federal long-term
capital gains rate), and must rely on the ability of the Managers to
find appropriate properties in which to reinvest such proceeds.
Uninsured losses. The Managers will arrange for comprehensive
insurance coverage on the properties. However, certain types of
losses (generally of a catastrophic nature) may be either uninsurable
or not economically insurable. Should such a disaster occur, the Fund
could suffer a complete loss of capital invested in, and any profits
expected from, the affected properties.
FEDERAL INCOME TAX RISKS
An audit of the Fund could affect your personal taxes. We have
not obtained a ruling from the Internal Revenue Service (the
"Service") with respect to any tax aspect of an investment in the
Fund. The Service could audit the Fund and challenge some of the tax
treatment we propose. See "Income Tax Aspects--Fund Tax Audits,
Returns and Penalties." The Service could also adjust your tax return
because of an audit of the Fund and this could result in scrutiny of
other items on your return or an examination of prior tax returns.
Moreover, you could incur legal and accounting costs in connection
with a challenge by the Service of the position taken by the Fund on
its tax returns, regardless of the outcome of the challenge.
Operation of the Fund could affect the propriety of Fund
allocations. The Operating Agreement allocates to each Investor his
or her distributive share of Fund tax items. Section 704(b) of the
Code and regulations issued under Section 704(b) govern allocations in
entities such as the Fund. Section 704(b) generally requires that
Fund allocations must have substantial economic effect. Counsel for
the Fund has concluded that, as of the date of this Prospectus, and
based on assumptions detailed in "Income Tax Aspects _ Allocations,"
it is more likely than not that the allocations under the Operating
Agreement will be recognized for federal income tax purposes under
Section 704(b) of the Code. Compliance with the regulations depends,
in certain cases, on the individual tax situations of the Investors,
and counsel's opinion does not extend to these situations. See
"Income Tax Aspects-- Allocations."
Changes in federal tax laws, regulations and interpretations
could affect the tax advantages of the Fund. Tax benefits of an
investment in the Fund could be reduced or tax liabilities could be
incurred by reason of changes in the tax law. Any legislative,
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administrative or judicial changes may, or may not, be retroactive
with respect to transactions entered into prior to the effective date
of such changes.
Taxable income from the Fund could exceed distributions from the
Fund. You will be required to report your share of the Fund's income
or gain, whether or not cash in a corresponding amount is distributed
to you, on your federal and state tax returns. The taxes on this
income or gain could be greater than cash distributions that you
receive from the Fund for the year, particularly in years in which the
Fund sells properties and reinvests the proceeds or uses distributable
net cash flow to repurchase Units. Investors participating in a
distribution reinvestment plan will be required to report the net
income from the Fund even though they will not receive any cash from
distributions.
Tax Liability Upon Sale or Disposition of Property or Units. The
sale of a property or your Units can result in tax liability to you.
Under certain circumstances, the taxes that you must pay because of
the sale of a property or of your Units could exceed the cash you
receive from the sale.
CAPITALIZATION
The capitalization of the Fund after the issuance and sale of the
minimum of 1,500 Units and the maximum of 24,000 Units is as follows:
After Sale of After Sale
1,500 Units 24,000 Units
Title of Class Minimum (Maximum)(1)
Managers' Capital (2) $ 1,000 $ 1,000
Investors' Capital 1,500,000 24,000,000
Less Organization and
Offering Expenses (3) (225,000) (3,360,000)
----------- -----------
Total Investors' Equity $ 1,275,000 20,640,000
=========== ===========
(1) There can be no assurance that the maximum proceeds will be
obtained.
(2) The Managers have contributed an aggregate of $1,000 to the Fund.
In the event the Managers have negative balances in their capital
accounts after dissolution and winding up of, or their withdrawal
from, the Fund, the Managers will contribute to the Fund an amount
equal to the lesser of (a) the deficit balances in their capital
accounts or (b) an amount equal to 1% of the sum of the Investors'
capital contributions and the capital contributions required to be
made by the Managers pursuant to this provision.
(3) Includes (i) selling commissions and nonaccountable expense
allowances equal to 10% and due diligence expenses reimbursements of
up to 1/2 of 1% of offering proceeds payable to the Dealer-Manager, (ii)
federal and state securities registration fees, fees of counsel,
accountant's fees, printing expenses, and other out-of-pocket expenses
paid by the Managers to nonaffiliates, and (iii) expenses of the
Managers and Affiliates, at Cost (as defined in the Operating
Agreement), in organizing the Fund and arranging for the sale of
Units.
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ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the
estimated use of proceeds from the sale of Units. All proceeds of the
offering will be held by the Fund for the benefit of investors to be
used in substantially the manner set forth below. Certain of the
figures set forth below cannot be precisely calculated at the present
time and could vary materially from the amounts shown.
Minimum Maximum
(1,500 Units) (24,000 Units)
Dollars Percent Dollars Percent
Gross Offering Proceeds (1) $ 1,500,000 100.0% $24,000,000 100.0%
Less Organization and Offering
Expenses:
Selling Commissions and
Nonaccountable Expenses(2) 150,000 10.0% 2,400,000 10.0%
Other Organization and
Offering Expenses (3) 75,000 5.0% 960,000 4.0%
----------- ------- ----------- -------
Amount Available for Investment
(net proceeds) $ 1,275,000 85.0% $20,640,000 86.0%
Acquisition Expenses (4) 60,000 4.0% 720,000 3.0%
Working Capital Reserve 15,000 1.0% 240,000 1.0%
----------- ------- ----------- -------
Cash Available for Purchase
of Properties (4) $ 1,200,000 80.0% $19,680,000 82.0%
=========== ======= =========== =======
(1) Such amounts exclude the aggregate of $1,000 contributed by the
Managers.
(2) The Dealer-Manager will be paid selling commissions and
nonaccountable expenses totaling 10% and will reallow a portion of
such commissions and expenses to Dealers that are members of the NASD
(3) Includes a 1/2 of 1% due diligence expense allowance payable to the
Dealer-Manager, federal and state securities registration fees, fees
of counsel, accountant's fees, printing expenses, and other out-of-
pocket expenses paid by the Managers to nonaffiliates as well as
expenses of the Managers and Affiliates, at Cost (as defined in the
Operating Agreement), in organizing the Fund and arranging for the
sale of Units. The sum of selling commissions and such other
Organization and Offering Expenses may not, in any event, exceed 20%
of the gross offering proceeds. To the extent they exceed such amount,
Organization and Offering Expenses will be borne by the Managers.
(4) Most properties that the Fund will acquire are newly constructed
properties purchased at construction cost, which cost includes most of
the incidental expenses incurred in acquiring a property, all of which
are reflected in the table as Acquisition Expenses. To cover most of
these expenses, the Fund charges most sellers a funding fee for
accepted proposals and a loan fee for proposals on which construction
advances are made. The Managers estimate that all but approximately
$15,000 (minimum) and $240,000 (maximum) of the Acquisition Expenses
will be covered by fees charged by the Fund to such third party
sellers and that the actual amount invested in properties will be
approximately $1,245,000 (minimum) and $20,160,000 (maximum). No
Acquisition Fees will be paid to the Managers or their Affiliates.
The amount available for investment in properties will not, in any
event, be less than 78% of gross offering proceeds. The proceeds of
the offering will be held in trust by the Fund for the benefit of the
purchasers of Units to be used only for the purposes set forth above.
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INVESTMENT OBJECTIVES AND POLICIES
PRINCIPAL INVESTMENT OBJECTIVES
The Fund intends to acquire free-standing, single-tenant, net-
leased commercial properties located throughout the United States.
The Fund may also sell such properties and purchase other similar
properties from time to time when, in the discretion of the Managers,
conditions are favorable to do so.
The Managers expect that many of these properties will be leased
to companies in the restaurant industry or the retail industry,
although properties in other industries may be acquired. See
"Properties." It is expected that such properties will be leased to
one tenant rather than multiple tenants and that most will be acquired
in sale-leaseback transactions. If the minimum 1,500 Units are sold,
the Managers anticipate that the Fund will acquire two properties. If
the maximum 24,000 Units are sold, the Managers anticipate that the
Fund will acquire up to 15 properties. Except as set forth herein,
the Fund does not have a policy, and there is no limitation, as to the
amount or percentage of its assets that may be invested in any one
property. The Fund's principal investment objectives are to invest
the proceeds of this offering in non-residential commercial properties
that will offer the investors the potential for:
(i) regular cash distributions of lease income;
(ii) growth in lease income and cash distributions through rent
escalation provisions;
(iii) capital growth through appreciation in the value of
properties; and
(iv) stable property performance through long-term lease
contracts.
There can be no assurance that such objectives can be attained. It is
not an objective of the Fund to shelter taxable income of investors
that is derived from sources other than the Fund.
ACQUISITION OF PROPERTIES
The Fund intends to use the net proceeds (after payment of
selling commissions and offering costs), estimated to be approximately
$1,275,000 if 1,500 Units are sold and approximately $20,640,000 if
24,000 Units are sold, for the purchase of improved income-producing
commercial real estate that is, or will be, subject to net leases at
the time of purchase. The Fund may commit to purchase properties upon
completion of construction at agreed prices or pursuant to pricing
formulas. The Fund will not purchase or lease any property from, or
sell or lease any property to, the Managers or their Affiliates,
provided that the Fund may purchase real property from the Managers or
their Affiliates if the Managers or their Affiliates purchased the
property in their own name and temporarily held title thereto (up to
one year) for the purpose of facilitating the acquisition of the
property, the borrowing of money, the obtaining of financing for the
Fund or any other purpose related to the business of the Fund, and the
property is purchased by the Fund for a price no greater than the
price paid by the Managers or their Affiliates plus Acquisition
Expenses.
Although the Fund does not intend to acquire any unimproved or
undeveloped properties, or to participate in the development of any
properties, the Fund may advance funds or make loans in connection
with the construction of a property to be purchased by the Fund. Any
such loan would be secured by the land and improvements under
construction. In no event will such outstanding advances for
construction exceed 30% of offering proceeds.
The Fund does not own any properties and has not identified any
properties which it expects to acquire. The Manager expects that many
of the properties the Fund acquires will be leased to established
operators (including franchisees and franchisers) in the restaurant
industry, or to established retail companies. Properties may,
however, be acquired for lease to entities in other industries. See
"Properties." Proposals for acquisitions in such industries will be
considered from tenants to whom prior Programs sponsored by Affiliates
of the Managers have leased properties, although the Managers will not
be limited to such entities. There is no affiliation between the
Managers and any of the are lessees of properties held by prior
Programs.
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The purchase price of each property will be supported by an
independent appraisal of the fair market value of the property.
Nevertheless, the Managers will rely on their own analysis and not on
such appraisals in determining whether to acquire, and the terms of
the acquisition, of a particular property. Copies of such appraisals
will be retained at the office of the Fund for at least five years and
will be available for inspection and duplication by any Investor.
Prior to the acquisition of any property, the Fund will be
provided with evidence satisfactory to the Managers that the Fund will
acquire marketable title to such property, subject only to acceptable
liens and encumbrances. Such evidence may include a policy of title
insurance, an opinion of counsel or such other evidence as is
customary in the locality in which the property is situated.
After release from escrow, and pending investment in properties,
the offering proceeds will be invested in short-term government
securities or in insured deposits with a financial institution and
will earn interest at short-term deposit rates. Any of the net
proceeds of this offering (except for amounts used to pay operating
expenses or to establish working capital reserves as determined by the
Manager) that have not been invested or committed for investment in
real property by the later of 24 months after the date of this
Prospectus or six months after termination of the offering of Units
will be distributed, without interest but together with any
commissions or other Organization and Offering Expenses paid thereon,
to the Investors as a return of capital. All funds will be available
for the general use of the Fund during such period and may be expended
in operating the properties that have been acquired. Investment
capital will not be segregated or held separate from other capital of
the Fund pending investment. For the purpose of the foregoing,
capital will be deemed to have been committed to properties, and will
not be returned to the Investors, to the extent written contractual
agreements have been executed prior to the expiration of the foregoing
period, regardless of whether any such investment is ultimately
consummated. To the extent any funds have been reserved to make
contingent payments in connection with any property pursuant to a
written contractual agreement in connection with such property, or
pursuant to a decision of the Managers that additional reserves are
necessary in connection with any property, regardless of whether any
such payment is ultimately made, funds will not be returned to
Investors.
DISTRIBUTIONS
The Fund intends to distribute Net Cash Flow from operations to
Investors within 30 days after the close of each fiscal quarter. The
ultimate amount of such distributions will depend upon the profitable
operation and cash flow of the Fund. Net Cash Flow from operations
will not be used for the acquisition of properties, although rental
revenue may be held as reserves. Net Cash Flow otherwise
distributable to Investors may be used to repurchase Units. See
"Summary of Operating Agreement--Repurchase of Units." Investors who
elect to participate in a distribution reinvestment plan will not
receive such distributions of Net Cash Flow. Instead, the
distributions of such participants will be applied to the purchase of
additional Units or interests in subsequent limited Programs with
substantially identical investment objectives. See "Summary of
Operating Agreement--Distribution Reinvestment Plan."
During the offering and property acquisition phase of the Fund's
operations, a period of approximately 36 months, the Fund intends to
maintain a distribution rate to Investors of 6.5%, a portion of which
will likely constitute a return of capital to the extent the rate of
net income of the Fund is less than this amount. Thereafter, the
distribution rate will be allowed to float quarterly based on the Net
Cash Flow or Net Proceeds of Sale available for distribution.
SALE OF PROPERTIES
The Fund expects to sell some or all of its properties and to
reinvest the proceeds from such sales in additional net leased
commercial properties. The Fund reserves the right, at the discretion
of the Managers, to either distribute Net Proceeds on Sale to
Investors or to reinvest such proceeds in net leased properties that
meet the acquisition criteria set forth in this Prospectus. The Fund
will not, however, reinvest any Net Proceeds of Sale unless sufficient
proceeds are distributed to Investors to pay income taxes resulting
from the sale of the property (assuming Investors are taxable at a
rate of seven percent above the individual capital gains rate).
The determination of whether a particular property should be sold
or otherwise disposed of will be made after consideration of
performance of the property and market conditions and will depend, in
part, on the economic benefits of continued ownership. In deciding
-14-
whether to sell properties, the Managers will consider factors such as
potential capital appreciation, cash flow and federal income tax
consequences.
The Fund may sell cotenancy or other fractional interests in
properties, rather than selling its entire interest in a property. The
Manager believes that, depending on market conditions, sales of
smaller interests through exchanges designed to comply with Section
1031 of the Internal Revenue Code can result in greater overall sales
proceeds. In those instances in which the Fund does not sell all of
its interest in a property, it will retain, either alone or with
another program sponsored by affiliates of the Managers, the authority
to direct management and policies relating to operation and sale of
the property.
Although the Managers intend to sell Fund properties for cash,
purchase money obligations secured by mortgages may be taken as
partial payment. The terms of payment to the Fund may be affected by
custom in the area in which the property being sold is located and by
then prevailing economic conditions. To the extent the Fund receives
notes and property other than cash on sales, such proceeds will not be
included in Net Proceeds of Sale until and to the extent the notes or
other property are actually collected, sold, refinanced or otherwise
liquidated. Therefore, the distribution to Investors of the proceeds
of a sale may be delayed until the notes or other property are
collected at maturity, sold, refinanced or otherwise converted to
cash. The Fund may receive payments (cash and other property) in the
year of sale in an amount less than the full sales price and
subsequent payments may be spread over several years. The entire
balance of the principal may be a balloon payment due at maturity.
For federal income tax purposes, unless the Fund elects otherwise, it
will report the gain on such sale ratably as principal payments are
received under the installment method of accounting.
BORROWING POLICIES--NO ACQUISITION LEVERAGE
The Fund intends to acquire all of its properties for cash,
except that it may assume outstanding indebtedness on operating
properties that it acquires if such indebtedness is available on
favorable terms. If any properties are financed, the Manager will use
its best efforts to obtain such financing on the best terms available.
The Managers do not intend to seek financing on all properties and do
not intend to seek financing at all unless such financing can be
obtained at rates that are likely to generate a positive spread over
the rental rates of a property over the life of the lease. Although
the Managers believe that the interest rate environment at the date of
this Prospectus is favorable, if rates increase, the Managers may
determine not to create or accept financing of any properties. In no
event will the aggregate amount of the Fund's indebtedness exceed the
lesser of 60% of the purchase price of all Fund properties, or 60% of
the fair market value of Fund properties on the date they are
refinanced. To the extent that any financing is not fully
amortizing, and it exceeds 25% of the purchase price of properties,
its maturity (its due date) will not be earlier than ten years after
the date of purchase of the underlying property or two years after the
anticipated holding period of the property (provided such holding
period is at least seven years).
The Fund will not obtain permanent financing from the Managers or
their Affiliates. Recourse for any indebtedness will be limited to
the particular Fund property to which the indebtedness relates. To
the extent recourse is limited to the Fund's property, under most
circumstances such indebtedness would increase the Investors' tax
basis in the Units if the Fund's principal activity is determined to
be investing in real property.
The Fund will not issue any senior securities and the Fund will
not invest in junior mortgages, junior deeds of trust or similar
obligations.
JOINT VENTURE INVESTMENTS
The Operating Agreement permits the Fund to invest in a property
jointly owned with another fund sponsored by the Managers or their
Affiliates that has investment objectives and management compensation
provisions substantially identical to those of the Fund, subject to
certain terms and conditions contained in the Operating Agreement,
which are summarized below. The Fund's ability to enter into such a
joint venture with another fund sponsored by the Managers or their
Affiliates may be important if the Fund wishes to acquire an interest
in a specified property but does not have sufficient funds (or, at the
-15-
time it enters into a commitment to acquire a specified property,
cannot determine whether it will have sufficient funds) to acquire the
entire property.
The Operating Agreement requires that, in any joint venture with
another fund sponsored by the Managers or their Affiliates, the
following conditions must be satisfied. First, the Fund will invest
only in a joint venture having comparable investment objectives and
the investment by each party to the joint venture must be on
substantially the same terms and conditions. Second, the Fund may not
pay more than once, directly or indirectly, for the same services and
may not act indirectly through any such joint venture if the Fund
would be prohibited from doing so directly because of restrictions
contained in the Operating Agreement. Third, the compensation of the
Managers and such Affiliates in the other fund must be substantially
identical to their compensation in the Fund. Fourth, in the event of
a proposed sale of the property initiated by the other joint venture
partner, the Fund must have a right of first refusal to purchase the
other party's interest.
There is a potential risk of impasse on joint venture decisions
and a potential risk that, even though the Fund will have the right of
first refusal to purchase the other party's interest in the joint
venture, the Fund may not have the resources to exercise such right.
RESERVES FOR OPERATING EXPENSES
The Managers expect that approximately one percent of the gross
proceeds of the offering initially will be reserved to meet costs and
expenses of the Fund's properties, capital expenditures and initial
cash distributions. To the extent that such reserves and any income
of the Fund are insufficient to defray such costs and other
obligations and liabilities, it will be necessary to attempt to
finance or refinance properties or, in the event financing or
refinancing is not available on acceptable terms, to liquidate the
Fund's investment in certain of its properties on possibly unfavorable
terms. During the holding period of a property, the Fund may increase
reserves from Net Cash Flow to meet anticipated costs and expenses and
other economic contingencies. If, in any fiscal quarter, the Managers
determine that reserves are in excess of the amount necessary for Fund
operations, such excess may be distributed as Net Cash Flow.
MANAGEMENT OF PROPERTIES
Each property will be managed, and the lease obligations of
tenants will be enforced, by the Manager or its Affiliates. Such
management will include negotiations with tenants, reletting and re-
modeling properties, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and of
insurance coverage, and periodic inspection of properties and tenants'
sales records, where applicable. The Manager or such Affiliates will
be compensated for such management at Cost, which includes an
allocable portion of overhead expenses. See "Compensation to Managers
and Affiliates." Because the properties will be net leased, the
tenants will be responsible, at their expense, for most of the day-to-
day on-site management and maintenance of the properties.
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES
Investors have no voting rights with respect to the
establishment, implementation or alteration of the investment
objectives and policies of the Fund, all of which are the
responsibility of the Managers. Nevertheless, the Managers will not
make any material changes in the investment objectives and policies
described above without first obtaining the written consent or
approval of Investors owning in the aggregate more than 50% of the
then outstanding Units.
PROPERTIES
As of the date of this Prospectus, the Fund had not acquired any
properties. The Managers are continually evaluating properties for
acquisition and engaging in negotiations with sellers, tenants and
developers regarding the purchase of properties for the Fund.
Depending upon the proceeds obtained, the Managers intend to diversify
the type and location of properties acquired. The Fund is not limited
as to the amount or percentage of its assets that may be invested in
any one property. Although the Fund presently intends to purchase two
or more properties with the net proceeds of this offering, the
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Managers may purchase only a single property if, in their judgment,
such purchase would be in the best interest of the Fund.
The Managers expect that many of the properties purchased by the
Fund will be acquired from companies that will simultaneously lease
back the properties. The Fund's leases will include provisions for
rent increases through participation in gross sales or through regular
rental increases on specific dates, or both. There can be no
assurance that the Fund will be able to include the foregoing
provisions in all of its leases.
All of the Fund's properties will be rented under net leases
which, generally, provide that the tenant is responsible for all real
estate taxes, insurance, maintenance, most of the repairs and
operating expenses of the properties. The Managers expect that the
Fund's leases will also provide that risks such as fitness for use or
purpose, design or condition, quality of material or workmanship,
latent or patent defects, compliance with specifications, location,
use, condition, quality, description or durability will be borne by
the lessee. Furthermore, it is customary in commercial property
transactions that leases provide for early termination upon the
occurrence of certain events (e.g., casualty or substantial
condemnation). Although considered "triple net," some lessees of
commercial properties, particularly those properties used for the sale
of goods or services at retail, require that the landlord bear the
costs of maintaining the structural integrity of the building,
including the roof and foundation.
ACQUISITION CANDIDATES
Prior Programs sponsored by the Managers and their Affiliates
have leased properties to businesses in the restaurant and retail
industry and many of the properties acquired by this Fund may be
leased to tenants in such industries. There is, however, no
prohibition on the acquisition of properties in other industries and
the Managers intend to monitor industry trends and invest in
properties that serve to provide the most favorable return balanced
with risk.
The Restaurant Industry. The restaurant industry is one of the
largest and fastest growing industries in the United States, with
annual sales at the top 100 restaurant chains alone exceeding $118
billion in 1997. Demographic trends are particularly favorable to the
casual dining segment of the restaurant industry with a steady
increase in the number of two-income families and a rapidly expanding
senior citizen population. Because this industry is highly property
dependent, the Managers believe it offers some of the best
opportunities for transactions of the type in which the Fund proposes
to engage. Further, the Managers believe that this industry includes
a number of companies and franchisees with established track records
that are attractive to the Fund.
The Retail Industry. Trends in the retail industry have
increased the attractiveness of retail establishments as acquisition
candidates for the Fund. Consumer demand for a large selection of
merchandise in a single category at discount prices has caused many
retailers to turn to large freestanding properties with minimal
interior partitions. These retail establishments or "superstores" are
often grouped together into a "power center" with few, if any, small
retailers. Many of the large retailers that operate these
establishments are driven by operating margins to minimize investment
in real estate and use lease transactions to finance the purchase and
construction of their facilities. The Managers believe that the
rapid expansion in these establishments may present attractive
candidates for acquisition by the Fund.
ACQUISITION CRITERIA
In determining whether a property is a suitable acquisition for
the Fund, the Managers will consider the following factors, among
others:
(a) the creditworthiness of the lessee and the lease guarantor,
if any, and their ability to meet lease obligations independent of
cash flow to be generated by the property;
(b) the location, condition, use and design of the property and
its suitability for a long-term net lease;
(c) the terms of the proposed lease and guaranty, if any
(including, specifically, provisions relating to rent increases or
percentage rent and provisions relating to passing on operating
expenses to tenants);
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(d) the prospects for long-term appreciation of the property;
(e) the prospects for long-range liquidity of the investment; and
(f) the stability and potential growth of the community in which
a property is located.
In addition, the Managers will apply the following standards with
respect to the properties to be acquired:
(a) Tenants must be actively involved in the daily operation of
the type of business for which the property is leased.
(b) Tenants must have experience and a history of successful
operations in the business for which the property is leased. The Fund
will not acquire properties for lease to inexperienced tenants.
(c) Tenants will be required to provide evidence of cash flow,
independent of cash flow generated by the property, or cash reserves,
sufficient to allow the tenant to meet its current obligations under
the lease.
Although acquisitions may vary from these standards, any variation
must be justified to management of the Managers.
To secure performance by the lessee of its lease obligations, and
to minimize any interruption of rental payments from properties the
Fund purchases, the Fund may require tenants to provide cash deposits,
letters of credit, lease insurance, personal guarantees or some
combination of these credit enhancements. Although any of these
measures should help protect the Fund, in a number of instances it may
be impossible to ensure that all rental payments are protected.
Individual guarantees or letters of credit may be devalued by severe
business setbacks of the tenant that result in the insolvency of the
guarantor or bankruptcy proceedings that impair the Fund's ability to
immediately evict a tenant or proceed against the security.
Accordingly, despite these measures, some programs sponsored by
Affiliates of the Managers have owned properties on which rental
payments have been interrupted. See "Prior Performance."
During the offering period, and at such time as the Managers
believe a reasonable probability exists that any additional property
will be acquired by the Fund, this Prospectus will be supplemented to
disclose the pending acquisition. Based upon the experience and
acquisition methods of the Managers, this will normally occur on the
signing of a legally binding purchase agreement, but may occur before
or after such signing, depending on the particular circumstances
surrounding each potential acquisition. A supplement to this
Prospectus will describe in detail the proposed terms of purchase, the
property to be acquired, the financial results of the prior operation,
if any, of the property, and other information considered appropriate
for an understanding of the transaction. Upon termination of this
offering, no further supplements to this Prospectus will be
distributed, but Investors will continue to receive acquisition
reports containing substantially equivalent information regarding
properties. See "Reports to Investors."
IT SHOULD BE UNDERSTOOD THAT THE INITIAL DISCLOSURE OF ANY
PROPOSED ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE THAT THE
FUND WILL ULTIMATELY CONSUMMATE THE ACQUISITION OR THAT THE
INFORMATION PROVIDED CONCERNING THE ACQUISITION WILL NOT CHANGE
BETWEEN THE DATE OF THIS PROSPECTUS OR SUPPLEMENT AND THE ACTUAL
PURCHASE DATE.
MANAGERS
FIDUCIARY RESPONSIBILITY
The Managers are accountable to the Fund as fiduciaries and,
consequently, must exercise good faith in handling the Fund's affairs.
The Operating Agreement provides that the Managers have fiduciary
responsibility for the safekeeping and use of all capital and assets
of the Fund, whether or not in the Managers' possession or control.
The managers are prohibited from employing, or allowing any other
person or entity to employ the capital or assets of the Fund in any
manner except for the exclusive benefit of the Fund.
The Operating Agreement also provides, however, that the Managers
will not be liable to the Fund or the Investors for acts or omissions
in the exercise of their judgment relative to the Fund if their
actions were taken in the good faith belief that they were in the best
interest of the Fund and not the result of negligence or misconduct.
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Furthermore, the Fund will indemnify the Managers for any claim or
liability arising out of their activities on behalf of the Fund unless
such claim or liability was the result of negligence or misconduct.
Therefore, the Investors have a more limited right of action than
would otherwise be the case absent such provisions in the Operating
Agreement.
In the opinion of the Securities and Exchange Commission (the
"Commission") and the securities administrators of most states,
indemnification for liabilities arising under the Securities Act of
1933 (the "Act") and arising under state securities laws is against
public policy and therefore unenforceable. In the event that a claim
for indemnification for liabilities arising under the Act or under
state securities laws (other than the payment by the Fund of expenses
incurred or paid by the Managers in the successful defense of any such
action, suit or proceeding) is asserted by the Managers in connection
with the securities being registered, the Fund will submit to a court
of appropriate jurisdiction, after apprising such court of the
position of the Commission and state securities administrators the
question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
MANAGEMENT
The Managers will have the sole and exclusive right, power and
responsibility to manage the Fund's business, including, under certain
limited circumstances, the right and power to have the Fund obtain
loans secured by its property. The Managers will make all of the
investment decisions of the Fund, including decisions relating to the
properties to be acquired, the method and timing of financing (if any)
of such properties, the selection of tenants, the terms of leases on
such properties, and the method and timing of the sale of properties.
The Managers will coordinate and manage all of the activities of the
Fund, maintain the Fund records and accounts, and arrange for the
preparation and filing of all Fund tax returns. Certain of the
administrative and management functions to be performed by the
Managers may be delegated to their Affiliates, provided that any
compensation to Affiliates of the Managers will be at Cost. See
"Compensation to Managers and Affiliates."
The Managers expect that all of the lease agreements with respect
to the properties of the Fund will provide that the tenant is
responsible for substantially all real estate taxes, insurance and
maintenance, and the Managers expect to have no day-to-day, on-site
property management obligations.
BACKGROUND AND EXPERIENCE
AEI Fund Management XXI, Inc., the Manager, is a Minnesota
corporation formed in 1994 to serve as a general partner of AEI Income
& Growth Fund XXI Limited Partnership, an affiliated limited
partnership with investment objectives and structure similar to the
Fund. The Manager does not have significant net worth. The sole
shareholder and director of the Manager is Robert P. Johnson, who also
serves as its President. Most of the management services for the Fund
will be performed by AEI Fund Management, Inc., a Minnesota
corporation having the same officers as the Manager. Management
services will be billed directly to the Fund. Each of the officers of
the Manager also holds a position as an officer in the corporations
formed to serve as general partners of prior funds sponsored by the
Managers and their affiliates.
The officers and sole director of the Manager are as follows:
Name Age Position
Robert P. Johnson 54 Sole Director, Chief Executive Officer
and President
Mark E. Larson, CPA 45 Chief Financial Officer, Treasurer and
Secretary
Robert P. Johnson will also serve as Individual Manager of the
Fund. Mr. Johnson is the President, Chief Executive Officer, sole
shareholder and sole director of The Manager. From 1970 to the
present he has been employed exclusively in the investment industry,
specializing in limited partnership investments. In that capacity, he
has been involved in the development, analysis, marketing and
management of public and private investment programs investing in net
lease properties as well as public and private investment programs
investing in energy development. Since 1971, Mr. Johnson has been the
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President, a director and a registered principal of AEI Securities
Incorporated, which is registered with the Securities and Exchange
Commission as a securities broker-dealer, is a member of the National
Association of Securities Dealers, Inc. (NASD) and is a member of the
Security Investors Protection Corporation (SIPC). Mr. Johnson has
been President, a director and the principal shareholder of AEI Fund
Management, Inc., a real estate management company founded by him,
since 1978. Mr. Johnson is currently a general partner or principal
of the general partner of each of the limited partnerships set forth
under "Prior Performance." Although not currently subject to any
material contingent liabilities, Mr. Johnson could become subject to
the claims of creditors as a general partner of such limited
partnerships or other Funds he manages.
Mark E. Larson, a Certified Public Accountant, is Chief Financial
Officer, Secretary and Treasurer of The Manager, and is a director of
AEI Fund Management, Inc. and has been employed by AEI Fund
Management, Inc. and affiliated entities since 1985. From 1979 to
1985, Mr. Larson was with Apache Corporation as Manager of Program
Accounting responsible for the accounting and reports for
approximately 45 public partnerships. Mr. Larson will be primarily
responsible for supervising the accounting functions of The Manager
and the Fund, including coordination of reports to the Commission and
Investors.
PRIOR PERFORMANCE
During the past twenty-five years, Mr. Johnson and his affiliates
have syndicated twelve public and twelve private net lease commercial
property investment partnerships in the United States.
Since 1984, Mr. Johnson and affiliates have formed, syndicated
and now manage twelve public real estate partnerships that have
purchased, for cash, single tenant properties under long-term net
leases. With the exception of size and the ability to use mortgage
indebtedness for acquisition of properties, all of such partnerships
are similar to the Fund. The offering of interests in the first such
partnership, Net Lease Income & Growth Fund 84-A Limited Partnership,
terminated in December 1984 with the maximum $5,000,000 of
subscriptions. The offering of interests in the next four
partnerships, AEI Real Estate Fund 85-A Limited Partnership, AEI Real
Estate Fund 85-B Limited Partnership, AEI Real Estate Fund 86-A
Limited Partnership, and AEI Real Estate Fund XV Limited Partnership
terminated in June 1985, February 1986, July 1986 and December 1986,
respectively, each with the maximum $7,500,000 of subscriptions. The
offering of interests in AEI Real Estate Fund XVI Limited Partnership
terminated in November 1987, with the maximum $15,000,000 of
subscriptions. The offerings of interests in AEI Real Estate Fund XVII
Limited Partnership, AEI Real Estate Fund XVIII Limited Partnership,
AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Net
Lease Income & Growth Fund XX Limited Partnership terminated on
November 1, 1988, December 4, 1990, February 5, 1993, and January 19,
1995, respectively with $23,388,700, $22,783,050, $21,157,928 and
$24,000,000 of subscriptions. The offering of interests in AEI Income
& Growth Fund XXI terminated on January 31, 1997 with $24,000,000 of
subscriptions. The offering of interests in AEI Income & Growth Fund
XXII will terminate immediately before commencement of this offering.
An aggregate of approximately 13,500 limited partners purchased
interests in such partnerships.
The properties purchased by all of such partnerships were new, or
recently constructed, net leased commercial properties. At September
30, 1998, approximately $184,000,000 of properties had been purchased
or were under contractual commitment for purchase by the public
partnerships. The following table sets forth the geographic
distribution of the 143 properties purchased, or under commitment to
purchase, by prior public partnerships:
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Number Number
State of Properties State of Properties
Alabama 1 Missouri 5
Arizona 5 Montana 1
Arkansas 1 Nebraska 4
California 4 Nevada 2
Colorado 5 New Hampshire 1
Florida 6 New Mexico 1
Georgia 3 North Carolina 3
Illinois 4 Ohio 14
Indiana 3 Oregon 1
Iowa 2 Pennsylvania 1
Kansas 1 South Carolina 3
Kentucky 1 Tennessee 3
Louisiana 4 Texas 38
Michigan 6 Virginia 5
Minnesota 12 Wisconsin 3
By dollar amount invested, approximately 74% of
such properties were restaurants, 12% were retail
facilities, 8% were childcare centers, 6% were auto service
centers, convenience centers, a motel and an office
building. The Managers will provide to any potential
investor upon request, and upon payment of a fee to cover
costs of reproduction and mailing, a copy of the Annual
Report on Form 10-KSB for any of such Funds as filed with
the Securities and Exchange Commission.
All but two of the private partnerships were specified
property syndications. Of the remaining private
partnerships, one acquired four properties on a "blind pool"
basis, one is a private partnership offered to institutional
investors that acquired seven properties on a blind pool basis,
and on is a private partnership currently being offered to
accredited investors on a blind pool basis. The private
partnerships purchased thirteen properties for $6,371,894
ten of which were restaurants, two supermarkets and one an
automotive center. Six of those properties were in
Minnesota, three in Florida and one each in Nebraska, Iowa,
Michigan and Ohio. As with this offering, the primary objective
of the earlier private partnerships was production of income (not
tax shelter) by investment in single-tenant properties located
throughout the United States and that were leased on a "triple
net" basis. Many of the private partnerships acquired properties
with a significant amount of indebtedness.
Like most entities engaged in real estate operations, the
partnerships sponsored by the Managers and their Affiliates have
invested in some properties that were leased to tenants that
failed to fully perform under the terms of the leases, including
timely performance of rental payments. Upon nonperformance, the
Affiliates managing such properties take such action, which may
include termination of leases in the case of continued
recalcitrance or an apparent inability to meet lease obligations,
as is prudent in commercial lease transactions. In the case of
terminations, the property may be leased to a new tenant under
renegotiated terms or sold.
When lessees default on lease obligations, rental payments
will most likely be interrupted for a period of time. Although
such rental interruption may cause a decrease in distributions of
cash flow for a period of time, because all of the public
partnerships invest in a number of properties and the Managers
attempt to diversify the types of property held for investment,
no default or series of defaults has caused a public partnership
sponsored by the Managers to miss a quarterly distribution of
cash flow or to have inadequate cash to fund operations. It is
the continuing objective of the Managers to minimize the number
of such properties through careful property evaluation and
investigation of the credit-worthiness of lessees prior to
purchase and by renegotiating leases or locating new tenants in a
manner designed to minimize any interruption of cash flow.
-21-
COMPENSATION TO MANAGERS AND AFFILIATES
The Managers and their Affiliates will provide nearly all of
the management services the Fund requires and will be compensated
accordingly. AEI Securities Incorporated, an Affiliate, will
serve as Dealer-Manager in the sale of the Units and will receive
commissions and expense allowances, most of which will be paid or
"reallowed" to Participating Dealers. See "Plan of
Distribution." AEI Fund Management, Inc. ("FMI"), an Affiliate
of the Managers, will provide administrative services in
connection with the organization of the Fund and the sale of
Units, the acquisition of properties, the administration of the
Fund, the management of properties, the sale of properties, and
eventually the liquidation of the Fund. Such Affiliate will be
reimbursed for all of its expenses in furnishing such services at
its "Cost," which includes a portion of the general expenses
directly related to the furnishing of such services. In
addition, the Managers will receive an interest in Net Cash Flow
and Net Proceeds on Sale of Properties. Robert P. Johnson, the
Individual Manager, is the sole shareholder and director, and the
chief executive officer, of each of the Manager and the Dealer-
Manager, and the sole shareholder and one of two directors of
FMI.
Under applicable state securities regulation, a sponsor
may receive fees for the services it provides, a 10% interest in
Net Cash Flow, and a 15% interest in Net Proceeds on Sale (after
return of a 6% cumulative, noncompounded return to limited
partners). The aggregate amount of fees for organization and
offering services and for services in connection with the
acquisition of properties is limited by such regulation to the
lesser of (i) 20% of the capital contributions plus .1625% of
such contributions for each 1% of financing of Fund properties or
(ii) 33% of the capital contributions. In addition, such
regulations allow a property management fee equal to 1% of the
net cash flow from properties, except for a one time initial
leasing fee of 3% of the gross revenues on each lease payable
over the first five full years of the original term of the lease,
sales commissions of up to 3% of the sales price for properties,
and reimbursement for all administrative expense, except certain
items of overhead and the salaries of controlling persons.
Rather than receiving the 10% interest in Net Cash Flow
allowed, the Managers of the Fund are paid only 3% of Net Cash
Flow. In addition, the Managers of the Fund have increased their
subordination in Net Proceeds on Sale to a 7% return to Investors
rather than the 6% subordination required. Finally, the Managers
do not receive any of the fixed fees allowed under applicable
regulation for services, including fees for the real estate
acquisition and sales services they provide to the Fund.
Rather than being paid a fee based on a fixed percentage of
revenue, assets or sales proceeds for services, the Managers and
their Affiliates are reimbursed at their Cost for the services
they perform on behalf of the Fund. As defined in the Operating
Agreement, Cost includes salaries of controlling persons and
certain items of overhead attributable to the furnishing of
services. This salary and expense reimbursement would not be
allowed under administrative interpretations of some state "blue
sky" laws in a traditional real estate program. Instead, these
state interpretations provide for the payment of fixed fees and a
10% interest in Net Cash Flow to cover these administrative
costs. Reimbursement to the Managers and Affiliates of other
Administrative Expenses that would not be allowed if the Fund
paid the increased interest in Net Cash Flow and the fixed fees
are limited to the extent they would exceed the aggregate of the
fixed fees and the Net Cash Flow interest the Managers are
allowed under applicable regulation but not paid in the Fund. In
addition, Organization and Offering Expenses and Acquisition
Expenses reimbursed to the Managers and Affiliates remain subject
to the limitation that, when added to such expenses paid to third
parties, they will not exceed 20% of capital contributions.
Further, all reimbursements must be provided at a cost that is
less than or equal to the price that would be paid to an
unaffiliated party rendering comparable services in the same
geographic area. Although the Managers expect that such
reimbursements will be less than the fees they would otherwise be
allowed to be paid, pursuant to Section 6.2 of the Operating
Agreement the aggregate Cost of such reimbursements could
approach an amount equal to the fees the Managers are allowed to
be paid under applicable state regulation.
The following table sets forth the forms of compensation,
Fund distributions and cost reimbursements that will or may be
paid by the Fund to the Managers or their Affiliates in
connection with the organization, operation and liquidation of
the Fund and its properties, assuming the minimum 1,500 Units and
the maximum 24,000 Units are sold.
-22-
The following arrangements were formulated by the Managers and
are not the result of arm's-length negotiations with the Fund.
PERSON OR ENTITY
RECEIVING FORM AND METHOD ESTIMATED
COMPENSATION OF COMPENSATION DOLLAR AMOUNT
OFFERING STAGE
AEI Securities Selling commissions and $2,520,000 (maximum) and
Incorporated nonaccountable expense $157,500 (minimum), all but
allowance equal to 10% of approximately $480,000
proceeds, all or a portion maximum) and $30,000
of which may be reallowed to (minimum) of which is
Participating Dealers, and a expected to be reallowed.
1/2% due diligence allowance,
a portion of which will be
reallowed to Participating
Dealers.
Managers and Reimbursement at Cost for Estimated $840,000(maximum)
Affiliates other Organization and and $67,500 (minimum), but
Offering Expenses(1). subject to limitation(2).
Most Organization and
Offering Expenses are paid
or repaid to nonaffiliates.
PROPERTY ACQUISITION STAGE
Managers and Reimbursement at Cost for all Estimated $700,000 (maximum)
Affiliates Acquisition Expenses (3). and $60,000 (minimum), but
subject to the limitation(3)
OPERATING STAGE
Managers Three percent (3%) of Net Not Presently Determinable
Managers and Reimbursement at Cost for all Estimated $75,000 to
Affiliates Administrative Expenses for the first 12 months of
attributable to the Fund, opertations. The cumulative
including all expenses related amount of such expense
to management and disposition reimbursements for general
of the Fund's properties and overhead of the Managers and
all other transfer agency, Affiliates, and for
reporting, Investor relations controlling person expenses,
and other administrative together with Front-End Fees
functions. (4) and sales expenses, are
subject to limitations. (4)
LIQUIDATION STAGE
Managers 1% of distributions of Net Not Presently Determinable
Proceeds of Sale until
Investors have received an
amount equal to (a) their
Adjusted Capital Contributions,
plus (b) an amount equal to 7%
of their Adjusted Capital
Contributions per annum,
cumulative but not compounded,
to the extent not previously
distributed. 10% of distributions
of Net Proceeds of Sale thereafter.
-23-
(1) Includes federal and state securities registration fees,
fees of counsel, accountant's fees, printing expenses, and
other out-of-pocket expenses paid to nonaffiliates.
(2) To the extent Organization and Offering Expenses exceed all
Organization and Offering Expenses (including payments to
the Dealer Manager and third parties) when added to
Acquisition Expenses, exceed 20% of the capital
contributions, they will be borne by the Managers.
(3) See Section 2.1 of the Operating Agreement for the
definition of Acquisition Expenses. All such expenses will
be paid at Cost (as defined in the Operating Agreement). To
the extent that all Acquisition Expenses, when added to
Organization and Offering Expenses, exceed the lesser of
20% of the capital contributions, they will be borne by the
Managers.
(4) Subject to the limitations set forth in Section 6.2(b) of
the Operating Agreement, the Fund will reimburse the
Managers and their Affiliates at Cost for their
Administrative Expenses incurred in managing all operations
of the Fund, including such Expenses incurred in connection
with providing services for the acquisition, leasing, and
operation of properties. Such expenses include the
salaries, fees and expenses paid to employees and
consultants of the Managers and such Affiliates for work
performed relative to the Fund including office rent,
telephone, travel, employee benefit expenses and other
expenses attributable to the performance of such services.
The majority of these expenses are allocated based on the
number of hours devoted by employees to the affairs of the
Fund, as recorded on daily time records of such employees
and the remainder are allocated at the end of each month
based upon the number of Investors and the capitalization of
the Fund. The cumulative amount of such expense
reimbursements for general overhead of the Managers and
Affiliates, and for controlling person expenses, together
with Front-End Fees and sales expenses may not exceed the
sum of (i) 20% of capital contributions, (ii) 5% of revenues
from properties, (iii) a 3% sales commission, and (iv) 10%
of Net Cash Flow (after such reimbursements) less amounts
paid to the Managers as their shares of cash flow.
No real estate commissions will be paid to the Managers
or Affiliates in connection with the purchase or sale of any of
the Fund's properties. The Managers and Affiliates are,
however, compensated at their Cost, subject to the limitations
set forth in the preceding table and in Section 6.2 of the
Operating Agreement, for all expenses they incur in connection
with the purchase and sale of properties. No Acquisition Fees
will be paid to the Managers. The Managers and their Affiliates
will not be compensated for services not set forth in the table
above.
CONFLICTS OF INTEREST
The Fund will be subject to actual and potential conflicts
of interest arising out of relationships with the Managers and
their Affiliates. These conflicts include, but are not limited
to, the following:
LACK OF ARM'S-LENGTH NEGOTIATIONS
Both during the operation of the Fund and upon its
liquidation, the Managers may realize income from the Fund. The
agreements and arrangements, including those relating to
compensation, between the Fund and the Managers are not the
result of arm's-length negotiations. Moreover, because a
significant portion of the Managers' compensation will not be
payable until the sale of Fund properties, the interests of the
Managers and the Investors with respect to the timing and price
of such sale may conflict.
OTHER REAL ESTATE ACTIVITIES OF MANAGERS
The Managers and their Affiliates are actively engaged in
the net lease commercial property real estate business as general
partners in other Programs. Mr. Johnson also intends to offer
additional real estate Program interests in the future. The Fund
will not have independent management and it will rely on the
Managers and their Affiliates for its operations. The Managers
will devote only so much of their time to the business of the
Fund, as in their judgment, is reasonably required. It is
anticipated that, although Mr. Johnson may personally devote
approximately 60% of his time to the business of the Fund during
its offering and property acquisition stages, the amount of time
he spends on Fund activities will probably be less than 10% of
his overall work time thereafter. The allocation of management
time, services and functions among various existing Programs and
any future Programs that the Managers and their Affiliates may
-24-
organize, as well as other business ventures in which they are
involved, may create conflicts of interest. The Managers and
their Affiliates believe that they have, or can retain,
sufficient staff to be fully capable of discharging their
responsibilities to all Programs with which they are affiliated.
COMPETITION WITH MANAGERS AND OTHER AFFILIATED PROGRAMS FOR
PURCHASE AND SALE OF REAL PROPERTY
The Managers and their Affiliates may engage in other
business ventures, including forming and sponsoring other public
or private Programs, and neither the Fund nor any investor will
be entitled to any interest therein.
It is possible from time to time that the Fund will have
proceeds available to acquire additional properties at the same
time as other Programs sponsored by the Managers or their
Affiliates. In the event that both the Fund and another Program
managed by the Managers and their Affiliates have capital
available for investment in the same or similar properties,
conflicts of interest will arise as to which of the Programs
should proceed to acquire the property or properties involved.
In such situations, the Managers and their Affiliates will review
the investment portfolio of each Program and will make the
decision as to which Program will acquire the property on the
basis of several factors, including (i) the cash flow
requirements of each Program, (ii) the degree of diversification
of each Program, (iii) the estimated income tax effects of the
purchase on each Program, (iv) the amount of funds available to
each Program and (v) the length of time such funds have been
available for investment. If funds should be available in two or
more Programs to purchase a given property or properties and the
factors enumerated above have been evaluated and deemed equally
applicable to each Program, the property will be acquired by the
Program that first reached its minimum investment level, and any
other conflicts that arise will be resolved by the Managers in
their discretion.
In addition, conflicts of interest may arise between the
Fund, the Managers and other Programs with which the Managers are
affiliated under other circumstances, such as when the Fund
attempts to sell or rent real property. The Managers may sell
less than 100% of the interest in a property and the Fund may own
a fractional interest in the real estate being sold. The
Managers may be forced to choose between selling the interest in
the property that is held by the Fund and the interest that is
held by the Manager or another affiliated Program. Such
conflicts will be generally be resolved by the Managers, in their
discretion, after consideration of the investment objectives of
the Program holding interests in the property and the length of
time until the planned final disposition of properties by such
Programs. The Managers may allow the sale of the fractional
interest held by the Managers or another affiliated Program prior
to the sale of the interest held by the Fund. There can be no
assurances that the terms of sale of all fractional interest in a
property that are sold at different times will be the same.
POSSIBLE JOINT INVESTMENT WITH AFFILIATED PROGRAMS
The Fund may invest in a property jointly with another
Program sponsored by the Managers or their Affiliates under the
conditions described in "Investment Objectives and Policies--
Joint Venture Investments." In the event of such a joint venture,
conflicts of interest could arise between the joint venture
partners.
MANAGER'S REPRESENTATION OF FUND IN AUDIT PROCEEDINGS
The Manager will act as the "tax matters partner" pursuant
to Section 6231 of the Internal Revenue Code. This grants the
Manager certain discretion and authority regarding extensions of
time for assessment of additional tax against the Investors
related to Fund income, deductions or credits and settlement or
litigation of controversies involving such items. The positions
taken by the Manager on tax matters may have differing effects on
the Managers and the Investors. Any decisions made by the
Manager with respect to such matters will be made in good faith
consistent with its fiduciary duties to the Fund and the
Investors. The Manager, to the extent its actions as tax matters
partner are in good faith and reasonably intended to be in the
best interests of the Fund and subject to the indemnification and
exculpation language contained in the Operating Agreement, may be
entitled to indemnity for liability incurred as a result of such
actions. See Exhibit A, Section 6.5 at Page A-14.
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LACK OF SEPARATE REPRESENTATION
The Fund, the Investors and the Managers are not represented
by separate counsel. The attorneys and accountants who will
perform services for the Fund also perform services for
Affiliates of the Fund, including the Managers, AEI Securities
Incorporated (the Dealer-Manager) and other Affiliates of the
Managers. Without independent legal representation, investors
may not receive legal advice regarding certain matters that might
be in their interest but contrary to the interest of the Managers
and their Affiliates. Should a dispute arise between the Fund
and the Managers or their Affiliates or should negotiations or
agreements between the Fund and the Managers, other than those
existing or contemplated on the effective date of this
Prospectus, be necessary, the Managers will cause the Fund to
retain separate counsel for such matters. Any future agreement
between the Fund and the Managers or their Affiliates will
provide that such agreement may be terminated at the option of
the Fund upon 60 days' notice without penalty to the Fund.
AFFILIATION OF SELLING AGENT
AEI, which is wholly owned by Robert P. Johnson, is serving
as Dealer-Manager for the offering of Units. Accordingly, the
"due diligence" investigation customarily performed by an
underwriter is being performed by an Affiliate of the Managers.
AEI believes, however, that such due diligence has, in fact, been
exercised. Moreover, under Section 34 of Article III of the NASD
Rules of Fair Practice, each Participating Dealer has an
obligation to make an appropriate independent inquiry about the
offering.
EXPENSE REIMBURSEMENTS
The Managers and their Affiliates are reimbursed at their
Cost for the services they perform on behalf of the Fund. As
defined in the Operating Agreement, Cost includes salaries of
controlling persons and certain items of overhead attributable to
the furnishing of services. This salary and expense reimbursement
would not be allowed under administrative interpretations of some
state "blue sky" laws, known as the "NASAA Guidelines," in a
traditional real estate program. Instead, these state
interpretations provide for the payment of fees based on a
percentage of revenue or sales proceeds and a 10% interest in Net
Cash Flow to cover these administrative costs. Reimbursement to
the Managers and Affiliates of other Administrative Expenses that
would not be allowed if the Fund paid the increased interest in
Net Cash Flow and the fixed fees are limited to the extent they
would exceed the aggregate of the fixed fees and the Net Cash
Flow interest the Managers are allowed under applicable
regulation but not paid in the Fund. In addition, Organization
and Offering Expenses and Acquisition Expenses reimbursed to the
Managers and Affiliates remain subject to the limitation that,
when added to such expenses paid to third parties, they will not
exceed 20% of capital contributions. Further, all reimbursements
must be provided at a cost that is less than or equal to the
price that would be paid to an unaffiliated party rendering
comparable services in the same geographic area. Although the
Managers expect that such reimbursements will be less than the
fees and increased interest in Net Cash Flow they would otherwise
be allowed to be paid under state securities laws, pursuant to
Section 6.2 of the Operating Agreement the aggregate Cost of such
reimbursements can be as much as the fees and increased interest
in Net Cash Flow interest the Managers are allowed to be paid
under applicable state regulation.
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CASH DISTRIBUTIONS AND TAX ALLOCATIONS
CASH DISTRIBUTIONS
The Managers intend to make distributions of available Net
Cash Flow, if any, within 30 days after the end of each fiscal
quarter. The Fund's objective is to acquire net leased
properties which will generate partially "tax deferred" cash
distributions to Investors. Net Cash Flow from operations, if
any, with respect to each fiscal year will be distributed 97% to
the Investors and 3% to the Managers.
Upon financing, sale or other disposition of any of the
properties, Net Proceeds of Sale may be reinvested in additional
properties. Net Proceeds of Sale that are not reinvested in
additional properties will be distributed as follows:
(a) First, 99% to the Investors and 1% to the Managers
until the Investors have received an amount from Net
Proceeds of Sale equal to the sum of (i) their Adjusted
Capital Contributions, plus (ii) an amount equal to a 7% per
annum return on their Adjusted Capital Contributions,
cumulative but not compounded, to the extent such 7% return
has not been previously distributed to them.
(b) Any remaining balance will be distributed 90% to
the Investors and 10% to the Managers.
The 1% unsubordinated interest in Net Proceeds of Sale
received by the Managers for a $1,000 capital contribution is not
proportionate to the interest that would be received by an
Investor with the same capital contribution.
TAX ALLOCATIONS
For income tax purposes, all income, profits, gains and
losses of the Fund for each fiscal year, other than any gain or
loss realized upon the sale, exchange or other disposition of any
of the Fund's properties, shall be allocated as follows: (a)
net loss shall be allocated 99% to the Investors and 1% to the
Managers so long as the Investors have positive balances in their
capital accounts (if their capital accounts are reduced to zero,
all losses are allocated to the Managers; and (b) net income will
be allocated first in the ratio, and to the extent, Net Cash Flow
is distributed to the Investors for such year and any additional
income for such year will be allocated in the same ratio as the
last dollar of Net Cash Flow is distributed.
For income tax purposes, the gain realized upon the sale,
exchange or other disposition of any property will be allocated
as follows:
(i) first, to and among the Investors in an amount
equal to the negative balances in their respective capital
accounts (pro rata based on the relative amounts of such
negative balances),
(ii) then, 99% to the Investors and 1% to the Managers
until the balance in each Investor's capital account equals
the sum of such Investor's Adjusted Capital Contribution
plus an amount equal to a 7% per annum return on such
Investor's Adjusted Capital Contribution, cumulative but not
compounded, to the extent not previously distributed,
(iii) the balance of any remaining gain will then
be allocated to the Investors and the Managers in the same
manner as the last dollar distributed.
For income tax purposes, any loss on the sale, exchange or
other disposition of any property shall be allocated 98% to the
Investors and 2% to the Managers.
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INCOME TAX ASPECTS
The complexity of the applicable federal income tax laws and
regulations prevents a detailed explanation of the federal income
tax treatment of the Fund or the tax treatment of investors in
the Fund; and, except as specifically stated below, no
representations can be made as to state income tax consequences
or that any federal income tax consequence described below will
be realized. A prospective investor is urged to consult with and
must rely upon his or her counsel and accountant (and be
responsible for their fees for advice) concerning the state and
federal income tax consequences of ownership of Units that are
attributable to the investor's personal tax situation.
Furthermore, investors must realize that periodic consultations
with respect to their individual tax situations may be necessary
because of future changes in the applicable statutes and
regulations or in their interpretations by the courts or the
state or federal tax authorities.
OPINION OF COUNSEL
Dorsey & Whitney LLP, counsel to the Fund, has rendered an
opinion on all material federal tax issues relating to an
investment in the Fund which involves a reasonable possibility of
challenge by the Internal Revenue Service or, where such an
opinion cannot be rendered with respect to a material tax issue,
has described the reasons for the inability to so opine. As set
forth below, counsel has not rendered an opinion on certain
federal tax issues whose outcome depends to a large extent upon
facts and circumstances that will only be determinable or will
arise in the future. In particular, for the foregoing reasons
and as more fully described below, no opinion is given with
respect to the probable outcome as to certain tax issues that
could be considered material to an investment in the Fund, such
as (i) the allocation of basis among buildings (the cost of which
is depreciable), personal property (the cost of which is
depreciable over a shorter period), and the underlying land (the
cost of which is not depreciable), (ii) whether the Fund will be
characterized as a "dealer" in real estate at the time of sale or
disposition of the Fund's properties, (iii) whether the
Properties will be considered to be "held for investment," (iv)
whether the leases to be entered into by the Fund will be "true
leases"or will be "stepped payment leases" for purposes of
determining whether the Fund will be considered an "owner" of
properties entitled to take depreciation and other deductions
thereon and for purposes of the timing of recognition of rental
income thereon, and (v) whether the Fund's allocation of start-
up, organization, syndication and acquisition expenses for
purposes of the deduction or capitalization of such expenses will
be upheld. Where counsel has not issued an opinion because the
factors relevant to the issue involved cannot be determined at
this time, depend on an investor's tax situation, or turn on
aspects of law that are at present uncertain, no inferences
should be drawn as to any possible legal outcome.
Subject to the information contained herein, counsel has
advised the Fund that in the aggregate the significant tax
benefits, as described herein, potentially available to an
investor will probably be realized. Counsel has reviewed the
material set forth under "Income Tax Aspects" and "Risk and Other
Important Factors--Tax Aspects" and believes that such material
constitutes a full and fair general disclosure of the material
tax risks associated with an investment in the Units.
An opinion of counsel represents only such counsel's best
legal judgment and has no binding effect or official status of
any kind. No assurance can be given that the conclusions reached
in an opinion would be sustained by a court if challenged by the
Service. Therefore, investors will assume the risks of a Service
challenge of the tax interpretations set forth herein or
otherwise made by the Fund or the Managers and the risks of
changes in tax laws, rules, regulations and interpretations.
Counsel's opinion, which is summarized herein, has been
filed with the Securities and Exchange Commission as Exhibit 8 to
the Fund's registration statement, of which this Prospectus is a
part.
GENERAL
A limited liability company formed under the Delaware
Limited Liability Company Act is generally treated in the same
manner as a limited partnership for federal income tax purposes.
The limited liability company form has been employed in an effort
to allow Investors in the Fund to obtain a direct pass-through of
their pro rata share of the operating results of the Fund. Under
the Internal Revenue Code of 1986, as amended (the "Code"), no
federal income tax is payable by a limited liability company that
is not a "publicly traded partnership." Each Investor and
Manager is required to report on his or her federal income tax
return his or her distributive share of the profits, losses,
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gains, income, deductions and credits of the Fund. Subject to
certain limitations, including limitations on passive activity
losses (See "Personal Tax Consequences--Losses and Credits from
Passive Activities"), each Investor and Manager may deduct his or
her share of the Fund's losses, if any, for any Fund fiscal year
on his or her individual return to the extent of the adjusted
basis of his or her interest in the Fund as of the end of such
year. Likewise, each Investor and Manager must include his or
her distributive share of any Fund taxable income for each year
with his or her other taxable income whether or not he or she has
received cash distributions from the Fund during such year.
PARTNERSHIP STATUS
The Fund has received an opinion from its legal counsel to
the effect that under currently applicable Treasury Regulations,
which Regulations they believe to be controlling, the Fund will
be treated as a partnership for federal income tax purposes and,
subject to the discussion below under "Income Tax Aspects--
Publicly Traded Partnership", will not constitute an
"association" taxable as a corporation. In rendering this
opinion, legal counsel is relying principally on the existing
Treasury Regulations under Section 7701 of the Code and on the
Fund's representation that the Fund will not, for any period,
elect to be treated as an "association" under Regulation Section
301.7701-3.
Effective January 1, 1997, the Service substantially revised
the Regulations under Code Section 7701. Under Section 301.7701-
2(b) of the current Regulations, certain specified categories of
business entities are classified as corporations for federal
income tax purposes, as are "associations" under Regulation
Section 301.7701-3. Under Regulation Section 301.7701-2(c), a
partnership means any other type of business entity which has at
least two members.
Under current Regulation Section 301.7701-3, a business
entity which is not classified as a corporation because it
belongs to one of the specified categories of entities (which do
not include a limited liability company, such as the Fund) (an
"eligible entity") having two or more members can elect to be
classified as an association (and thus taxable as a corporation)
instead of a partnership. Such an entity would then be treated
as a corporation for federal income tax purposes. If an election
is not made as provided in the Regulations, an eligible entity
with two or more members will automatically be classified as a
partnership.
Therefore, assuming the Fund will not elect to be classified
as an association under the current Regulations, counsel is of
the opinion that the Fund will be classified as a partnership for
federal income tax purposes.
PUBLICLY TRADED PARTNERSHIPS
The Code contains several provisions that significantly
change the tax treatment of "publicly traded partnerships" and
the income and loss they generate. Under the Code, unless 90% of
a publicly traded partnership's income is from passive-type
investments, a publicly traded partnership will be taxed as if it
were a corporation.
Generally, income from a publicly traded partnership will be
treated as portfolio income. Such income from a publicly traded
partnership cannot be offset by passive losses from other sources
and losses from the publicly traded partnership cannot be used to
offset passive income from other sources.
The Code defines an entity as a "publicly traded
partnership" if (i) interests in the entity are traded on an
established securities market, or (ii) interests in such entity
are readily tradeable on a secondary market (or the substantial
equivalent thereof). Treasury Regulations issued in November
1995 under Section 7704 of the Code provide that an established
securities market includes an national exchange registered under
the Securities Exchange Act of 1934, or exempted therefrom
because of limited volume, any regional or local exchange or any
inter-dealer quotation system that regularly disseminates firm
buy or sell quotations. The Regulations provide that a
"secondary market" or its "substantial equivalent" exists if
interests in the entity are regularly quoted by any person making
a market in the interests, any person regularly makes available
bid or offer quotes and stands ready to effect buy or sell
transactions at the quoted prices, the holder of a partnership
interest has a readily available regular and ongoing opportunity
to sell or exchange the interest through a public means of
obtaining or providing information of offers to by, sell or
exchange the partnership interest, or there is any other
opportunity to buy, sell or exchange interests in the partnership
in a manner that is comparable to the foregoing.
-29-
The Treasury Regulations provide for several "safe harbors"
from the definition of a "publicly traded limited partnership."
Interests in an entity will not be considered readily tradeable
on a secondary market or its substantial equivalent if the
interests traded during the tax year represent two percent or
less of the entity's capital or profits if transfers executed
through a matching service or pursuant to certain redemption and
repurchase agreements are excluded from the calculation.
Generally, transfers of interests by gift, at death, between
family members, as a distribution from a retirement plan, as a
large block, and at original issue, regardless of volume, will be
disregarded for purposes of the safe harbor test above.
The Manager will not list the Units for trading on an
exchange, in the over-the-counter market, or in any inter-dealer
quotation system. Although it is likely that some transfers of
Units will occur, such transfers will be on an individual basis
and will not be negotiated in a time frame comparable to that
which would be available on a secondary market. The Operating
Agreement provides that the Managers may refuse to recognize any
transfer or refuse to repurchase any Units if such transfer or
repurchase, together with all other transfers or repurchases of
Units in the same calendar year other than the exempt transfers
noted above, would exceed five percent of the Units outstanding
at the beginning of such calendar year. The Operating Agreement
also provides that, if the Managers permit a non-exempt transfer
in excess of the test described above, such transfer, together
with all other transfers for such calendar year, but excluding
transfers made through the repurchase provisions or Qualified
Matching Services, cannot exceed two percent (2%) of the Units
outstanding.
Based upon existing interpretations of the Service and the
foregoing provisions of the Operating Agreement, and provided
that any transfers are made in accordance with such
interpretations and provisions, counsel to the Fund is of the
opinion that the Fund will not be considered a publicly traded
partnership as contemplated by the Code.
ALLOCATIONS
The Operating Agreement allocates to each Investor and
Manager his or her distributive share of income, gain, loss,
deduction, or credit. The Operating Agreement also provides for
a specific allocation of Fund proceeds among the Investors and
the Managers upon dissolution and termination of the Fund, upon
the refinancing, sale, or other disposition of the Fund
properties, and a specific allocation of cash flow. Section
704(b) of the Internal Revenue Code provides that the allocations
under the Operating Agreement shall govern unless those
allocations do not have substantial economic effect. In the
event the allocations in the Operating Agreement do not have
substantial economic effect, the distributive share of income,
gain, loss, deduction, or credit (or item thereof) of each
Investor and Manager shall be determined in accordance with the
interest in the Fund held by such Investor or Manager.
Regulations under Section 704(b) impose three requirements
for an allocation to be deemed to have economic effect: (1)
capital accounts must be maintained in accordance with the rules
established in the final Regulations; (2) upon liquidation,
liquidating distributions are required in all cases to be made in
accordance with positive capital account balances; and (3) if a
partner has a deficit balance in his or her capital account at
the time of liquidation of the partner's interest in the entity,
he or she must be unconditionally obligated to restore such
negative balance to the partnership. The Regulations further
provide an alternate test for economic effect. If requirements
(1) and (2) above are met and the entity contains a "qualified
income offset," an allocation that does not cause or increase a
deficit balance in a partner's capital account will be deemed to
have economic effect.
The Operating Agreement complies with requirements (1) and
(2) above, and contains a "qualified income offset" provision.
Therefore, assuming that throughout the term of the Fund, all the
Investors and Managers have positive balances in their capital
accounts (determined after adjusting such accounts for reasonably
expected adjustments of the nature described in Treasury
Regulation 1.704-1(b)(2)(ii)(d)(4), (5) and (6) and for the
share of minimum gain under Treasury Regulation 1.704-2(g)(1)
of each such Investor and Manager), the allocations made under
the Operating Agreement should be deemed to have economic effect
under Section 704(b) and the Treasury Regulations. The Manager
anticipates that the Investors will maintain such a positive
balance (after adjustment as set forth above) in their capital
accounts throughout the term of the Fund. In the event the
Investors were to have negative balances in their capital
accounts (after adjustment as set forth above), the Operating
Agreement provides that losses will not be allocated to the
Investors.
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Under the Treasury Regulations, the economic effect of an
allocation must also be "substantial" in order to be recognized
for tax purposes. An allocation is generally treated as being
"substantial" if there is a reasonable possibility that the
allocation will affect substantially the dollar amounts the
participants will receive from the entity, independent of tax
consequences. However, the economic effect of an allocation is
not substantial if (1) the after-tax economic consequences of at
least one participant may be enhanced by the existence of the
allocation, and (2) there is a strong likelihood that the after-
tax economic consequences of no participant will be substantially
diminished by the existence of the allocation. For purposes of
this determination, tax attributes of the participants that are
unrelated to the entity must be taken into account.
It appears that the allocations provided for in the
Operating Agreement will affect substantially the dollar amounts
the Investors and Managers will receive from the Fund, and
therefore satisfy the "substantiality" requirement of the
Treasury Regulations. Although Counsel is unable to make a
determination as to the after-tax economic consequences to the
Investors and Managers of the allocations given the inherently
factual nature of this inquiry, Counsel has no reason to believe
that these consequences will result in failure to satisfy the
"substantiality" requirement. Accordingly, it appears that the
allocations provided for in the Operating Agreement will be found
to be substantial under the Treasury Regulations.
It is expected that the debt that the Fund may incur in
connection with the acquisition of its properties will be
considered nonrecourse financing under applicable Treasury
Regulations. Deductions with respect to nonrecourse financing
(for example, depreciation on a building financed with
nonrecourse debt) are referred to in the Regulations as
"nonrecourse deductions." To establish substantial economic
effect with respect to nonrecourse deductions, such deductions
must be allocated in accordance with the participants interests
as determined by Regulations Section 1.704-2(e), which requires
among other things that the partnership agreement contain a
provision known as a "minimum gain chargeback." "Minimum gain" is
defined as the amount of gain, if any, that would be realized by
a partnership if it disposed of the property subject to the
liability for no consideration other than the satisfaction of the
liability. Thus, a minimum gain occurs each year the outstanding
nonrecourse indebtedness at the end of the year exceeds the
adjusted tax basis of the property at the end of the year. A
"minimum gain chargeback" provision requires that, if there is a
net decrease in partnership minimum gain for any taxable year,
for that year each partner must be allocated items of partnership
gain and income equal to that partner's share of the net decrease
in partnership minimum gain, computed according to the manner
prescribed in the Regulations. The Operating Agreement for the
Fund contains a "minimum gain chargeback" and appears to
otherwise comply with the requirements of Regulations Section
1.704-2(e).
It is the opinion of counsel for the Fund, therefore, as of
the date of this Memorandum, that, assuming that all the
Investors and Managers have positive balances in their respective
capital accounts (determined after adjusting such capital
accounts as noted above) throughout the term of the Fund and that
the after-tax economic consequences of the allocations made
pursuant to the Operating Agreement do not violate the
"substantiality" requirement imposed by the Regulations, it is
more likely than not that the allocations to an Investor, if
properly made in accordance with the Operating Agreement, will
have substantial economic effect within the meaning of Section
704(b) of the Code. Counsel is unable to render an opinion on
the allocation of losses or deductions where the Investors have
negative balances in their respective capital accounts (adjusted
as noted above) given the absence of an unlimited deficit
restoration obligation by any of the Investors. It is assumed
for purposes of this opinion that the allocations in the
Operating Agreement do not, by design or in practice, provide for
allocations to Investors based on their individual tax situation
or status. Because the interpretation of certain aspects of the
Regulations under Section 704(b) is still uncertain, no assurance
can be given that the allocations contained in the Operating
Agreement will not be challenged by the Service.
TAX-EXEMPT USE PROPERTY
Units will be purchased by both tax-exempt entities and
investors not exempt from taxation. Section 168(h)(6) of the
Code provides that in certain instances where a limited liability
company has as members both tax-exempt entities and persons or
entities not exempt from taxation, a portion of the property
owned by the limited liability company will be deemed tax-exempt
use property that must be depreciated over the greater of 40
years or 125% of any long-term lease. Under Section 168(h)(6),
unless the allocation of tax items under the Operating Agreement
is determined to be a qualified allocation, any property owned by
the Fund will be deemed to be tax-exempt use property to the
extent of the tax-exempt entities' proportionate share of the
Fund. A qualified allocation is an allocation to a tax-exempt
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entity that is consistent with the entity's being allocated the
same distributive share of income, gain, loss, deduction, credit
and basis during the entire period the entity is a partner, and
which allocation has substantial economic effect as determined
under Section 704(b)(2). The Operating Agreement provides for
varying allocations of profits, losses and items of income of the
Fund.
Although the issue is somewhat uncertain because of the lack
of clear guidelines in applicable Temporary and Proposed
Regulations, counsel for the Fund has reviewed the allocation
provisions contained in the Operating Agreement and believes
that, pursuant to existing authority, such allocations are not
qualified allocations under Section 168(h)(6). Although
Investors that are tax-exempt entities will be allocated
distributive shares of income, gain, loss, deduction, credit and
basis in the same manner and in the same proportion that such
items are allocated to Investors who are not tax-exempt entities,
such allocations are not the same during the entire period that
such entities are members. Therefore, it is likely that, to the
extent of the interests of tax-exempt Investors in the Fund, a
portion of the Fund's property will be depreciated over 40 years
and that depreciation deductions to all Investors will be
decreased in early years of operation as a result of this
adjustment.
STATUS OF THE FUND AS OWNER AND LESSOR OF THE IMPROVEMENTS
Although it is anticipated that the Fund will be treated as
the owner of the properties, the Service has taken the position
in certain situations that certain lease transactions should be
treated as financing transactions with the result that, for
federal income tax purposes, the lessor of the property is not
treated as the owner and is not entitled to take depreciation and
other deductions with respect to his or her investment. In
several cases the Service has been sustained in court on this
issue. In this regard, the Service has promulgated guidelines in
Revenue Procedure 75-21, 1975-1 C.B. 715, indicating the
conditions that must be satisfied in order to obtain an advance
ruling that the lessor is the owner of property for federal
income tax purposes. Some of these conditions may not be met by
the Fund in its anticipated net leasing of the properties.
Nevertheless, Revenue Procedure 75-21 expressly states that the
guidelines do not define, as a matter of law, whether a
transaction is or is not a lease and are not intended to be used
for audit purposes.
In recent cases in which the ownership status of the lessor
has been upheld for tax purposes, the courts have given
significant weight to such factors as (1) the presence of a third-
party lender; (2) the possibility that the lessor will obtain
material non-tax benefits from its ownership of the property; and
(3) the structuring of purchase options granted to the lessee in
such a fashion that the purchase price is "fair" and there is no
"economic compulsion" on the part of the lessee to purchase the
property pursuant to such options. Moreover, in several recent
cases, the courts rejected arguments by the Service that such
factors as the net nature of the lease, the nonrecourse nature of
the mortgage loan or the equivalence of rental payments due under
the lease to debt service payments due under the mortgage loan
evidence a lack of ownership by the lessor for tax purposes.
See, e.g., DUNLAP V. COMMISSIONER, 74 T.C. 1377 (1980); SANDERSON
V. COMMISSIONER, 50 T.C. 1033 (1985); HILTON V. COMMISSIONER, 671
F.2d 316 (9th Cir. 1982).
Leases entered into by prior Programs sponsored by the
Managers and their Affiliates have, in general, contained terms
indicative of ownership in accordance with the factors enumerated
above. The Managers will continue to attempt to enter into
leases that will result in the Fund being treated as the owner of
the leased property. Nevertheless, the characterization of
transactions as leases involves analysis of complex factual
situations under evolving judicial doctrines and, because the
Fund has not yet entered into any leases and no analysis thereof
is possible, counsel for the Fund has not expressed an opinion on
the status of the Fund as owner and lessor of properties.
STEPPED PAYMENT LEASES
Under Section 467 of the Code, a lessor may be required to
accrue rental income for income tax purposes during a taxable
period in amounts that differ from the actual rental payments
received during such period if (i) rental payments are made after
the close of the calendar year following the calendar year in
which the use of the property occurs, or (ii) rental payments
increase over the term of the lease ("Section 467 Lease").
If a lease is a Section 467 Lease but is not a disqualified
leaseback or long-term agreement described below, the lessor must
include in current income for any period rentals allocated by the
lease to that period plus the present value of rentals allocated
to such period but not paid until future periods. Accordingly,
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unless such a Section 467 Lease allocates rent to periods earlier
than the payment date of such rent, Section 467 should not have
any effect on the taxable income from such lease.
If a lease that is a Section 467 Lease does not allocate
rent to specific periods or, subject to certain exceptions, (i)
is entered into in a leaseback transaction, or (ii) is for a term
of in excess of 75% of the statutory recovery period for the
property subject to the lease, and (iii) provides for increasing
rents to avoid income taxation (a "disqualified leaseback or long-
term agreement"), the lessor may be required to disregard actual
rental payments and accrue and recognize as income in each lease
period a constant amount which, if paid as of the close of each
lease period under the rental agreement, would result in an
aggregate present value equal to the present value of the
aggregate payments required under the agreement.
Proposed Treasury Regulations issued in June 1996 provide
that a leaseback or long-term agreement will not be
"disqualified" unless the total value of the rental payments
reasonably expected to be made as of the date of the rental
agreement exceeds $2 million. Furthermore, a leaseback or long-
term agreement will not be "disqualified" unless a principal
purpose for providing for increasing or decreasing rent is the
avoidance of federal income tax. The avoidance of federal income
tax will not be considered a principal purpose for providing for
increasing or decreasing rent if either one of the following is
true: (1) the rent allocated to each calendar year does not vary
from the average rent allocated to all calendar years by more
than 10%; or (2) all of the increases and decreases in rent are
attributable to one or more of the following provisions: (i) a
rental increase provision based on a percentage of the lessee's
receipts, (ii) an adjustment based on a "reasonable price index,"
(iii) a provision requiring the lessee to pay third-party costs,
or (iv) a rent holiday provision allowing reduced or no rent for
a period at the beginning of the lease term if certain conditions
are met.
Lessors under leaseback or long-term agreements who are not
required to accrue a constant amount must, upon disposition of
the property subject to the lease, recapture as ordinary income
the lesser of (i) the difference between the amount which would
have been taken into account had the lessor been required to
accrue a constant amount and the amount actually taken into
account for the periods prior to the disposition or (ii) the gain
realized.
Prior Programs have entered into leases which may qualify as
Section 467 Leases. In certain instances, such agreements may
require accrual of a constant amount or may require recapture on
the disposition of the property subject to the lease. Because
the Fund has not yet entered into any lease agreements, it is not
possible to determine what treatment of the Fund's leases may be
required under Section 467. If the Fund enters into agreements
that require accrual of a constant amount, such an accrual could
result in the Fund's recognition in certain years of a greater
amount of income than is actually received. If, on the other
hand, the Fund is required to recapture ordinary income on the
disposition of property subject to its leases, the Fund will
recognize ordinary income rather than capital gain to the extent
of the recapture. For individuals, estates, and trust, ordinary
income is currently subject to a top marginal rate of 39.6% while
long-term capital gains (applicable in the case of property held
over 18 months) are subject to a top marginal rate of 20%.
ORGANIZATION AND SYNDICATION COSTS AND OTHER PAYMENTS TO THE
MANAGERS
The Managers and their Affiliates will be reimbursed for all
costs incurred by the Managers or such Affiliates that are
attributable to the Fund. Such reimbursements will include costs
incurred in syndicating, organizing and managing the Fund, as
well as an allocation of related general and administrative costs
of the Managers and their Affiliates. The Managers will
categorize reimbursements as start-up, syndication, organization,
management or acquisition costs.
Section 709 of the Code denies the Fund a deduction for
amounts paid or incurred in connection with the issuance or
marketing of Units ("syndication expenses"). However, under
Sections 709 and 195 of the Code, amounts paid or incurred to
organize the Fund ("organization expenses"), or to create an
active trade or business conducted by the Fund ("start-up
expenses") may be amortized over a period of not less than 60
months. The Managers will allocate certain expenses between
syndication, organization and start-up and may amortize certain
organization and start-up expenses. There can be no assurance
that the Service will accept the Managers' determination of the
classification of the costs with respect to syndicating and
organizing the Fund, and because the issue is factual in nature,
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counsel to the Fund has not issued an opinion on this issue. The
Managers, however, will attempt to follow the applicable Treasury
Regulations relating to which costs qualify as organizational
costs and which costs are deemed syndication costs.
Acquisition Expenses incurred in connection with acquired
properties will generally be added to the purchase price and
amortized. All other reimbursements will be deducted as
management expenses. The Service has successfully challenged the
deductibility of such payments to general partners in other cases
and may allege that such expenses reimbursed to the Managers or
an Affiliate are not currently deductible by the Fund. The
Managers believe that the management expenses to be reimbursed to
the Managers or an Affiliate by the Fund will be deductible
either under Code Section 707(a) (transactions between a limited
liability company and a member acting in a capacity other than as
a member of the limited liability company) or under Section
707(c) ("guaranteed payments" that are determined without regard
to the income of the limited liability company), and such
expenses will be paid for necessary and ordinary services
rendered to the Fund. Upon audit, the Service may challenge the
Managers' allocation of expenses, either on the basis of the
nature of the reimbursements paid or on the basis that the
reimbursements were paid to the Managers or an Affiliate for
performing services within the normal scope of their duty as
Managers and, therefore, may not be deducted. The deductibility
of such reimbursements to be paid to the Managers or an Affiliate
ultimately will depend upon, among other things, a factual
determination of the nature of the services performed and cannot
be predicted with certainty. The Fund's legal counsel has not
issued an opinion on the deductibility of these expenses because
their deductibility is inherently a factual issue that depends
upon their amount or the appropriateness of the relevant items
for reimbursement.
DEPRECIATION DEDUCTIONS
1. GENERAL. The Code permits a taxpayer to claim
depreciation deductions with respect to property used in a trade
or business or held for the production of income. As a general
rule the cost of acquiring or constructing an asset, including
all costs incident to such acquisition or construction, may be
included in the tax basis thereof for the purposes of computing
cost recovery deductions.
The Fund will claim depreciation, cost recovery and
amortization deductions with respect to the properties it
acquires to the extent permitted by the applicable Code
provisions. Although such deductions will reduce the Fund's
taxable income, they will also reduce the Fund's adjusted basis
in the properties, thereby increasing the potential gain (or
decreasing the potential loss) to the Fund upon the ultimate
disposition of the properties. See "Sales of Fund Property and
Foreclosure."
2. MACRS. Under the Modified Accelerated Cost Recovery
System ("MACRS"), tangible real or personal property (other than
land) that qualifies as "recovery property" is eligible for MACRS
deductions over specific statutory recovery periods. The
applicable recovery period for nonresidential real property with
a class life exceeding 27.5 years (which includes most commercial
real property) is 39 years. The Fund intends to purchase only
commercial properties. Accordingly, the Fund will depreciate
most of its real properties over 39 years using the straight-line
method. (But see "Income Tax Aspects--Tax-Exempt Use Property,"
above.) Under Rev. Proc. 87-56, certain real properties,
including automotive service station buildings and car wash
buildings, in which prior Programs sponsored by the Managers have
invested, have class lives of less than 27.5 years and are not
nonresidential real property subject to the 39-year recovery
period. Automotive service stations and car washes are
depreciated over a recovery period of 15 years. The MACRS
deduction with respect to a property in the year of acquisition
will be based on the number of months in which the property has
been placed in service by the Fund, and each property will be
deemed placed in service for MACRS purposes in the middle of the
month in which it is placed in service by the Fund.
A small portion of the property to be purchased by the Fund
is expected to be five-year recovery property. Five-year
recovery property is subject to a table delineating the amount
deductible in each year. The table is based on the 200 percent
declining balance method but converts to the straight line method
to maximize depreciation in later years. During the first year
the table incorporates a half-year convention. A new entity such
as the Fund is subject to a short taxable year, thus reducing the
first year cost recovery deduction to the amount specified in the
aforementioned table multiplied by a fraction, the numerator of
which is the number of months the Fund is involved in activity
and the denominator of which is twelve. No investment tax credit
will be available on the personal property of the Fund.
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3. ALLOCATION OF PURCHASE PRICE. Allocation of the
purchase price of a property among the various depreciable and
nondepreciable assets is a factual question, and there can be no
assurance that the allocations made by the Manager will be
accepted by the Service. In determining the allocation of the
purchase price between depreciable and nondepreciable assets, the
Manager relies on its own experience and on reports of
independent appraisal firms on similar properties acquired by
affiliated Programs. Because none of the Fund's properties have
been acquired and the issue depends on facts that are not yet
determined, counsel to the Fund has not rendered an opinion on
this issue. Adjustment of the allocation of the purchase price
of a property could decrease Fund depreciation deductions thereby
increasing Fund taxable income or decreasing Fund losses.
BASIS OF FUND INTEREST
Subject to the at risk rules and the passive activity loss
limitations (see "Personal Tax Consequences--Losses and Credits
from Passive Activities"), an Investor is generally allowed to
deduct his or her allocable share of Fund losses to the extent of
the adjusted basis in the Investor's Units. Each Investor's
adjusted basis of the Units initially will include his or her
contribution to the capital of the Fund and the Investor's pro
rata share of indebtedness as to which neither the Fund nor any
Investor is personally liable ("nonrecourse liabilities"). Under
the "at risk" rules, a taxpayer cannot deduct losses arising from
an activity, including the activity of holding real property, to
the extent such losses exceed the aggregate amount with respect
to which the taxpayer is financially "at risk" in such activity.
Generally, a taxpayer is "at risk" in the amount of his or her
capital contribution plus his or her share of recourse
liabilities and "qualified" nonrecourse liabilities within the
meaning of Section 465(b)(6) of the Code. Although the Managers
will attempt to ensure that financing, if any, that may be placed
on properties in the future will be qualified nonrecourse
financing, because that determination depends on facts not yet in
existence, no assurances can be given that any loans actually
obtained by the Fund will qualify as amounts at risk under
Section 465.
An Investor's adjusted basis of his or her Units will
increase by the Investor's distributive share of Fund income for
each year and decrease by his or her distributive share of Fund
losses and by distributions of cash and other property made by
the Fund to him or her (and for this purpose the Investor's share
of any reduction in principal of the Fund's indebtedness will be
treated as a distribution of cash to the Investor); provided,
however, that the adjusted basis may not be reduced below zero.
In the event that the amount of Fund losses allocated to an
Investor for any fiscal year exceeds the Investor's available
basis of his or her Units, such excess losses may be carried
forward to such time, if ever, such basis is sufficient to absorb
such excess losses.
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NONLIQUIDATING DISTRIBUTIONS
Nonliquidating distributions of cash to an Investor
generally will be regarded as a return of capital for tax
purposes to the extent of a Investor's adjusted basis of his or
her Units and serve to reduce such basis by an amount equal to
the cash distributed. To the extent that the amount of cash
distributed exceeds the Investor's adjusted basis of her or his
Units prior to distribution, the Investor will recognize taxable
gain. Nonliquidating distributions of property other than cash
to an Investor will reduce the Investor's basis in his or her
Units by an amount equal to the adjusted basis of the property in
the hands of the Fund; provided, however, that the adjusted basis
of her or his Units may not be reduced below zero. The
distributed property will have a basis in the hands of the
distributee Investor equal to its adjusted basis in the hands of
the Fund, except that the basis of such property shall not exceed
the adjusted basis of such Investor's Units reduced by the amount
of any cash distributed in the same transaction.
SALES OF FUND PROPERTY AND FORECLOSURE
In the event the Fund sells a property, gain will be
recognized to the extent that the amount realized from such sale
exceeds the Fund's adjusted basis in the property and loss will
be recognized to the extent that the adjusted basis of the
property exceeds the amount realized. The amount realized from
the sale or other disposition of a property includes all cash
received, all liabilities assumed and the fair market value of
all property received other than cash. If a purchaser of a
property assumes or takes subject to liabilities encumbering the
transferred property, the amount of such liabilities represents
consideration to be included in the amount realized by the Fund
as though there had been a payment in a like amount.
The federal income tax consequences of the foreclosure of a
mortgage, deed of trust or other financing instrument with
respect to a property depend on a number of factors. In general,
however, the Investors will recognize taxable gain to the extent
the foreclosed liability exceeds the adjusted basis of the
property. If the property is sold in foreclosure for an amount
greater than the applicable liability, the rules described in the
preceding paragraph will apply.
In the event of the disposition (including a sale as a
result of foreclosure) of any depreciable real property within
one year after acquisition (even if straight-line depreciation
has been taken) or of any depreciable personal property, gain, if
any, will be recaptured as ordinary income to the extent that
depreciation has been previously allowed on the property.
Further, in the case of an installment sale all depreciation to
be recaptured as ordinary income will be recaptured in the year
of sale without regard to the actual payment received in such
year.
If the Fund is considered a dealer in real estate at the
time of any sale of a property, installment sale reporting of the
amount of recognized gain will not be available. Therefore, an
installment sale of property by the Fund could result in a
recognition of income in an amount exceeding cash distributions
from the Fund in the year of sale. If the Fund is not a dealer,
deferral of recognition of income from an installment sale will
be available, although under certain circumstances the amount of
tax deferred may be subject to an interest charge denominated as
additional tax.
Under certain circumstances, the sale of property may not
generate for the Investors net cash proceeds in amounts
sufficient to cover the tax liabilities thereby created for the
Investors. Such circumstances might include (i) the sale of a
property on adverse terms, i.e., for gross proceeds that exceed
the depreciated book value of the property by an amount
significantly greater than the net proceeds after payment of the
remaining principal amount of the related mortgage or deed of
trust, (ii) the sale or transfer of a property pursuant to
foreclosure of a mortgage, deed of trust or other financing
instrument or (iii) the sale of a property for proceeds that
include illiquid assets, such as promissory notes of the
purchaser.
Any gain or loss on the sale or other disposition of (a)
property that is held by the Fund as a "dealer" or (b) property
that is neither a capital asset nor a Section 1231 asset will be
taxed as ordinary income or loss, as the case may be. The
holding period required for long-term capital gain treatment
(subject to a maximum federal tax rate of 20%) is more than 12
months.
Losses from the Fund that Investors have been unable to
deduct due to application of the passive loss limitation rules
(see "Personal Tax Consequences--Losses and Credits from Passive
Activities") may be applied against gains subsequently realized
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from sales of the properties of the Fund or Units. Any losses
remaining after such application in the event of a complete
liquidation of an Investor's interest in the Fund may be applied
against other income of the Investor, whatever the source.
SALE OF UNITS
INVESTORS MUST RECOGNIZE THAT NO PUBLIC MARKET FOR UNITS MAY
EXIST AT SUCH TIME AS AN INVESTOR WISHES TO SELL HIS UNITS.
Any gain or loss realized by an Investor who is not a
"dealer" upon the sale, exchange or assignment of Units
(including contribution to a charitable organization) generally
will be treated as capital gain or loss. However, under present
law, the portion of the sales proceeds attributable to the
Investor's share of the Fund's unrealized receivables and
inventory items that have appreciated substantially in value will
give rise to ordinary income. For this purpose, unrealized
receivables of the Fund include depreciation recapture property
to the extent that any gain realized if the Fund had sold such
property at its fair market value would have been taxed as
ordinary income (as described above, with respect to depreciation
recapture) and inventory items include all items of the Fund
that, if sold by the Fund or if held by the selling Investor and
sold by him, would have been taxed as ordinary income either
because the property was neither a capital asset nor a "Section
1231 asset" or because the Fund or the selling Investor would be
a "dealer" in such property. Furthermore, in determining the
amount received upon the sale or exchange of a Unit, an Investor
must take into account his share of any reduction of the
nonrecourse partnership liabilities. Accordingly, an Investor's
gain on the sale or exchange of Units may substantially exceed
the cash proceeds therefrom, and the income taxes payable with
respect to such gain also may exceed such cash proceeds.
A gift of Units by an Investor may result in the imposition
of income tax on such Investor if the gift is made at a time when
his share of the Fund's nonrecourse liabilities exceeds the basis
of the Units that are the subject of the gift. The taxable
income resulting from a gift of Units would be equal to the
amount by which the Investor's share of nonrecourse partnership
liabilities exceeds his basis in the Units given. Such a gift
also may result in a federal gift tax being imposed upon the
donor.
In the event of a transfer of all or part of the Units of
any Investor, the Fund may elect pursuant to Section 754 of the
Code to adjust the transferee's share of the basis of the assets
of the Fund. Pursuant to the Operating Agreement, the Manager
has sole discretion to determine whether such adjustment to the
basis of the assets of the Fund shall be made. Because of the
complexities and added expense of the tax accounting required to
implement such an election, the Manager does not intend to cause
the Fund to make the Section 754 election. Therefore, any
benefit that might be available to the Investors by reason of
such an election probably will not be available. Moreover, an
Investor may have greater difficulty in selling his Units or may
realize a lower sales price since the purchaser will obtain no
current tax benefits from his investment to the extent that his
cost of such investment exceeds his allocable share of the Fund's
basis in its assets.
LIQUIDATION OF THE FUND
Upon the liquidation of the Fund, an Investor will recognize
taxable gain to the extent that any money distributed to the
Investor exceeds the adjusted basis of such Investor's interest
in the Fund. An Investor will recognize a loss upon liquidation
of his or her Fund interest only if he or she receives
liquidation distributions from the Fund consisting solely of
money, unrealized receivables or inventory items and then only to
the extent that the adjusted basis of his or her interest in the
Fund exceeds the basis of the items distributed to him. In the
event other property is distributed to a Investor as a
liquidation distribution, the basis of such other property in the
hands of the Investor shall be equal to the adjusted basis of
such Investor's interest in the Fund reduced by any money
distributed to such Investor in the same transaction.
TAX SHELTER REGISTRATION
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Section 6111 of the Code requires tax shelters, as defined
therein, to register with the Service. The Manager has
determined, however, that the Fund does not fall within the
Code's definition of a tax shelter, and, therefore, the Manager
does not intend to register the Fund as such.
TAX AUDIT, RETURNS AND PENALTIES
The Manager will arrange for the preparation and filing of
all necessary tax returns for the Fund. The Manager also will
serve as the "tax matters partner" pursuant to Section 6231 of
the Code. This Section of the Code grants the Manager certain
discretion and authority regarding extensions of time for
assessment of additional tax against Investors related to Fund
income, deductions or credits and settlement or litigation of
controversies involving such items. This is significant because
controversies regarding determination of Fund taxable income will
be resolved, under regulations, through settlement or litigation
at the Fund level. Investors are required to report any item of
income, gain or loss consistently with the reporting of such item
by the Fund, unless a specific explanation of the inconsistency
is included with the affected income tax return.
Each Investor whose interest in revenues of the Fund is one
percent or more will receive notice of any tax controversy from
the Service. Each Investor will have the right to participate in
settlement or litigation of any tax controversy if such right is
exercised timely. Investors who do not reserve their right to
reject settlements accepted by the Manager will be bound by the
settlement. All Investors will be bound by the outcome of any
litigation that may result.
A penalty is imposed under Section 6662 of the Code for
substantial understatement of tax liabilities in certain cases.
Provided the principal purpose of the investment is not evasion
or avoidance of tax, the penalty does not apply if either there
was "substantial authority" for treatment of the item that is
later adjusted or the relevant facts regarding such item were
disclosed in the return. In the case of a Fund item, the
disclosure is to be made in the Fund's return, but may also be
made in the individual Investor's return after satisfaction of
additional procedural requirements. Should it be determined that
the Fund constitutes a "tax shelter," a penalty for substantial
understatement of tax, if otherwise appropriate, would not be
avoided by disclosure. In such case, the tax treatment of the
item in question would require support of substantial authority
and, in addition, the individual Investor's belief that his or
her treatment was "more likely than not" the proper treatment.
There is little guidance available on the interpretation of the
term "tax shelter" for purposes of Section 6662 and it is unclear
whether the Fund constitutes a tax shelter. Should an adjustment
be sustained to the Fund's returns where proper disclosures were
not made and there was not "substantial authority" supporting the
position taken, a penalty could be assessed against each Investor
for 20% of any underpayment of taxes by such Investor exceeding
the greater of 10% of such Investor's correct tax or $5,000 for
individuals and $10,000 for corporations.
With respect to Investors who are individuals, closely held
corporations or personal service corporations, Section 6662 of
the Code imposes a penalty of 20% on all underpayments of tax
attributable to a "valuation overstatement." A valuation
overstatement results when the value or basis of property or a
depreciable component thereof is represented for income tax
purposes to be 200% or more of its actual value or basis.
Furthermore, the penalty increases to 40% of the underpayment in
the case where the value or basis of property is represented to
be 400% or more of its actual value or basis.
Generally, the period during which the Service can assess an
income tax deficiency is three years. The statute of limitations
for adjusting Fund items of entities registered under federal
securities laws (such as the Fund) extends until the later of
three years after the entity's return is filed or one year after
the name and address of a investor against whom the deficiency is
assessed is provided to the Service if such name and address does
not appear on the entity's return. In the case of fraud by
others or a substantial omission of gross income from an entity's
return, the period for assessment for an investor can be extended
to six years. The running of the applicable assessment period is
suspended during the pendency of an audit proceeding and for one
year thereafter.
PERSONAL TAX CONSEQUENCES
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The provisions of the Code discussed below may have tax
consequences to investors beyond their investment in the Fund,
and the applicability of such provisions to an investment in the
Fund must be considered with regard to the total individual tax
situation of the investor, which is beyond the scope of the tax
discussion contained in this Prospectus.
1. INVESTMENT BY QUALIFIED PLANS/UBTI. Qualified Plans,
although generally exempt from federal income taxation under
Section 501(a) of the Internal Revenue Code, nevertheless are
subject to tax to the extent that their unrelated business
taxable income ("UBTI") exceeds $1,000 during any tax year. An
allocable portion of income from property that is "debt-financed
property" will constitute UBTI. Debt-financed property is
generally defined to mean any property as to which there is
"acquisition indebtedness." Acquisition indebtedness includes
indebtedness incurred in acquiring or improving a property,
indebtedness incurred before acquisition or improvement if such
indebtedness would not have occurred but for the acquisition or
improvement, and indebtedness incurred after acquisition or
improvement if reasonably foreseeable at the time of acquisition
or improvement.
To the extent that any properties of the Fund are financed
with acquisition indebtedness, Qualified Plans investing in the
Fund will be required to recognize UBTI. If a Qualified Plan's
share of UBTI from the Fund together with UBTI from other
investments of the Qualified Plan exceeds $1,000 during any tax
year, the Qualified Plan will be required to pay federal income
tax on the UBTI. If any of the Fund's properties are financed
with acquisition indebtedness, an allocable portion of the income
directly associated with such financed properties reduced by an
allocable portion of the deductions directly associated with such
financed properties will be treated as UBTI. The allocable
portion will be equal to the average acquisition indebtedness
outstanding on such properties for the taxable year to the
average adjusted basis of the property during the taxable year.
When the Fund disposes of a property with acquisition
indebtedness, the Qualified Plan will be required to recognize an
allocable portion of the gain as UBTI based on the ratio between
the highest amount of acquisition indebtedness during the 12-
month period ending with the date of sale or disposition and the
average adjusted basis of the property during the taxable year.
The portion of the Fund's income that is not deemed to be
UBTI will continue to be exempt for a Qualified Plan even if a
portion of the Fund's income is deemed to be UBTI. Moreover,
such UBTI will not affect the Qualified Plan's tax status or its
exemption from taxation of normal investment income from other
sources.
In considering an investment in the Fund of a portion of the
assets of a Qualified Plan, a fiduciary should consider (i)
whether the investment is in accordance with the documents and
instruments governing the Qualified Plan, (ii) whether the
investment satisfies the diversification requirements of
Section 404(a)(1)(C) of the Employee Retirement Income Security
Act of 1974 ("ERISA") and (iii) whether the investment is
prudent, since there will not be a market in which to sell or
otherwise dispose of the Units.
ERISA requires that the assets of a Qualified Plan be valued
at their fair market value at least annually. As of the close of
each fiscal year of the Fund, each Qualified Plan that is an
Investor will be provided with an annual statement of estimated
value of each Unit based on the estimated value of the properties
and other Fund assets.
2. INVESTMENT BY CHARITABLE REMAINDER TRUSTS/UBTI. THE
FUND IS NOT AN APPROPRIATE INVESTMENT FOR A CHARITABLE REMAINDER
TRUST BECAUSE SUCH AN INVESTMENT WOULD LIKELY CAUSE ALL OF THE
TRUST'S INCOME TO BE SUBJECT TO FEDERAL TAX. Under the Code,
charitable remainder trusts (which include charitable remainder
annuity trusts and charitable remainder unitrusts) are generally
exempt from federal income tax. A charitable remainder trust,
however, loses its exemption from income tax if it has any amount
of UBTI. UBTI is defined to include all or a portion of the
gross income derived from debt-financed property, which is
property with respect to which there exists "acquisition
indebtedness." Since the Fund intends to borrow money to
purchase one or more of the properties that it acquires, the Fund
will have "acquisition indebtedness" with respect to such
properties, and a charitable remainder trust, as a Member, would
be deemed to have its proportionate share of such acquisition
indebtedness. Therefore, a charitable remainder trust that
invested in the Fund (either directly or indirectly, through a
partnership or another entity taxable as a partnership) would
derive at least some unrelated business taxable income from that
investment, which would cause all of its income to become subject
to federal income tax.
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3. LIMITATION ON INVESTMENT INTEREST DEDUCTIONS. The Code
imposes limitations with respect to the deduction of interest on
investment indebtedness. For individuals, the amount of
investment interest (as defined below) otherwise allowable as a
deduction in any taxable year will be limited to the amount of
net investment income. Investment interest is interest paid or
accrued on indebtedness incurred or continued to purchase or
carry property held for investment. However, interest on
liabilities on Fund properties and on debt incurred to acquire
Units will not be considered "investment interest" under the Code
with respect to Investors, but will be considered a deduction
attributable to a passive investment activity subject to the
passive loss limitations discussed below.
4. DEDUCTIBILITY OF INTEREST INCURRED TO PURCHASE OR CARRY
TAX-EXEMPT OBLIGATIONS. In the case of an Investor who holds tax-
exempt securities and plans to borrow money to purchase his
Units, it is possible that the Service may seek to disallow the
deductibility of all or a portion of such investor's expenses
incurred in connection with such borrowing, claiming that the
indebtedness was incurred to "purchase or carry" tax-exempt
securities under Section 265(2) of the Code. Such risk would
substantially increase for an investor whose tax-exempt
obligations were used as security for the debt incurred to
purchase Units.
5. LOSSES AND CREDITS FROM PASSIVE ACTIVITIES. Under
Section 469 of the Code, losses from a "passive activity" are
deductible only to the extent of the income from such activity
and other passive activities. Passive activity losses that are
not deductible because of inadequate passive activity income are
carried forward and become deductible against future passive
activity income or upon complete liquidation of the taxpayer's
interest in the activity. Credits from passive activities are,
in general, limited to the tax attributable to income from
passive activities. Passive activities include trade or business
activities in which the taxpayer does not materially participate
and presumptively include holders of a limited liability company
interest such as Units in the Fund. Accordingly, to the extent
losses or deductions from passive activities of the Fund, when
combined with deductions from all other passive activities of
such Investor, exceed the Investor's income from passive
activities, the excess losses or deductions will be suspended and
carried forward to future years until applied.
On final disposition of all of the Units held by an Investor
or liquidation of the Fund, any losses attributable to the Fund
not previously deducted by the Investor due to application of
Section 469 of the Code, together with any losses recognized as a
result of such final disposition or liquidation, will be allowed
as a deduction against income in the following order: (i)
passive income or gain from the Fund, (ii) net income or gain
from all passive activities and (iii) any other income or gain
(subject to limitations on the deductibility of capital items).
(But see "Income Tax Aspects--Publicly Traded Partnerships,"
above.)
Gross income from interest, dividends, annuities or
royalties not derived in the ordinary course of a trade or
business, expenses allocable to such gross income, and gain or
loss attributable to the disposition of property producing such
gross income or property (other than an interest in a passive
activity) held for investment, are not taken into account in
computing income or loss from passive activity but, instead, are
considered "portfolio income items." If a limited liability
company holds assets producing portfolio income items in addition
to the assets used in its trade or business, the gross income
(and gain or loss) from and expenses allocable to such portfolio
assets are considered to arise from an activity which is separate
from any passive activity engaged in by the limited liability
company. Also, that portion of any gain from the sale of an
interest in such a limited liability company will be considered a
portfolio income item to the extent the underlying assets
determined on an applicable date generate portfolio income items.
Income, gain or loss attributable to an investment of working
capital is treated as a portfolio income item.
The taxpayer's net aggregate loss and net aggregate credit
from passive activities are to be allocated to activities, and
within activities, on a pro rata basis as prescribed by Treasury
Regulations. Whether a particular property constitutes a single
activity or part of a larger activity is relevant in determining
the amount of suspended passive losses (if any) for the activity
and whether suspended passive losses (if any) are deductible upon
disposition of such property.
Under IRS regulations, the Fund will have some discretion as
to whether to treat each of the properties that it acquires and
leases as a separate "activity" for purposes of the passive
activity loss rules, or to aggregate some or all of its
properties as a single "activity." If the Fund chose to treat the
operation of different properties as a single activity, the
Investors would be required to adopt the same treatment on their
own tax returns. The aggregation or separation of the Fund's
operations with respect to different properties as a single
"activity" or as multiple "activities" can have tax consequences
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to the Investors when the Fund finally disposes of a property.
Upon complete disposition of an interest in a passive activity,
previously suspended passive losses attributable to that
activity, as well as any losses sustained from the operation of
the activity during the year of disposition and any loss realized
on the disposition, can be used to offset income from other
sources, including non-passive income. Because it is likely that
the administrative burdens at the Fund level and to Investors of
accounting for each property separately for tax purposes would be
more costly than any tax advantages, and because it is
anticipated that the Fund will generate net income against which
losses can be offset, the Managers do not currently intend to
treat each property as a separate entity. If it appears more
favorable in the future to account separately for properties, the
Managers will take all steps possible to obtain such treatment.
The Manager intends to conduct the Fund's affairs in a
manner so that an Investor's distributive share of Fund income
derived from the Fund's real estate rental activities will
constitute passive activity income which may be utilized by such
Investor as an offset against passive activity losses. In the
opinion of counsel for the Fund, and subject to Treasury
Regulations which may be adopted in the future, it is more likely
than not that the real estate rental activities of the Fund, from
which the Fund does not derive the equivalent of a guaranteed
return or portfolio income or other item not allocable thereto,
will constitute passive activities with respect to an Investor,
and therefore that an Investor's distributive share of Fund
income or loss (computed without taking into account portfolio
income items and other non-passive activity items, if any) will
constitute income or loss from passive activities. Interest
income earned on the proceeds of the offering of Units prior to
the investment of such proceeds in real property and income (or
loss) attributable to working capital investments will be treated
as portfolio income items, and losses from passive activities
will not offset an Investor's share of income derived from such
portfolio income items.
Investors should note that any passive activity income
derived from investment in the Fund may reduce a passive activity
loss of an investor which is an individual (or under certain
circumstances an estate) attributable to a rental real estate
activity with respect to which the individual actively
participated that might otherwise be deducted against non-passive
activity income under a special rule permitting qualified
individuals (with adjusted gross income below a specified level)
to deduct up to $25,000 of losses from such rental real estate
activities. Furthermore, Section 469 of the Code provides the
Service with broad authority to prescribe regulations to carry
out the provisions of Section 469 in addition to those
regulations discussed above, and there can be no assurance as to
the content of any such regulations.
6. INDIVIDUAL AND CORPORATE TAX RATES. For individuals,
long-term capital gains (for capital assets held over 12 months)
are subject to a maximum tax rate of 20% while ordinary income is
subject to a maximum effective rate of 39.6% (resulting from a
combination of a top marginal rate of 36% (applicable to taxable
income in excess of $155,950 for joint returns in 1998) and a 10%
surtax (applicable to taxable income in excess of $278,450 for
joint returns in 1998)). Effective tax rates may be slightly
higher after phase-out of personal exemptions and disallowance of
itemized deductions for higher-income taxpayers. The maximum
rate on the taxable income of corporations (including net capital
gains) is 35%.
7. Minimum Tax. Taxpayers are subject to an "alternative
minimum tax" in addition to the regular income tax. The
alternative minimum tax for noncorporate taxpayers is the excess
of (i) 26% of the first $175,000 of the amount by which the
alternative minimum taxable income exceeds the applicable
exemption amount ($45,000 for surviving spouses and married
persons filing joint returns, $33,750 in the case of single
taxpayers, and $22,500 in the case of estates, trusts, and
married taxpayers filing separate returns) plus 28% of the
taxable excess that is greater than $175,000, over (ii) the
taxpayer's regular federal income tax. For corporate taxpayers,
the alternative minimum tax is the excess of (i) 20% of the
amount by which the alternative minimum taxable income exceeds
the exemption amount of $40,000, over (ii) the corporation's
regular federal income tax. Such exemption amount is reduced by
25% of the amount by which alternative minimum taxable income
exceeds $150,000 (for corporations, surviving spouses and married
persons filing jointly), $112,500 (for single taxpayers) and
$75,000 (for estates, trusts and married taxpayers filing
separate returns).
Alternative minimum taxable income, generally, is the
taxpayer's adjusted gross income increased by the amount of tax
preference items and decreased by deductions for certain
charitable contributions, medical expenses, casualty losses,
certain home mortgage interest, and other interest expense to the
extent of qualified net investment income. Minimum tax paid with
respect to certain preferences may be carried forward
indefinitely as a credit against regular tax liability. Each
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Investor must include his allocable share of the Fund's income
and tax preference items in computing his alternative minimum tax
liability.
Passive losses, such as operating losses from the Fund, if
any, are not allowed in determining alternative minimum taxable
income to the extent they exceed alternative minimum taxable
income from passive activities. In applying these limitations,
minimum tax rules apply to the measurement and allowability of
all relevant items of income, deduction and credit. The amount
of any passive loss that is subject to disallowance is determined
after computing all preferences and making all other adjustments
to income that apply for minimum tax purposes. Thus, the amount
of suspended losses attributable to passive activities may differ
for minimum and regular tax purposes. Prospective investors are
urged to consult their tax advisors with respect to the effect of
the alternative minimum tax on their specific situations.
7. Activities Not Engaged in for Profit. Section 183 of
the Code provides that certain deductions attributable to any
activity not engaged in for profit will be disallowed to the
extent that such claimed deductions exceed the gross income from
the activity. This section does not limit the deductibility of
expenses that would be allowable without regard to whether the
activity is engaged in for profit, such as real estate taxes and
certain amounts of interest. If the gross income from an
activity for two or more of five consecutive years exceeds the
deductions attributable to such activity, then such activity
shall be presumed to be an activity engaged in for profit unless
the Service establishes otherwise. Where the deductions claimed
exceed the gross income (which may be the case in the Fund's
first several years) for more than two of five taxable years,
there is a possibility that the Service will claim that the
activity was not engaged in for profit and, therefore, will limit
the amount of the deduction allowed. The provisions of Section
183 may be applied by the Service to Investors individually, even
though the Fund may be considered to have the requisite profit
objective. If such a position was asserted successfully against
either the Fund or an individual Investor, a significant
advantage of investing in the Fund would be lost.
In determining whether an activity is engaged in for profit,
Treas. Reg. 1.183-2 provides that the Service will consider
objective standards, taking into account all the facts and
circumstances of each case. Included among the factors that are
normally taken into account in making such determination are an
indication that the taxpayer carried on the activity as a
business, the expectation that assets used in the activity may
appreciate in value, the financial status of the taxpayer, and
the absence of elements of personal pleasure or recreation. In
the past the Service has applied Section 183 primarily to
investment in activities that have elements of personal benefit
or recreation, such as hobby farms or vacation homes, and tax
shelters that have very substantial tax benefits combined with
little likelihood of any economic return other than those
benefits. The Fund does not appear to fall within any of those
categories. Counsel for the Fund has expressed no opinion with
respect to this issue because of the inherently factual nature of
the issues involved in proposed operations of the Fund, and
because the individual circumstances and judgment of each
Investor are essential determinants.
8. Foreign Investors. Although this discussion is not
intended to describe foreign or federal tax consequences of an
investment in the Fund by foreign investors, it should be noted
that the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA") taxes nonresident aliens and foreign corporations on
gains from the disposition of United States real property
interests as if such taxpayers were engaged in a trade or
business in the United States. If the Fund disposes of
properties or if a foreign Investor disposes of an interest in
the Fund, the foreign Investor may be subject to tax and
withholding as a result of the disposition.
Furthermore, the Fund is required to withhold federal income
tax on amounts of income allocable to foreign Investors (rather
than amounts actually distributed to them). The rates of
withholding are 35% of the amount of income allocable to a
foreign Investor that is a corporation and 39.6% of the amount of
income allocable to any other foreign Investor. The Fund is
obliged to make estimated quarterly withholding payments based on
annualized taxable income.
9. Carryover Basis and Estate Planning Considerations.
The tax basis of inherited property is its fair market value at
the date of death (or the date of alternate valuation if that
date is elected for estate tax return purposes). The fair market
value of a Investor's Units will be includable in his gross
estate for federal estate tax purposes and could cause estate tax
to be paid even though the Units are illiquid assets that may not
be able to be sold to generate cash to pay such estate tax. Each
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prospective investor should consult with his personal tax
advisers concerning the impact of an investment in a Unit on his
personal estate planning.
State Income Taxes
This Prospectus does not summarize the state income tax
consequences of owning a Unit in the various states in which
investors may reside or of owning property in the various states
in which the Fund may acquire properties. An Investor is advised
to consult with his own tax counsel as to the state income tax
consequences in his particular state of residence.
The foregoing discussion is general in nature and by no
means is intended to cover all of the tax issues that might
affect any investment in the Fund. IN VIEW OF THE COMPLEXITY OF
THE TAX ASPECTS OF THE OFFERING, PARTICULARLY IN LIGHT OF CHANGES
IN THE LAW AND THE FACT THAT CERTAIN OF THE TAX ASPECTS OF THE
OFFERING WILL NOT BE THE SAME FOR ALL INVESTORS, PROSPECTIVE
INVESTORS ARE STRONGLY ADVISED TO CONSULT THEIR TAX ADVISERS WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATION PRIOR TO INVESTMENT
IN THE FUND.
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RESTRICTIONS ON TRANSFER
It is anticipated that there will never be a public market
for the Units and, therefore, an Investor should not expect to
readily liquidate this investment or to use the Units as
collateral for a loan. If an Investor wishes to transfer his or
her Units, or any portion thereof, he or she might not be able to
find a buyer for such Units due to market conditions or the
general illiquidity of the Units. Moreover, if an Investor was
able to sell his or her Units, depending upon the price he or she
negotiated, he or she might receive less than the amount of his
or her original investment. No representation is made that the
Units could be resold for their original purchase price.
The Operating Agreement allows transfers, other than
Permitted Transfers, only to the extent that they comply with
certain safe harbors created by the Service from treatment as a
"publicly traded partnership" for tax purposes. See "Income Tax
Aspects--Publicly Traded Partnerships." Counsel for the Fund has
advised the Managers that such limitations are necessary to fall
within the safe harbor provisions from treatment as a publicly
traded partnership for tax purposes.
Under presently applicable "Blue Sky" guidelines, except in
the case of a transfer by gift, inheritance, intra-family
transfer, or marital dissolution, each transferee of Units must
generally satisfy minimum investment and investor suitability
standards similar to those that were applicable to the original
offering of Units, and following a transfer of less than all his
Units, each transferor must retain a sufficient number of Units
to satisfy the minimum investment standards applicable to his
initial purchase of Units. Pursuant to the Operating Agreement,
any substituted Investor must, as a condition of receiving any
interest in the Fund, agree in the instrument of assignment to
become an Investor and pay reasonable legal fees and filing costs
in connection with his substitution as an Investor. Transfer of
Units will be recognized by the Fund only as of the last day of
the month in which written evidence respecting the assignment is
received by the Fund in form satisfactory to the Managers.
SUMMARY OF OPERATING AGREEMENT
The Operating Agreement to be executed by each investor
pursuant to a power of attorney is included as Exhibit A hereto
and it is recommended that each prospective investor and his
advisors carefully review the entire document. The following
summarizes certain provisions of the Operating Agreement. All
statements made below and elsewhere in this Prospectus relating
to the Operating Agreement are qualified in their entirety by
reference to the Operating Agreement.
Certain provisions of the Operating Agreement are described
in other sections of this Prospectus. For a discussion of
compensation and payments to the Managers and their Affiliates,
see "Compensation to Managers and Affiliates"; for a discussion
of the distribution of cash by the Fund and the allocation of
profits and losses for tax purposes, see "Cash Distributions and
Tax Allocations"; for a discussion of the Fund's investment
objectives and policies, see "Investment Objectives and
Policies"; for a discussion of the liability of the Managers to
the Fund for their acts or omissions and of the indemnification
of the Managers by the Fund, see "Managers--Fiduciary
Responsibility"; for a discussion of the reports to be received
by the Investors from the Fund, see "Reports to Investors."
TERM AND DISSOLUTION
The Operating Agreement provides that the Fund will be
dissolved and liquidated on December 31, 2048 or upon the
election of Investors holding a majority of the Units, the sale
or disposition of the final asset of the Fund, the final decree
of a court that such dissolution is required under law, or in the
event that the Managers withdraw without a successor either being
appointed by the withdrawing Managers or being elected by
Investors holding a majority of the Units.
RETURN OF CAPITAL
Prior to the dissolution and subsequent liquidation of the
Fund, no Investor will have the right to demand the return of his
capital contribution except in the event the Fund is unable to
fully utilize the offering proceeds, either by purchasing
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properties or through joint ventures with other similar Funds, or
in the event the Fund agrees to repurchase such Investor's Units.
Repurchase of Units
Commencing 36 months from the date of this Prospectus, and
subject to certain conditions discussed in the Operating
Agreement, the Fund will repurchase an Investor's Unit(s) upon
the written request of the Investor. The per Unit repurchase
price will be equal to 80% of the net value of the Fund's assets,
as estimated by the Manager, divided by the number of Units
outstanding. For such purposes, the Manager will base the net
value of the Fund's assets on the discounted present value of the
rental income from Fund properties, on the most recent price at
which Units have been purchased by third parties, or such other
method as it believes is reasonable. The Managers will calculate
and make available to Investors on the first business day of
January and July of each year the price at which Units may be
presented for repurchase. The Fund's obligation to repurchase
Unit(s) is limited in any year to five percent of the number of
Units outstanding at the beginning of the year of repurchase.
Investors will be allowed to present their Units for
repurchase during two different periods in each year. Investors
desiring to have their Units repurchased will be required to
submit to the Manager notification on a form supplied by the
Manager of the number of Units for which they are requesting
repurchase. The notification must be postmarked after January 1
but before January 31, or after July 1 but before July 31 of the
year of repurchase. If Units totaling more than five percent are
tendered, repurchase requests with the earliest postmarks will be
honored first. Units will be repurchased on March 31 and
September 30 of each year and any Investor who tenders Units that
are not repurchased must retender the Units in succeeding periods
if he or she wants the request reconsidered. The Fund is not
obligated to repurchase any Unit(s) if doing so would, in the
discretion of the Managers, impair the Fund's ability to continue
operations. Repurchases will be funded out of either (i) Fund
revenues otherwise distributable to Investors or (ii) Fund
borrowings. No assurances can be given that such revenues or
borrowings will be available or that the Fund will be able to
repurchase any or all of the Units tendered. A repurchase will
result in less Net Cash Flow or Net Proceeds of Sale being
distributed to remaining Investors in the year of repurchase, but
will not result in a reduction of taxable income or gains to such
Investors. In addition, a repurchase may result in certain
adverse tax consequences to the tendering Investor. See "Income
Tax Aspects--Sale of Units."
DISTRIBUTION REINVESTMENT PLAN
The Managers have established a Distribution Reinvestment
Plan (the "Plan") to enable Investors who so elect in writing
("Participants") to have their distributions of Net Cash Flow
("Distributions") from the Fund reinvested in additional Units of
the Fund during the period of the offering pursuant to this
Prospectus. The Managers, in their discretion, may determine not
to provide such a reinvestment plan or to terminate the Plan at
any time. The Plan provides for the direct purchase by the
reinvesting Investor of Units at the public offering price per
Unit ($1,000).
No Distributions accrued to a Participant prior to release
of funds from
escrow and execution of the Operating Agreement
will be reinvested in the Plan. Instead, such Distributions will
be distributed in cash to Participants.
All other Distributions to Participants will be reinvested
promptly, but in any event within 30 days after the date of the
Distribution, in additional Units or fractional Units at the
public offering price per Unit ($1,000), provided that:
(1) the sale of Units continues to be registered or
qualified for sale under federal and applicable state
securities laws;
(2) each continuing Participant has received a current
prospectus relating to the Fund, including any supplements
thereto, and executed a confirmation within one year of such
reinvestment indicating such Participant's intention to
purchase units in the Fund and confirming that the
Participant continues to satisfy the investor suitability
requirements; and
(3) there has been no distribution of Net Proceeds of
Sale or Refinancing.
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The Plan will terminate upon completion of the public offering of
the Units pursuant to this Prospectus. If at any time one of the
requirements set forth above is not satisfied, Distributions will
be paid in cash to Participants as of the Distribution date.
EACH INVESTOR PARTICIPATING IN THE PLAN AGREES THAT, IF AT ANY
TIME SUCH INVESTOR FAILS TO MEET THE FUND'S INVESTMENT
SUITABILITY STANDARDS OR CANNOT MAKE THE OTHER INVESTOR
REPRESENTATIONS OR WARRANTIES SET FORTH IN THE THEN CURRENT FUND
PROSPECTUS, THE SUBSCRIPTION AGREEMENT, OR THE OPERATING
AGREEMENT RELATING THERETO, HE OR SHE WILL PROMPTLY NOTIFY THE
MANAGER IN WRITING.
Investors should note that affirmative action is required to
change or withdraw from participation in the Plan. Change in or
withdrawal from participation in the Plan shall be effective only
with respect to distributions made 30 days following receipt by
the Managers of written notice of such change or withdrawal. In
the event a Investor transfers his or her Units, such transfer
will terminate such Investor's participation in the Plan as of
the first day of the quarter in which such transfer is effective.
Selling commissions may be paid by the Fund in amounts not
to exceed eight percent with respect to any Units purchased with
reinvested Distributions. Each Participant is permitted to
identify, change or eliminate the name of his or her account
executive at a participating dealer. Identification of such
account executive may be changed or eliminated for subsequent
Distributions. In the event no account executive is identified,
or in the event that the account executive is not employed by a
broker-dealer having a dealer agreement with the Fund or a
subsequent Program, no selling commission will be paid with
respect to Distributions which are then reinvested, and the Fund
will retain for additional investment in real estate any amounts
otherwise payable as commissions. All holders of Units, based on
the number of Units outstanding, will receive the benefit of the
savings realized by the Fund from investors who do not identify
account executives.
No reinvestment fee or charge will be offset against any
reinvested distributions pursuant to the Plan. The cost of
administering the Plan will be considered an organization and
offering cost of the Fund and the actual cost of administering
such Plan may be reimbursed to the Managers in accordance with
the limitations on reimbursements for Organization and Offering
Expenses.
Following each reinvestment pursuant to the Plan, each
Participant will be sent a statement showing the distributions
received and the number and price of Units issued to such
Participant. TAXABLE PARTICIPANTS WILL INCUR TAX LIABILITY FOR
FUND INCOME ALLOCATED TO THEM EVEN THOUGH THEY HAVE ELECTED NOT
TO RECEIVE THEIR DISTRIBUTIONS I CASH BUT RATHER TO HAVE THEIR
DISTRIBUTIONS REINVESTED IN THE PURCHASE OF UNITS OR IN INTERESTS
IN A SUBSEQUENT PROGRAM.
The Fund reserves the right to amend any aspect of the Plan,
or to terminate the Plan, with respect to any Distribution
subsequent to notice of such amendment or termination, provided
that notice is sent to all Participants at least 10 days prior to
the record date for the Distribution. The Managers also reserve
the right to assign the administrative duties of the Plan to a
reinvestment agent who may hold Units on behalf of participants,
provide reports to Participants, and satisfy other record keeping
requirements.
Investors may also be given the opportunity to reinvest
distributions from the Fund in interests of a Program having
substantially identical investment objectives as the Fund, if
affiliates of the Managers publicly offer such Program interests
after the termination of the offering of Units pursuant to this
Prospectus. Investors would be allowed to reinvest distributions
from the Fund in a subsequent Program only if (i) the subsequent
program is registered under federal and applicable state
securities laws, (ii) the subsequent program has substantially
identical investment objectives, (iii) reinvesting Investors are
afforded the revocation rights described above with respect to
such reinvestments and the payment of commissions on such
reinvestments, and (iv) each participating Investor receives the
prospectus relating to such subsequent program and satisfies the
investment qualifications, including minimum investment
requirements, for such subsequent offering.
Nothing herein shall be construed as obligating the Managers
or any Affiliate to continue the offering of Units or to offer
units in any subsequent real estate Programs or permit
reinvestment therein.
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LIABILITIES OF INVESTORS
No Investor will be liable for any obligations of the Fund
in excess of the capital contribution he or she has agreed in the
Operating Agreement to make by signing a Subscription Agreement
plus his or her share of undistributed net income; except that an
Investor receiving a return of his or her capital contribution
will be liable to the Fund, for a period of one year if such
capital contribution was returned in accordance with the
Operating Agreement and for a period of six years if it was not,
for any sum, not in excess of such returned capital contribution
with interest, necessary to discharge the liabilities to all
creditors who extended credit, or whose claims arose, before such
capital contribution was returned. Investors will not have the
right to a return of their capital contributions except in
accordance with the distribution and repurchase provisions of the
Operating Agreement.
RIGHTS, POWER AND DUTIES OF THE MANAGERS
The Managers will have the exclusive right to manage the
business of the Fund. The Managers will be responsible for the
selection, acquisition, sale, financing, refinancing and leasing
of the properties. The rights, powers and duties of the Managers
may be delegated or contracted to an Affiliate of the Managers at
Cost. AEI Fund Management XXI, Inc. will initially serve as
Manager.
WITHDRAWAL OR REMOVAL OF A MANAGER
Neither of the Managers may withdraw from the Fund without
providing a substitute Manager to the Fund. Any substitute
Manager must be accepted by the vote of a majority, by interest,
of the Investors at a special meeting called by the Manager for
such purpose. A Manager shall be expelled or replaced upon its
bankruptcy or insolvency or upon a finding of fraud or breach of
its management duties or upon the vote of a majority, by
interest, of the Investors at a special meeting called for the
purpose of replacing such Manager.
SUBSTITUTED INVESTORS; ASSIGNEES
No Investor will have the right to substitute an Investor in
his or her place unless the substituted Investor has agreed in
the instrument of assignment to become an Investor and has paid
all expenses in connection with admission as a substituted
Investor. An assignee who does not become a substitute Investor
as provided above will only have the right to receive the
distributions of the Fund to which the assigning Investor would
have been entitled if no such assignment had been made. Such
assignee will have no right to require any information or account
of the Fund's transactions or to inspect the Fund's books.
APPOINTMENT OF MANAGERS AS ATTORNEYS-IN-FACT
Each Investor will irrevocably constitute and appoint the
Managers, and each of them individually, to be his true and
lawful attorney-in-fact, with full power to execute such
documents as may be necessary or appropriate to carry out the
provisions of the Operating Agreement.
AMENDMENTS
Investors holding a majority of the Units may amend the
Operating Agreement. Any amendment will not, without the consent
of the Managers, alter the allocation of economic interests to
the Investors or alter the allocation of management
responsibilities and control.
MEETINGS
No regular or periodic meeting of the Fund is required or
contemplated. Upon delivery of proper notification, the Managers
may at any time call a meeting of the Investors. In addition,
Investors holding at least 10% of the Units may cause the
Managers to call a meeting.
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ROLL-UPS
The Operating Agreement prohibits certain transactions in
which Units are required to be exchanged for securities of
another entity (as defined in the Operating Agreement as a "Roll-
Up") unless certain rights of the Investors are maintained in the
Roll-Up Entity and unless a vote of the majority of the Investors
is obtained. The Operating Agreement defines a Roll-Up to
include certain transactions involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of
the Fund and the issuance of securities from another entity.
This definition comports with requirements under certain state
securities laws but differs slightly from definitions used by the
Securities and Exchange Commission ("SEC") and may differ from
definitions contained in rules or legislation promulgated in the
future. The determination of whether a transaction constitutes a
Roll-Up will, in the first instance, be made by the Managers.
The Operating Agreement provides, in material part, that the
Fund may not participate in any Roll-Up which would reduce the
democracy rights of Investors, which would impede the ability of
the equity owners of the resulting entity to purchase the
securities of that entity, which would limit the voting rights of
the Investors as equity owners of the resulting entity, which
would limit rights to access to records of the resulting entity,
or which would provide, without the consent of Investors, that
the costs of the Roll-Up are to be borne by the Fund. Further,
the Operating Agreement requires the Fund to obtain an appraisal
by a competent independent expert of its assets, based on all
available information and assuming an orderly liquidation of the
Fund's assets, in connection with any Roll-Up and to provide a
summary of that appraisal to Investors. If the appraisal is
included in a prospectus to offer securities of the Roll-Up
Entity, it must be filed with applicable securities authorities
and the Fund will have liability for misrepresentations or
omissions therein.
Any Roll-Up requires the vote of holders of not less than a
majority of the Units. The Operating Agreement provides that an
Investor who votes against the amendments must be given the
option of (a) accepting securities in the Roll-Up Entity or (b)
one of (i) cash for such Investor's Units at the pro rata
appraised value of the assets or (ii) retention of such
Investor's interest in the Fund on the same terms and conditions
as existed previously.
REPORTS TO INVESTORS
The books and records of the Fund will be maintained at the
principal offices of the Fund and will be open for examination
and inspection by the Investors during reasonable business hours.
The Fund will furnish a list of names and addresses of, and
number of Units held by, all Investors to any Investors who
request such a list in writing for a proper purpose, with costs
of photocopying and postage to be borne by the requesting
Investor. The assignee of an Investor does not have a right to
receive any reports unless such assignee is admitted to the Fund
as a substitute member in accordance with the Operating
Agreement.
The Managers will distribute to each Investor, within 75
days after the close of each taxable year of the Fund, all
information necessary for the preparation of Investor's federal
income tax returns. A separate report will be issued, solely for
purposes of asset evaluation by certain Qualified Plans, that
will contain the Managers' estimate of the fair market value of
the Units.
The Managers will also distribute to the Investors, within
120 days after the end of each fiscal year, an annual report
containing a balance sheet and statements of operations, changes
in members' equity and cash flows (which will be prepared on a
GAAP basis of accounting and will be examined and reported upon
by an independent public accountant) and a report of the Fund's
activities during the period reported upon. Such annual report
will describe all reimbursements to the Managers and their
Affiliates and all distributions to Investors, including the
source of such payments.
The Managers will also distribute to the Investors, within
60 days after the end of each quarter, a report containing a
condensed balance sheet, condensed statements of operation, and a
related cash flow statement, together with a detailed statement
describing all real properties acquired (including the geographic
locale and the plan of operation, the appraised value and
purchase price and all other material information), setting forth
all fees, if any, received by the Managers or their Affiliates
and describing the services rendered for such fees.
-48-
THE MANAGERS INTEND TO MAKE ALL OF THE FOREGOING REPORTS
AVAILABLE ELECTRONICALLY, AND TO ALLOW DELIVERY TO AN E-MAIL
ADDRESS OR THROUGH ACCESS AT ONE OF THE MANAGER'S WEB SITES.
BECAUSE ELECTRONIC DELIVERY IS EXPECTED TO SAVE THE FUND
CONSIDERABLE PRINTING AND MAILING COSTS, ALL INVESTORS WHO HAVE
THE ABILITY TO ACCEPT ELECTRONIC DELIVERY ARE URGED TO COMPLETE
THE PORTION OF THE FUND'S SUBSCRIPTION AGREEMENT THAT PROVIDES
WRITTEN CONSENT TO THIS FORM OF DELIVERY.
Finally, when and if required by applicable SEC rules, the
Fund will make available to Investors, upon request, the
information set forth in SEC Form 10-QSB within 45 days after the
close of each quarter and SEC Form 10-KSB within 90 days after the
close of each fiscal year. The Managers are permitted to combine
such reports so long as they are distributed in a timely manner.
PLAN OF DISTRIBUTION
The Fund is offering, through AEI Securities Incorporated,
as Dealer-Manager, $24,000,000 of its limited liability company
interests in the form of 24,000 Units of $1,000 each (the
"Units"). The minimum investment required of each investor is
two and one-half Units ($2,500), except that an Individual
Retirement Account, Keogh Plan or other Qualified Plan will be
permitted (subject to the requirements of certain states--see
Exhibit C) to purchase two Units ($2,000). The offering period
will commence on the date hereof. No Units will be sold unless
the Fund receives subscriptions for at least 1,500 Units by the
date one year after the date of this Prospectus.
Each investor purchasing Units will be required to accept
and adopt the provisions of the Operating Agreement attached to
this Prospectus as Exhibit A and to complete and execute a
Subscription Agreement, which includes a power of attorney
(Exhibit D). At the time the prospective investor submits such
Subscription Agreement, he or she must tender a check to the Fund
in the amount of $1,000 for each Unit being purchased. Checks
should be made payable to "Fidelity Bank--AEI Real Estate
Escrow." Units will only be sold to an investor who represents
in writing that, at the time the investor executes the
Subscription Agreement, he or she meets the applicable
suitability requirements. See "Who May Invest."
All funds received from subscribers will be deposited in an
escrow account with the Fidelity Bank, Edina, Minnesota until
$1,500,000 has been deposited therein. In the event the required
$1,500,000 has not been deposited by the date one year after the
date of this Prospectus, all subscriptions will be canceled and
all funds will be promptly returned to investors with interest
actually earned thereon and without any deduction therefrom.
Under the terms of the escrow agreement, a subscriber may not
withdraw his funds from the escrow account. When subscriptions
for the minimum number of Units have been received, the Managers
may remove funds from escrow and instruct the escrow agent to pay
accrued selling commissions. Upon admission to the Fund, each
investor will receive his pro rata share of any interest earned
on escrowed funds based on the date of deposit of his
subscription payment. Escrow funds will be invested in insured
deposits with a financial institution and will earn interest at
short-term deposit rates. Following first admission, the Fund
will admit additional investors as Investors on or before the
first business day of each month until the termination of the
offering. Only subscribers whose subscriptions have been
received and accepted at least three days prior to each
admittance date will be admitted as Investors on such date.
The Managers have complete discretion to reject any
subscription agreement executed by any subscriber within thirty
days of its submission and funds from a rejected subscriber will
be returned within 10 days thereafter. It is anticipated that
subscriptions would be rejected for an investor's failure to meet
the suitability requirements, an over-subscription of the
offering, or for other reasons determined to be in the best
interest of the Fund.
The Units are being offered on a "best efforts" basis by AEI
Securities Incorporated (an Affiliate of the Managers) as Dealer-
Manager and by other selected broker-dealers that are members of
the National Association of Securities Dealers, Inc. and that
enter into Participating Dealer Agreements. Participating
Dealers in the offering will offer and sell Units in the Fund on
the same terms and conditions as the Dealer-Manager. Subject to
the volume discounts described below, the Dealer-Manager will
receive selling commissions and a nonaccountable expense
allowance totalling to 10% of the gross proceeds from the sale of
Units, all or a portion of which will be reallowed to
Participating Dealers. The Dealer-Manager may also receive up to
1/2 of 1% of the gross offering proceeds for the reimbursement of
-49-
bona fide due diligence expenses of the Participating Dealers,
all of which will be paid by the Dealer-Manager to such
Participating Dealers.
A registered principal or representative of the Dealer-
Manager, or a Participating Dealer, may purchase Units net of
commissions at $920 per Unit.
The Participating Dealers and their controlling persons,
will be indemnified by the Managers against certain liabilities,
including liabilities under the Securities Act of 1933. As of
the date hereof, no broker-dealers have entered into a
Participating Dealer Agreement. The Managers will receive
reimbursement of certain expenses incurred by them in connection
with the supervision and monitoring of the organizational and pre-
sale activities of the Fund.
SALES MATERIALS
Sales material may be used in connection with this offering
only when accompanied or preceded by the delivery of this
Prospectus. The only written sales material that may be
disseminated to prospective investors is a brochure prepared by
the Managers describing the Fund and its proposed activities and
a brochure attached to a folder in which this Prospectus will be
placed. In certain states such sales material may not be
available. In addition, audio-visual materials may be used in
connection with this offering in certain states. With the
aforementioned exceptions, sales materials have not been
authorized for use by the Managers and should be disregarded.
The offering is made only by means of this Prospectus.
Although the information contained in the supplemental sales
material does not conflict with the information contained in this
Prospectus, such sales material does not purport to be complete
and should not be considered part of this Prospectus or as
forming the basis of the offering of the Units.
LEGAL PROCEEDINGS
Neither the Fund nor the Managers are parties to any pending
legal proceedings that are material to the Fund. Neither AEI
Fund Management XXI, Inc. nor Robert P. Johnson, who is the
general partner of other investment programs (see "Managers"), is
an adverse party in any legal proceedings with limited partners
in such other limited partnerships.
EXPERTS
The balance sheets of AEI Income & Growth Fund 23 LLC and
AEI Fund Management XXI, Inc. as of October 22, 1998 and
September 30, 1998, respectively,included in this Prospectus have
been examined by Boulay, Heutmaker, Zibell & Co., P.L.L.P.,
independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance on the
authority of said firm as experts in giving such report.
The statements concerning federal taxes under the headings
"Income Tax Aspects" and "Risks and Other Important Factors" have
been reviewed by Dorsey & Whitney LLP, counsel for the Fund, and
have been included herein, to the extent they constitute matters
of law, in reliance upon the authority of said firm as experts
thereon. Counsel for the Fund believes that such material
constitutes a full and fair general disclosure of the material
tax risks associated with an investment in the Units.
LEGAL OPINION
The legality of the Units being offered hereby will be
passed upon for the Fund by its counsel, Dorsey & Whitney LLP.
-50-
INDEPENDENT AUDITOR'S REPORT
To the Partners
AEI Income & Growth Fund 23 LLC
St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI Income
& Growth Fund 23 LLC as of October 22, 1998. This financial
statement is the responsibility of the Partnership's management.
Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of
the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of AEI
Income & Growth Fund 23 LLC as of October 22, 1998 in conformity
with generally accepted accounting principles.
Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
October 22, 1998
AEI INCOME & GROWTH FUND 23 LLC
BALANCE SHEET
October 22, 1998
ASSETS
Cash $ 1,000
=======
LIABILITIES AND PARTNERS' CAPITAL
Partners' Capital
Initial Managers' Capital 1,000
--------
Total Liabilities and Partners' Capital $ 1,000
========
The accompanying Notes to the Balance Sheet are an integral part
of this statement.
AEI INCOME & GROWTH FUND 23 LLC
NOTES TO THE BALANCE SHEET
(1) Summary of Organization and Significant Accounting Policies -
Organization
AEI Income & Growth Fund 23 LLC (the LLC) commenced
operations on October 14, 1998 to acquire and lease
commercial properties to operating tenants. The LLC's
operations are managed by AEI Fund Management XXI, Inc.
(AFM), the Manager of the LLC. Robert P. Johnson, the
President and sole shareholder of AFM, serves as the Special
Managing Member of the LLC.
The terms of the offering call for a subscription price of
$1,000 per LLC Unit, payable on acceptance of the offer.
The LLC has not yet sold any Units.
Under the terms of the Restated Operating Agreement, 24,000
LLC Units are available for subscription which, if fully
subscribed, will result in contributed Limited Members'
capital of $24,000,000. The agreement sets forth the
methods for allocation of Net Cash Flow, Net Proceeds of
Sale and profits, losses and other items.
Operations
In the interim period since inception, the LLC did not
engage in any operations or incur any expenses except for
banking fees and a minor management fee. Accordingly, a
Statement of Income, Statement of Cash Flows and Statement
of Changes in PartnersO Capital are not presented.
Accounting Estimates
Management uses estimates and assumptions in preparing the
balance sheet in accordance with generally accepted
accounting principles. Those estimates and assumptions
affect the reported amounts of assets and liabilities.
Actual results could differ from those estimates.
(2) Income Taxes -
The income or loss of the LLC for federal income tax
reporting purposes is includable in the income tax returns of
the members. Accordingly, no recognition has been given to
income taxes in the accompanying balance sheet.
The tax return, the qualification of the LLC as such for tax
purposes, and the amount of distributable LLC income or loss
are subject to examination by federal and state taxing
authorities. If such an examination results in changes with
respect to the LLC qualification or in changes to
distributable LLC income or loss, the taxable income of the
members would be adjusted accordingly.
(3) Fair Value of Financial Instruments -
The carrying value of certain assets and liabilities
approximate fair value.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AEI Fund Management XXI, Inc.
Saint Paul, Minnesota
We have audited the accompanying balance sheet of AEI
Fund Management XXI, Inc. as of September 30, 1998 and
December 31, 1997. This financial statement is the
responsibility of the Company's management. Our
responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above
presents fairly, in all material respects, the financial
position of AEI Fund Management XXI, Inc. as of September
30, 1998 and December 31, 1997, in conformity with generally
accepted accounting principles.
Certified Public Accountants
Minneapolis, Minnesota
November 9, 1998
AEI FUND MANAGEMENT XXI, INC.
BALANCE SHEET
ASSETS
September 30, December 31,
1998 1997
CURRENT ASSETS:
Cash and Cash Equivalents $ 13,446 $ 10,196
Distributions Receivable 7,093 4,453
Receivable from AEI Fund Management, Inc. 130 10
---------- ----------
Total Assets $ 20,669 $ 14,659
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deficit in Real Estate Partnership
Investments $ 27,047 $ 17,806
STOCKHOLDER'S EQUITY:
Common Stock, Par Value $.01 Per Share,
1,000 Shares Issued 10 10
Additional Paid-in Capital 990 990
Retained Earnings (Deficit) (7,378) (4,147)
---------- ----------
Total Stockholder's Equity (Deficit) (6,378) (3,147)
---------- ----------
Total Liabilities and
Stockholder's Equity $ 20,669 $ 14,659
========== ==========
The accompanying notes to Balance Sheet are an integral part
of this statement.
AEI FUND MANAGEMENT XXI, INC.
NOTES TO BALANCE SHEET
(1)Summary of Organization and Significant Accounting Policies -
Organization
AEI Fund Management XXI, Inc. (Company) is the Managing
General Partner of AEI Income & Growth Fund XXI Limited
Partnership (Fund XXI), and AEI Income & Growth Fund
XXII Limited Partnership (Fund XXII). The Company is
the Managing Member of AEI Income & Growth Fund 23 LLC,
which will be formed in October, 1998.
Financial Statement Presentation
The Company accounts for its investments in
Partnerships under the equity method of accounting.
The Company's major source of revenue is its share of
distributions allocated under the terms of the
Partnerships' Limited Partnership Agreements. At
September 30, 1998 and December 31, 1997, the Company
has accumulated deficits of $27,047 and $17,806,
respectively, in excess of its basis in Fund XXI and
Fund XXII. The Company would be responsible to fund a
deficiency in its capital account if the Partnership
terminates.
Accounting Estimates
Management uses estimates and assumptions in preparing
these financial statements in accordance with generally
accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets,
liabilities, stockholder's equity, revenue and
expenses. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity of three months
or less to be cash equivalents.
(2) Receivable from AEI Fund Management, Inc. -
AEI Fund Management, Inc. performs the administrative
and operating functions of the Company. The receivable
from AEI Fund Management, Inc. represents the balance
due for those services. The balance is non-interest
bearing and unsecured and is to be paid in the normal
course of business.
(3) Income Taxes -
The Company elected S-Corporation status. As a result,
the income of the Company for Federal and State income
tax reporting purposes is includable in the income tax
return of the sole stockholder. Accordingly, there is
no provision for income taxes.
EXHIBIT A
OPERATING AGREEMENT
OF
AEI INCOME & GROWTH FUND 23 LLC
TABLE OF CONTENTS
Article
Page
I. Formation of Limited Liability Company A-2
II. Definitions A-2
III. Purpose and Character of Business A-6
IV. Capital A-6
V. Allocation of Profits, Gains and
Losses; Distributions to Members A-9
VI. Rights, Powers and Duties of Managing Members A-11
VII. Provisions Applicable to Limited Members A-17
VIII. Books of Account; Reports and Fiscal Matters A-19
IX. Assignment of Limited Member's Interest A-21
X. Death Withdrawal, Expulsion and Replacement
of the Managing Members A-22
XI. Amendment of Agreement and Meetings A-23
XII. Dissolution and Liquidation A-24
XIII. Miscellaneous Provisions A-25
OPERATING AGREEMENT
OF
AEI INCOME & GROWTH FUND 23 LLC
THIS OPERATING AGREEMENT is entered into as of this
day of _____, 1998, by and among AEI Fund Management
XXI, Inc. (the "Managing Member"), a Minnesota corporation,
Robert P. Johnson (the "Special Managing Member"), and all
other parties comprising the Limited Members, who shall
execute this agreement and whose addresses appear at the end
of this agreement.
I. FORMATION OF THE LIMITED LIABILITY COMPANY
The parties hereto do hereby confirm the formation of
a limited liability company (the "Company") pursuant to the
provisions of the Delaware Limited Liability Company Act
(the " Act") by the filing of a Certificate of Formation on
and agree that the Company shall be governed by the terms of
this agreement. The parties agree that they shall promptly
file any amended certificates of formation that may be
required in the appropriate office in the State of Delaware
and in such other offices as may be required, and that the
parties shall comply with the other provisions and
requirements of the Limited Liability Company Act as in
effect in Delaware, which Act shall govern the rights and
liabilities of the Members, except as herein or otherwise
expressly stated.
1.1 NAME. The business of the Company is conducted
under the firm name and style of: AEI INCOME & GROWTH FUND
23 LLC.
1.2 AGENT FOR SERVICE. The agent for service of
process is The Corporation Trust Company. The location of
the and agent for service of process of the Company shall be
at The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware
19801.
1.3 PRINCIPAL PLACE OF BUSINESS /NAMES AND ADDRESSES.
The location of the principal place of business, principal
office and agent for service of process of the Company shall
be at the offices of the Managing Member, 1300 Minnesota
World Trade Center, 30 East Seventh Street, Saint Paul,
Minnesota 55101. The Company may also maintain offices at
such other place of business as the Managing Member may from
time to time determine. The name and address of the Managing
Member is AEI Fund Management XXI, Inc., 1300 Minnesota
World Trade Center, 30 East Seventh Street, Saint Paul,
Minnesota 55101. The name and address of the Special
Managing Member is Robert P. Johnson, 1300 Minnesota World
Trade Center, 30 East Seventh Street, Saint Paul, Minnesota
55101. The names and addresses of the Limited Members are
set forth on Schedule A at the end of this agreement.
1.4 TERM. The Company shall commence business on the
date hereof, and shall continue until December 31, 2048,
unless dissolved, terminated and liquidated prior thereto
under the provisions of Article XIII.
II. DEFINITIONS
As used in this agreement, the following terms shall
have the following meanings:
2.1 "Acquisition Expenses" means expenses including,
but not limited to, legal fees and expenses, travel and
communication expenses, costs of appraisals, non-refundable
option payments on properties not acquired, accounting fees
and expenses, title insurance and miscellaneous expenses
related to selection and acquisition of properties, whether
or not acquired.
2.2 "Acquisition Fees" means the total of all fees
and commissions paid by any party in connection with making
or investing in mortgage loans or the purchase, development
or construction of Properties, whether designated as a real
estate commission relating to the purchase of Properties,
selection fee, Development Fee, Construction Fee,
A-2
nonrecurring management fee, loan fees or points paid by
borrowers to the Managing Member if the Company invests in
mortgage loans, or any fee of a similar nature, however
designated or however treated for tax or accounting
purposes. Acquisition Fees shall not include Development
Fees and Construction Fees paid to any person or entity not
Affiliates of the Managing Members in connection with the
actual development and construction of a project.
2.3 "Adjusted Capital Contributions" means the
aggregate original capital contribution of a Limited Member
reduced, from time to time, by (i) any return of capital
contributions pursuant to Section 4.5, and (ii) to the
extent the Company has paid a cumulative (but not
compounded) 6% per annum return on Adjusted Capital
Contributions, by total cash distributed from Net Proceeds
of Sale with respect to the Units; and increased from time
to time by the product of (i) the Adjusted Capital
Contribution of any Limited Member whose Units are
repurchased and (ii) the ratio of each remaining Limited
Member's Units to the total Units outstanding after such
repurchase. Adjusted Capital Contributions shall not be
reduced by distributions of Net Cash Flow.
2.4 "Administrative Expenses" means expenses incurred
by the Managing Members and their Affiliates during the
operation of the Company directly attributable to rendering
the following services to the Company: (i) administering
the Company (including agency type services, member
relations and communications, financial and tax reporting ,
accounting and payment of accounts, payment of
distributions, payment of unit redemptions, staffing and
processing other investor requests); (ii) property
management (including collecting, depositing and monitoring
rental payments and penalties, monitoring compliance with
leases, monitoring the maintenance of property and liability
insurance and the payment of taxes, maintenance of lease
insurance (if applicable), monitoring and negotiating other
forms of tenant security and financial condition, ongoing
site inspections and property reviews and reviewing tenant
reports); (iii) property and lease workout (including
enforcing lease provisions in default, filing lease
insurance claims, enforcing guarantees, collecting letters
of credit or foreclosing other collateral, if applicable,
eviction of tenants in default, re-leasing of properties,
and monitoring tenant disputes and foreclosures); (iv)
property financing and refinancing; and (v) Company
dissolution and liquidation (accounting, final payment to
creditors, administrative filings and other costs).
2.5 "Affiliate" means (i) any person directly or
indirectly controlling, controlled by or under common
control with another person, (ii) any person owning or
controlling 10% or more of the outstanding voting securities
of such other person, (iii) any officer, director or partner
of such person and (iv) if such other person is an officer,
director or partner, any such company for which such person
acts in such capacity.
2.6 "Competitive Real Estate Commissions" means real
estate or brokerage commissions paid for the purchase or
sale of a Property that are reasonable, customary and
competitive in light of the size, type and location of such
Property and which do not, in any event, exceed 6% of the
contract price for the sale of such Property.
2.7 "Construction Fee" means a fee or other
remuneration for acting as general contractor and/or
construction manager to construct improvements, supervise
and coordinate projects or to provide Major Repairs or
Rehabilitation of Company Property.
2.8 "Cost" means, when used with respect to services
furnished by the Managing Members or their Affiliates to, or
on behalf of, the Company, the lesser of (i) the actual
expenses incurred by such Managing Members and Affiliates in
providing services necessary to the prudent operation of the
Company, including salaries and expenses paid to officers,
directors, employees and consultants, depreciation and
amortization, office rent, travel and communication
expenses, employee benefit expenses, supplies and other
overhead expenses directly attributable to the furnishing of
such services; or (ii) the price that would be charged by
unaffiliated parties rendering similar services in the same
geographic location. Overhead expenses shall be charged
only if directly attributable to such services and shall be
allocated based upon the amount of time personnel actually
spend providing such services, or such other method of
allocation as is acceptable to the Company's independent
public accountant.
2.9 "Development Fee" means a fee for packaging the
Company's Property, including negotiating and approving
plans, and undertaking to assist in obtaining zoning and
necessary variances and necessary financing for a specific
Property, either initially or at a later date.
A-3
2.10 "Front-End Fees" means fees and expenses paid by
any party for services rendered during the Company's
Organizational or acquisition phase, including
Organizational and Offering Expenses, Acquisition Fees,
Acquisition Expenses, interest on deferred fees and expenses
and other similar fees, however designated by the Managing
Member.
2.11 "Managing Members" means the Managing Member,
the Special Managing Member and any substitute Managing
Member as provided in Article X.
2.12 "Special Managing Member" means Robert P.
Johnson, and any substitute as provided in Article X.
2.13 "Investment in Properties" means the amount of
capital contributions actually paid or allocated to the
purchase of Properties, including working capital reserves
allocable thereto (except that working capital reserves in
excess of 5% will not be included) and other cash payments
such as interest and taxes, but excluding Front-End Fees.
2.14 "Limited Members" means all parties who shall
execute, either personally or by an authorized attorney-in-
fact, this agreement as Limited Members and comply with the
conditions in Section 4.2, and any and all assignees of the
Limited Members, whether or not such assignees are admitted
to the Company as substitute Limited Members; provided,
however, that an assignee of the interest of any Limited
Member shall not be considered a "Limited Member" for
purposes of Articles X and XI hereof unless such assignee is
admitted as a substitute Limited Member as provided in
Article IX.
2.15 "Limited Liability Company Act" means the
Delaware Limited Liability Company Act, as the same may be
amended.
2.16 "Limited Liability Company Unit" or "Unit" means
the Company interest and appurtenant rights, powers and
privileges of a Limited Member and represents the stated
capital contributions with respect thereto, all as set forth
elsewhere in this agreement.
2.17 "Major Repairs or Rehabilitation" means the
repair, rehabilitation or reconstruction of a Property where
the aggregate costs exceed 10% of the fair market value of
the Property at the time of such services.
2.18 "Managing Member" means AEI Fund Management XXI,
Inc., and any substitute as provided in Article X.
2.19 "Net Value" means the aggregate value of the
Company's assets less the Company's liabilities, as
determined by the Managing Member, after taking into account
(i) the present value of future net cash flow from rental
income on the Fund's properties, (ii) the price at which
Units of the Company have last been purchased, and (ii) such
other factors as the Managing Members deem relevant.
2.20 "Net Cash Flow" means Company cash funds
provided from operations, including lease payments from
builders and sellers without deduction for depreciation, but
after deducting cash funds used to pay all other expenses,
debt payments, capital improvements and replacements and
less the amount set aside for restoration or creation of
reserves.
2.21 "Net Proceeds of Sale" means the excess of gross
proceeds from any sale, refinancing (including the financing
of a Property that was initially purchased debt-free) or
other disposition of a Property over all costs and expenses
related to the transaction, including fees payable in
connection therewith, and over the payments made or required
to be made on any prior encumbrances against such Property
in connection with such transaction.
2.22 "Members" means the Managing Member, the Special
Managing Member and the Limited Members.
2.23 "Organization and Offering Expenses" means those
expenses incurred in connection with and in preparing the
Company for registration and subsequently offering and
distributing it to the public, including any sales
commissions, nonaccountable expense allowances or
reimbursement of due diligence expenses paid to broker-
dealers in connection with the distribution of the Company
and all advertising expenses.
A-4
2.24 "Company" means the limited liability company
formed by this agreement.
2.25 "Permitted Transfer" means, with respect to the
transfer of Units in any fiscal year of the Company (i)
transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference
to its basis in the hands of the transferor, or is
determined under Section 732 of the Internal Revenue Code of
1986, as amended (the "Code"), (ii) transfers of Units upon
the death of a Limited Member, (iii) transfers of Units
between members of a family (as defined in Section 267(c)(4)
of the Code), (iv) transfers of Units at original issuance
and sale, (v) transfers of Units pursuant to distribution
under a Qualified Plan, and (vi) block transfers of Units by
a single Member in one or more transactions during any
thirty calendar day period representing in the aggregate
more than five percent (5%) of the total interest of all
Members in Company capital and profits.
2.26 "Properties" or "Property" means real properties
or any interest therein acquired directly or indirectly by
the Company and all improvements thereon and all repairs,
replacements or renewals thereof, together with all personal
property acquired by the Company that from time to time is
located thereon or specifically used in connection
therewith.
2.27 "Prospectus" means that certain prospectus of
the Company dated , 1998.
2.28 "Qualified Matching Service" means a listing
system operation, provided either through the Managing
Members or through any unrelated third party (including any
dealer in the Units), in which Limited Members contact the
operator to list Units they desire to transfer and through
which the operator attempts to match the listing Limited
Member with a customer desiring to buy Units without (i)
regularly quoting prices at which the operator stands ready
to buy or sell interests, (ii) making such quotes available
to the public, or (iii) buying or selling interests for its
own account.
2.29 "Qualified Matching Service Transfer" means a
transfer of Units through a Qualified Matching Service in
which (i) at least a fifteen (15) calendar day delay occurs
between the day (the "Contact Date") a Limited Member
provides written confirmation to the Qualified Matching
Service that his or her Units are available for sale and the
earlier of (A) the day information is made available to
potential buyers that such Units are available for sale, or
(B) the day information is made available to the selling
Limited Member regarding the existence of outstanding bids
to purchase Units, (ii) the closing of the transfer does not
occur until at least forty five (45) days after the Contact
Date, (iii) the Limited Member's offer to sell is removed
from the Qualified Matching Service within one hundred and
twenty (120) days of the Contact Date, and (iv) no Units of
such Limited Member are entered for listing by the Qualified
Matching Service for at least sixty (60) days after the
removal of the Limited Member's information from such
Qualified Matching Service; provided, however, that no
transfer shall be a Qualified Matching Service Transfer if,
after giving effect to such transfer, the aggregate of (a)
Qualified Matching Service Transfers, (b) transfers pursuant
to the repurchase provisions contained in section 7.7 of
this agreement of Limited Member interests and (c) all other
transfers of Limited Member interests except Permitted
Transfers since the beginning of the fiscal year in which
such transfer is made would exceed ten percent (10%) of the
Company interests outstanding.
2.30 "Qualified Plans" means Keogh Plans and
pension/profit-sharing plans that are qualified under
Section 401 of the Internal Revenue Code.
2.31 "Roll-Up" means a transaction involving the
acquisition, merger, conversion, or consolidation, either
directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity; provided, however, that a
Roll-Up shall not include a transaction involving the
conversion to corporate, trust or association form of only
the Company if, as a consequence of such transaction, there
will be no significant adverse change in any of the
following:
(i) voting rights of Limited Members;
(ii) the term of existence of the surviving entity
beyond that of the Company;
(iii) compensation to the Managing Members or their
Affiliates;
(iv) the investment objectives of the Company or the
surviving entity.
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2.32 "Roll-Up Entity" means a Company, real estate
investment trust, corporation, trust or other entity that
would be created or would survive after successful
completion of a proposed Roll-Up Transaction.
2.33 "Sponsor" means any person, Company,
corporation, association or other entity which is directly
or indirectly instrumental in organizing, wholly or in part,
the Company or any person, Company, corporation, association
or other entity which will manage or participate in the
management of the Company, and any Affiliate of such person,
Company, corporation, association or other entity, but does
not include a person, Company, corporation, association or
other entity whose only relation with the Company is as that
of an independent property manager, whose only compensation
is as such. "Sponsor" does not include wholly independent
third parties such as attorneys, accountants, and
underwriters whose only compensation is for professional
services rendered in connection with the offering of Company
interests. A person, Company, corporation, association or
other entity may also be a Sponsor of the Company by: (i)
taking the initiative, directly or indirectly, in founding
or organizing the business or enterprise of the Company,
either alone or in conjunction with one or more other
persons, companies, corporations, associations or other
entities; (ii) receiving a material participation in the
Company in connection with the founding or organizing of the
business of the Company, in consideration of services or
property, or both services and property; (iii) having a
substantial number of relationships and contacts with the
Company; (iv) possessing significant rights to control
Company Properties; (v) receiving fees for providing
services to the Company which are paid on a basis that is
not customary in the industry; (vi) providing goods or
services to the Company on a basis which was not negotiated
at arm's length with the Company.
III. PURPOSE AND CHARACTER OF THE BUSINESS
The purpose and character of the business of the
Company shall be to acquire an interest in the Properties
upon such terms and conditions as the Managing Member, in
its absolute discretion, shall determine, including, without
limitation, taking title to the Properties; to own, lease,
operate and manage the Properties for income-producing
purposes; to furnish services and goods in connection with
the operation and management of the Properties; to enter
into agreements pertaining to the operation and management
of the Properties; to borrow funds for such purposes and to
mortgage or otherwise encumber any or all of the Company's
assets or Properties to secure such borrowings; to sell or
otherwise dispose of the Properties and the assets of the
Company; and to undertake and carry on all activities
necessary or advisable in connection with the acquisition,
ownership, leasing, operation, management and sale of the
Properties.
IV. CAPITAL
4.1 MANAGING MEMBERS. The Managing Member and the
Special Managing Member shall be obligated to make capital
contributions to the Company, to the extent not previously
made, in the amounts of $600 and $400, respectively. The
Managing Members shall not be obligated to make any other
contributions to the capital of the Company, except that, in
the event that the Managing Members have negative balances
in their capital accounts after dissolution and winding up
of, or withdrawal from, the Company, the Managing Members
will contribute to the Company an amount equal to the lesser
of (a) the deficit balances in their capital accounts or (b)
1.01% of the total capital contributions of the Limited
Members' over the amount previously contributed by the
Managing Members hereunder.
4.2 LIMITED MEMBER CAPITAL CONTRIBUTIONS.
(a) INITIAL CONTRIBUTION. There shall initially be
available for subscription by prospective Limited
Members an aggregate of 24,000 Limited Liability Company
Units. The purchase price of each Unit shall be $1,000,
except that the AEI Securities Incorporated may purchase
Units for $920. Except as provided in section 4.10,
each subscriber must subscribe for a minimum purchase of
two and one-half Units, with the exception of Qualified
Plans and Individual Retirement Accounts, which must
subscribe for a minimum purchase of two Units and
subscribers may purchase fractional Units above such
minimums.
(b) REQUIREMENTS FOR LIMITED MEMBER STATUS. Upon the
initial closing of the sale of Units, the purchasers
will be admitted as Limited Members not later than 15
days after the release from impound of the purchasers'
funds. Thereafter, an investor will be admitted to the
Company not later than the first day of each month
provided that his or her subscription for Units has been
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received at least three days prior to such date. The
Members shall not be obligated to make any additional
contributions to the capital of the Company.
4.3 CAPITAL ACCOUNTS. A separate capital account
shall be maintained by the Company for each Member. It is
intended that the capital account of each Member will be
maintained in accordance with the capital accounting rules
of Treas. Reg. Section 1.704-1(b)(2)(iv). In general this
will mean that the capital account of each Member shall be
initially credited with the amount of his or her cash
contribution to the capital of the Company. The capital
account of each Member shall further be credited by the
amount of any additional contributions to the capital of the
Company made by such Member from time to time, shall be
debited by the amount of any cash distributions made by the
Company to such Member and shall be credited with the amount
of income and gains and debited with the amount of losses of
the Company allocated to such Member. In all instances the
capital accounting rules in Treas. Reg. Section 1.704-
1(b)(2)(iv) will determine the proper debits or credits to
each Member's capital account. The Managing Member may, at
its option, increase or decrease the capital accounts of the
Members to reflect a revaluation of Company Property on the
Company's books at the times when, pursuant to Treas. Reg.
Section 1.704-1(b)(2)(iv), such adjustments may occur. The
adjustments, if made, will be made in accordance with such
Regulation, including allocating taxable items, as computed
for book purposes, to the capital accounts as prescribed in
such Regulation. In the case of the transfer of all or a
part of an interest in the Company, the capital account of
the transferor Member attributable to the transferred
interest will carry over to the transferee Member. In the
case of termination of the Company pursuant to Section 708
of the Code, the rules of Treas. Reg. Section 1.704-
1(b)(2)(iv) shall govern adjustments to the capital
accounts. If there are any adjustments to Company property
as a result of Sections 732, 734, or 743, the capital
accounts of the Members shall be adjusted as provided in
Treas. Reg. Section 1.701-1(b)(2)(iv)(m). Except as
provided in Section 4.1 of this agreement, in the event that
any Member has a negative capital account balance after
dissolution and winding up of the Company, such Member will
not be obligated to contribute capital in the amount of such
deficit.
4.4 NO RIGHT TO RETURN OF CONTRIBUTION. The Limited
Members shall have no right to withdraw or to receive a
return of their contributions to the capital of the Company,
as reflected in their respective capital accounts from time
to time, except upon presentment of Units in accordance with
Section 7.7 or upon the dissolution and liquidation of the
Company pursuant to Article XII.
4.5 RETURN OF UNUSED NET OFFERING PROCEEDS. In the
event that any portion of the Limited Members' capital
contributions is not invested or committed for investment in
real property before the later of two years after the date
of the Prospectus or six months after the date of the offer
and sale of Units pursuant to the Prospectus is terminated
(except for amounts utilized to pay operating expenses of
the Company and to establish reasonable working capital
reserves as determined by the Managing Member), such portion
of the capital contributions shall be distributed, without
interest but with any Front-End Fees, including without
limitation commissions or other Organization and Offering
Costs, paid thereon, by the Company to the Limited Members
as a return of capital. All of such capital contributions
will be available for the general use of the Company during
such period and may be expended in operating the Properties
that have been acquired. For the purpose of the foregoing,
funds will be deemed to have been committed to investment,
and will not be returned to the Limited Members to the
extent written contractual agreements have been executed
prior to the expiration of the preceding period, regardless
of whether any such investment is ultimately consummated
pursuant to the written contractual agreement. To the
extent any funds have been reserved to make contingent
payments in connection with any Property pursuant to a
written contractual agreement in connection with such
Property or pursuant to a reasonable decision of the
Managing Members that additional reserves are necessary in
connection with any Property, regardless of whether any such
payment is ultimately made, subscription funds will not be
returned to the Limited Members.
4.6 LOANS TO COMPANY; NO INTEREST ON CAPITAL. The
Members may make loans to the Company from time to time, as
authorized by the Managing Member, in excess of their
contributions to the capital of the Company, and any such
loans shall not be treated as a contribution to the capital
of the Company for any purpose hereunder, nor shall any such
loans entitle such Member to any increase in his or her
share of the profits and losses and cash distributions of
the Company, nor shall any such loans constitute a lien
against the Properties. The amount of any such loans with
interest thereon at a rate determined by the Managing
Member, in its absolute discretion, but not to exceed the
rate that otherwise would be charged by unaffiliated lending
institutions on comparable loans for the same purpose, shall
be an obligation of the Company to such Member. The
Managing Members or their Affiliates may loan funds to the
Company during the offering period for the purpose of
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acquiring a Property. Interest on such loans shall not be
in excess of the rate that either would be charged by an
unrelated lending institution on comparable loans for the
same purpose in the same locality of the Properties or
represents the cost of funds of the Managing Members or
their Affiliates. No interest shall be paid by the Company
on the contributions to the capital of the Company by the
Members.
4.7 PURCHASE OF LIMITED LIABILITY COMPANY UNITS BY
MANAGING MEMBERS. The Managing Members and their Affiliates
may subscribe for and acquire Units for their own account;
provided, however, that any Units acquired by the Managing
Members or their Affiliates will be acquired for investment
and not with a view to the distribution thereof and that the
aggregate amount of Units so purchased by the Managing
Members will not exceed five percent (5%) of the Units
offered. With respect to such Units, the Managing Members
and their Affiliates shall have all the rights afforded to
Limited Members under this agreement, except as may be
expressly provided in this agreement.
4.8 NONRECOURSE LOANS. A creditor who makes a
nonrecourse loan to the Company will not have or acquire, at
any time as a result of making the loan, any direct or
indirect interest in the profits, capital or property of the
Company other than as a secured creditor.
4.9 WORKING CAPITAL RESERVE. The Managing Members
shall use their best efforts to maintain a working capital
reserve of one percent (1%) of the aggregate Adjusted
Capital Contributions and to restore such reserve if
depleted.
4.10 DISTRIBUTION REINVESTMENT PLAN.
(a) A Limited Member may elect to participate in a
program for the reinvestment of his or her distributions
of Net Cash Flow (the "Distribution Reinvestment Plan")
and have his or her distributions of Net Cash Flow from
operations reinvested in Units of the Company. Limited
Members participating in the Distribution Reinvestment
Plan may purchase fractional Units and there shall be no
minimum purchase amount with respect to such
participants. Each Limited Member electing to
participate in the Distribution Reinvestment Plan shall
receive, at the time of each distribution of Net Cash
Flow, a notice advising such Limited Member of the
number of additional Units purchased with such
distribution and advising such Limited Member of his or
her ability to change his or her election to participate
in the Distribution Reinvestment Plan.
(b) If a Limited Member withdraws from the
Distribution Reinvestment Plan, such withdrawal shall be
effective only with respect to distributions made more
than 30 days following receipt by the Company of written
notice of such withdrawal. In the event of a transfer
by a Limited Member of Units, such transfer shall
terminate the Limited Member's participation in the plan
as of the first day of the quarter in which the transfer
is effective.
(c) Distributions may be reinvested only if (i) the sale of
Units continues to be registered or qualified for sale under
federal and applicable state securities laws; (ii) each
continuing Participant has received a current prospectus relating
to the Company, including any supplements thereto, and executed a
confirmation within one year of such reinvestment indicating such
Participant's intention to purchase units in the Company through
the Plan and confirming that the Participant continues to satisfy
the investor suitability requirements; (iii) there has been no
distribution of Net Proceeds of Sale or Refinancing. If (A) any
of the foregoing conditions are not satisfied at the time of any
distribution, or (B) no interests are available to be purchased,
such distributions shall be paid in cash.
(d) Each Limited Member electing to participate in the
Distribution Reinvestment Plan hereby agrees that his or her
investment in this Company constitute his or her agreement to be
a Limited Member of the Company and to be bound by the terms and
conditions of this agreement and, if at any time he or she fails
to meet applicable investor suitability guidelines or cannot make
the other investor representations required or set forth in the
then current Company agreement prospectus or subscription
agreement, he or she will promptly notify the Managing Members in
writing.
(e) The Company shall pay a commission in connection with
any reinvestment pursuant to the plan to any broker-dealer
designated by the Participant in the plan. If no broker-dealer
is designated or the Limited Member has advised the Company that
he or she desires that such commissions not be paid, or if the
designated broker-dealer has not signed a dealer agreement with
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respect to the Company, or if the broker-dealer is no longer
qualified under applicable law to engage in the solicitation of
the sale of such Company interests, then no commission shall be
paid and all Limited Members in the Company shall be credited
with a pro rata portion of the commission not so paid. No fees
shall be paid to the Company or the Managing Members at the time
of any such reinvestment, but the Managing Members of the Company
may be reimbursed for the Cost incurred in making such
reinvestment, in accordance with the provisions of this
agreement.
(f) The Managing Members may, at their option, elect to
terminate the Distribution Reinvestment Plan at any time without
notice to Limited Members.
V. ALLOCATION OF PROFITS, GAINS AND LOSSES; DISTRIBUTIONS
TO MEMBERS
The Members agree that the income, profits, gains and losses
of the Company shall be allocated and that cash distributions of the
Company shall be made as follows:
5.1 ALLOCATION OF INCOME, PROFITS, GAINS AND LOSSES. For
income tax purposes, income, profits, gains and losses of the
Company for each fiscal year, other than any gain or loss realized
upon the sale, exchange or other disposition of any Property, using
such methods of accounting for depreciation and other items as the
Managing Member determines to use for federal income tax purposes,
shall be allocated as of the end of each fiscal year to each Member
based on his or her varying interest in the Company during such
fiscal year. The Company shall determine, in the discretion of the
Managing Member and as recommended by the Company auditors, whether
to prorate items of income and deduction according to the portion of
the year for which a Member was a member of the Company or whether
to close the books on an interim basis and divide such fiscal year
into segments. Subject to Section 5.6, for income tax purposes,
income, profits, gains and losses, other than any gain or loss
realized upon the sale, exchange or other disposition of any
Property, shall be allocated as follows:
(a) Net loss shall be allocated 99% to the Limited Members,
.6% to the Managing Member and .4% to the Special Managing
Member; and
(b) Net income, profits and gains shall be allocated first in
the ratio in which, and to the extent, Net Cash Flow is
distributed to the Members for such year, and any additional
income, profits and gains for such year will be allocated in the
same ratio as the last dollar of Net Cash Flow is distributed.
5.2 DISTRIBUTIONS OF NET CASH FLOW. Net Cash Flow from
operations, if any, with respect to a fiscal year will first be
distributed 97% to the Limited Members and 3% to the Managing
Members. Any amounts distributed to the Limited Members in
accordance with this Section 5.2 shall be allocated among the
Limited Members pro rata based on the number of Units held by each
Limited Member and the number of days such Units were held during
such fiscal year.
5.3 ALLOCATION OF GAIN OR LOSS UPON SALE, EXCHANGE OR OTHER
DISPOSITION OF A PROPERTY.
(a) Subject to Section 5.6, for income tax purposes, the gain
realized upon the sale, exchange or other disposition of any
Property shall be allocated as follows:
(i) First, to and among the Members in an amount equal
to the negative balances in their respective capital accounts
(pro rata based on the respective amounts of such negative
balances).
(ii) Next, 99% to the Limited Members and 1% to the
Managing Members until the balance in each Limited Member's
capital account equals the sum of such Limited Member's
Adjusted Capital Contribution plus an amount equal to a 7%
per annum return on such Limited Member's Adjusted Capital
Contribution, cumulative but not compounded, to the extent
not previously distributed pursuant to Section 5.2 and
Section 5.4(a).
(iii) The balance of any remaining gain will then be
allocated 90% to the Limited Members and 10% to the Managing
Members.
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(b) Subject to Section 5.6, any loss on the sale, exchange or
other disposition of any Property will be allocated 98% to the
Limited Members and 2% to the Managing Members.
5.4 DISTRIBUTION OF NET PROCEEDS OF SALE. Upon financing,
refinancing, sale or other disposition of any of the Properties, Net
Proceeds of Sale may be reinvested in additional properties;
provided, however, that sufficient cash is distributed to the
Limited Members to pay state and federal income taxes (assuming
Limited Members are taxable at a marginal rate of 7% above the
federal capital gains rate applicable to individuals) created as a
result of such transaction. Except for distributions upon
liquidation of the Company (which are governed by Section 12.3 of
this agreement), Net Proceeds of Sale that are not reinvested in
additional properties will be distributed as follows:
(a) First, 99% to the Limited Members and 1% to the Managing
Members until the Limited Members have received an amount from
Net Proceeds of Sale equal to the sum of (i) an amount equal to a
7% per annum return on their Adjusted Capital Contributions,
cumulative but not compounded, to the extent such 7% return has
not been previously distributed to them pursuant to Section 5.2
and this Section 5.4(a), plus (ii) their Adjusted Capital
Contributions.
(b) Any remaining balance will be distributed 90% to the
Limited Members and 10% to the Managing Members.
In no event will the Managing Members receive more than 10% of Net
Proceeds of Sale.
5.5 CUMULATIVE RETURN. The Company shall pay a cumulative,
but not compounded, 6% per annum return on Adjusted Capital
Contributions before applying Net Proceeds of Sale to a reduction of
Adjusted Capital Contributions. The cumulative (but not compounded)
return on Adjusted Capital Contributions with respect to each Unit
shall commence on the first day of the calendar quarter following
the date on which such Unit is initially held by a Limited Member.
5.6 REGULATORY ALLOCATIONS. The following Regulatory
Allocations shall be made in the following order:
(a) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Section 1.704-2(f) of the Treasury
Regulations, notwithstanding any other provision of these
Regulatory Allocations, if there is a net decrease in Company
minimum gain during any Company fiscal year, each Member shall be
specially allocated items of Company income and gain for such
year (and, if necessary, subsequent years) in an amount equal to
that Member's share of the net decrease in Company minimum gain
(within the meaning of Treas. Reg. 1.704-2(b)(2) and 1.704-
2(d)) determined in accordance with Treas. Reg. 1.704-2(g).
Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to
each Member pursuant thereto. The items to be so allocated shall
be determined in accordance with Treas. Reg. 1.704-2(f)(6) and
1.704-2(j)(2). This paragraph (a) is intended to comply with the
minimum gain chargeback requirement in Treas. Reg. 1.704-2(f)
and shall be interpreted consistently therewith.
(b) MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise
provided in Treas. Reg. 1.704-2(i)(4),
notwithstanding any other provision of these Regulatory
Allocations, if there is a net decrease in Member nonrecourse
debt minimum gain, as defined in Treas. Reg. 1.704-2(i)(2) and
determined pursuant to Treas. Reg. 1.704-2(i)(3), attributable
to a Member nonrecourse debt, as defined in Treas. Reg. 1.704-
2(b)(4), during any Company fiscal year, each Member who has a
share of the Member nonrecourse debt minimum gain attributable to
such Member nonrecourse debt, determined in accordance with
Treas. Reg. 1.704-2(i)(5), shall be specially allocated items
of Company income and gain for such year (and if necessary,
subsequent years) in an amount equal to such Member's share of
the net decrease in Member nonrecourse debt minimum gain
attributable to such Member nonrecourse debt, determined in
accordance with Treas. Reg. 1.704-2(i)(4). Allocations
pursuant to the previous sentence shall be made in proportion to
the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be
determined in accordance with Treas. Regulations 1.704-2(i)(4)
and 1.704-2(j)(2). This paragraph (b) is intended to comply with
the minimum gain chargeback requirement in Treas. Reg. 1.704-
2(i)(4) and shall be interpreted consistently therewith.
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(c) QUALIFIED INCOME OFFSET. If a Member unexpectedly
receives an adjustment, allocation or distribution described
in Treas. Reg. s 1.704-1(b)(2)(ii)(d)(4), (5) or (6), and such
unexpected adjustment, allocation or distribution puts such
Member's capital account into a deficit balance or increases such
deficit balance determined after such account is credited by any
amounts which the Member is obligated to restore or is deemed to
be obligated to restore pursuant to the penultimate sentence of
Treas. Reg. 1.704-2(g)(1) and 1.704-2(i)(5) and debited by the
items described in Treas. Reg. 1.704-1(b)(2)(ii)(d)(4), (5)
and (6) and for all other allocations tentatively made pursuant
to these Regulatory Allocations as if this paragraph (c) were not
in this agreement, such Member shall be allocated items of
Company income and gain in an amount and manner sufficient to
eliminate such deficit or increase as quickly as possible. It is
intended that this paragraph (c) shall meet the requirement that
this agreement contain a "qualified income offset" as defined in
Treas. Reg. 1.704-1(b)(2)(ii)(d) and this Section shall be
interpreted and applied consistently therewith.
(d) GROSS INCOME ALLOCATION. In the event any Member has a
deficit capital account at the end of any fiscal year which
is in excess of the sum of (i) the amount such Member is
obligated to restore pursuant to any provision of this agreement,
and (ii) the amount such Member is deemed to be obligated to
restore pursuant to the penultimate sentences of Treas. Reg.
1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be
specially allocated items of Company income and gain in the
amount of such excess as quickly as possible, provided that an
allocation pursuant to this paragraph (d) shall be made only if
and to the extent that such Member would have a deficit capital
account in excess of such sum after all other allocations
provided for in these Regulatory Allocations have been made as if
paragraph (c) and this paragraph (d) were not in the Agreement.
(e) NONRECOURSE DEDUCTIONS. Nonrecourse deductions, within
the meaning of Treas. Reg. 1.704-2(b)(1), for any fiscal year or
other period shall be specially allocated to the Members in
proportion to their Units.
(f) MEMBER NONRECOURSE DEDUCTIONS. Any Member nonrecourse
deductions, within the meaning of Treas. Reg. 1.704-2(i)(1)
and 1.704-2(i)(2), for any fiscal year or other period shall be
specially allocated to the Member who bears the economic risk of
loss with respect to the Member nonrecourse debt to which such
Member nonrecourse deductions are attributable in accordance with
Treas. Regulations Section 1.704-2(i).
(g) SECTION 754 ADJUSTMENT. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code
Sections 732, 734(b) or 743(b) is required, pursuant to Treas.
Reg. 1.704-1(b)(2)(iv)(m)(2) or (4), to be taken into account
in determining capital accounts, the amount of such adjustment to
the capital accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in a manner consistent with
the manner in which their capital accounts are required to be
adjusted pursuant to such Sections of the Treasury Regulations.
The Regulatory Allocations are intended to comply with certain
requirements of the Treasury Regulations. It is the intent of the
Members that to the extent possible, all Regulatory Allocations
shall be offset either with other Regulatory Allocations or with
special allocations of other items of Company income, gain, loss, or
deduction pursuant to this paragraph. Therefore, notwithstanding
any other provision of these Regulatory Allocations (other than the
Regulatory Allocations), the Managing Member shall make such
offsetting special allocations of Company income, gain, loss, or
deduction in whatever manner it determines appropriate so that,
after such offsetting allocations are made, each Member's capital
account balance is, to the extent possible, equal to the capital
account balance such Member would have had if the Regulatory
Allocations were not part of the Agreement and all Company items
were allocated pursuant to Section 12.1 and Section 12.2. In
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exercising its discretion under this paragraph, the Managing Member
shall take into account future Regulatory Allocations under Sections
paragraphs (a) and (b) that, although not yet made, are likely to
offset other Regulatory Allocations previously made under paragraphs
(e) and (f).
5.7 LIMITATION ON LOSS ALLOCATION. Notwithstanding anything
in Sections 5.1 above, losses allocated pursuant to Section 5.1
shall not exceed the maximum amount of losses that can be so
allocated without causing a Member to have an adjusted capital
account deficit at the end of any fiscal year. In the event one of
the Members would have an adjusted capital account deficit as a
consequence of an allocation of losses pursuant to Section 5.1, the
limitation set forth herein shall be applied on a Member by Member
basis so as to allocate the maximum permissible losses to each
Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations. All
losses in excess of the foregoing limitation shall be allocated to
the Members in proportion to their Units.
5.8 ALLOCATION AMONG MANAGING MEMBERS. Any allocations or
distributions to the Managing Members shall be made in the following
ratio: 60% to the Managing Member and 40% to the Special Managing
Member.
VI. RIGHTS, POWERS AND DUTIES OF MANAGING MEMBERS
The Members agree that the Managing Members, acting through
the Managing Member, shall have the following rights, powers and,
where provided, duties in connection with the conduct of the
business of the Company.
The Managing Member shall manage the affairs of the Company in
a prudent and business-like fashion and shall use its best efforts
to carry out the purposes and character of the business of the
Company. The Managing Member shall devote such of its time as it
deems necessary to the management of the business of the Company and
may enter into agreements with an Affiliate to provide services for
the Company, provided that such services are furnished at Cost.
6.1 APPOINTMENT OF MANAGING MEMBER. Subject to the
limitations herein, and to the express rights afforded Limited
Members herein, including, without limitation, the rights set forth
in Articles VII and XI herein, the Special Managing Member and the
Limited Members delegate to the Managing Member the sole and
exclusive authority for all aspects of the conduct, operation and
management of the business of the Company, including making any
decision regarding the sale, exchange, lease or other disposition of
the Properties; provided, however, that the Managing Member shall be
required to obtain the prior consent of the Special Managing Member
and a majority of the Limited Members, by interest, to the sale of
all or substantially all of the assets of the Company. In the event
the Managing Member proposes to cause the Company to enter into a
transaction requiring the consent of the Special Managing Member,
the Managing Member shall forthwith notify the Special Managing
Member of its intentions in writing. The Special Managing Member
shall be considered to have consented to such proposal if he fails
to notify the Managing Member of his objection thereto within 20
days of the date of notice of such proposal, such notification to
include a brief statement of each reason for the Special Managing
Member's opposition to such proposal. With the exceptions stated
above, the Managing Member shall have the exclusive authority to
make all decisions affecting the Company and to exercise all rights
and powers granted to the Managing Members. Nothing in this section
shall limit the liability of the Special Managing Member.
6.2 REIMBURSEMENT OF EXPENSES.
(a) Subject to the limitations set forth in Section 6.2(b),
the Company shall reimburse the Managing Members and their
affiliates at their Cost: (i) for any expenditures of their own
funds for purposes of organizing the Company and arranging for
the offer and sale of Units (including commissions); (ii) for all
Acquisition Expenses incurred by them, (iii) for the services
they provide in the sales effort of the Properties, and (iv) for
the expenses of controlling persons and overhead expenses
directly attributable to the forgoing services or attributable to
Administrative Services (which overhead expenses shall be
allocated based upon the amount of time personnel actually spend
providing such services, or such other method of allocation as is
acceptable to the Company's independent public accountant). In
addition, the Company shall reimburse the Managing Members and
their affiliates at their Cost for Administrative Expenses
necessary for the prudent operation of the Company, provided that
any expenses of controlling persons and overhead expenses
included in such Administrative Expense reimbursements shall be
subject to the limitations set forth in Section 6.2(b).
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(b) The aggregate cumulative reimbursements pursuant to
Section 6.2(a)(i) to (iv) to the Managing Members and their
Affiliates, will not exceed, at the end of any fiscal year, the
sum of (i) the Front-End Fees of up to 20% of capital
contributions, (ii) property management fees of up to 1% of Net
Cash Flow, except for a one time initial leasing fee of 3% of the
gross revenues on each lease payable over the first five full
years of the original term of the lease, (iii) real estate
commission of 3% of Net Proceeds of Sale of properties on which
the Managing Members or Affiliates furnish a substantial amount
of sales efforts, and (iv) 10% of Net Cash Flow less the Net Cash
Flow actually distributed to the Managing Members. The Managing
Members will review the reimbursements that they and their
Affiliates receive at the end of each fiscal year of the Company.
If the Managing Members and their Affiliates receive
reimbursement for items set forth in Section 6.2(a)(i) to (iv) in
excess of the limitations set forth in this section, they will
refund the difference to the Company within 30 days of discovery
of such excess. Such review shall not take into account any of
the fees that might be paid in years after the fiscal year for
which the calculation is made.
(c) The Company's annual report to Limited Members will
contain information concerning reimbursements made to the
Managing Member and its Affiliates. Within the scope of the
annual audit, an independent certified public accountant shall
verify the allocation of costs to the Company. The methods of
verification shall be in accordance with generally accepted
auditing standards and shall, accordingly, include such tests of
the accounting records and such other auditing procedures that
the Managing Member's independent certified public accountants
consider appropriate in the circumstances. Such methods of
verification shall at a minimum provide: (i) a review of the time
records of employees and control persons, the costs of whose
services were reimbursed and (ii) a review of the specific nature
of the work performed by each such employee and control person.
The additional cost of such verification will be itemized by such
accountant on a program-for-program basis, and the Managing
Members will be reimbursed for such additional cost only to the
extent that the cost of such verification, when added to all
reimbursements to the Managing Members for services rendered to
the Company, does not exceed the competitive price for such
services which would be charged by non-affiliated persons
rendering similar services in the same or comparable geographic
location.
(d) The Managing Members and their Affiliates will not be
reimbursed or otherwise paid for any services except as set forth
in Section 6.2(a).
6.3 OTHER ACTIVITIES OF MANAGING MEMBERS. The Managing
Members, during the term of this Company, may engage in and possess
an interest for their own account in other business ventures of
every nature and description, independently or with others,
including, but not limited to, the ownership, financing, leasing,
operation, management, syndication, brokerage, investment in and
development of real estate; and neither the Company nor any Member,
by virtue of this agreement, shall have any right in and to said
independent ventures or any income or profits derived therefrom.
Nothing in this section shall be deemed to diminish the Managing
Member's overriding fiduciary obligation to the Company, or to
constitute a waiver of any right or remedy the Company or Limited
Members may have in the event of a breach by a Managing Member of
such obligation.
6.4 INDEMNIFICATION AND LIABILITY OF MANAGING MEMBERS.
(a) The Company shall indemnify each of the Managing Members
and their Affiliates (other than an Affiliate that is acting in
the capacity of a Broker-Dealer selling Units) against any claim
or liability incurred or imposed upon such Managing Member or
such Affiliates provided such Managing Member or Affiliate was
acting on behalf of or performing services for the Company and
the Managing Member has determined, in good faith, that the
course of conduct which caused the loss or liability was in the
best interests of the Company, and such conduct of the Managing
Member or Affiliate did not constitute misconduct or negligence.
The Managing Members or Affiliates shall not be liable to the
Company or any Member by reason of any act or omission of such
Managing Member or Affiliate provided the Managing Member has
determined, in good faith, that the course of conduct which
caused the loss or liability was in the best interests of the
Company, and such conduct of the Managing Member or Affiliate did
not constitute misconduct or negligence. Solely for purposes of
this Section 6.4, but for all such purposes, the term "Affiliate"
shall mean only those Affiliates, as defined in Section 2.5, that
furnish services to the Company within the scope of the Managing
Members' authority.
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(b) No Managing Member or Affiliate or any Broker-Dealer
selling Units shall be indemnified for any liability imposed by
judgment, or costs associated therewith, including attorneys'
fees, arising from or out of a violation of state or federal
securities laws. The Managing Members and such Affiliates, and
such Broker-Dealers, shall be indemnified for settlements and
related expenses of lawsuits alleging securities law violations,
and for expenses incurred in successfully defending such
lawsuits, provided that the party seeking indemnification places
before the court the position of the Massachusetts Securities
Division, of the Missouri Securities Division, of the
Pennsylvania Securities Commission, of the administrator of other
relevant state securities laws and of the Securities and Exchange
Commission on indemnification for securities law violations, and
the court thereafter either:
(i) approves the settlement and finds that
indemnification of the settlement and related costs should be
made, or
(ii) approves indemnification of litigation costs if a
successful defense is made.
Any indemnification pursuant to this Section 6.4, or otherwise,
shall be recoverable only from the assets of the Company and not
from any of the Limited Members. No Managing Member or Affiliate
shall be entitled to advances for legal expenses and other costs
incurred as a result of legal action initiated against the
Managing Members or Affiliate unless (1) the action relates to
the performance of the duties of such Managing Member or
Affiliate on behalf of the Company, (2) the action is not
initiated by a Limited Member, and (iii) the Managing Member or
Affiliate undertakes to repay such advances in cases in which it
is determined they are not entitled to indemnification.
(c) The Managing Member shall have fiduciary responsibility
for the safekeeping and use of all funds and assets of the
Company, whether or not in its immediate possession or control,
and the Managing Member shall not employ, or permit another to
employ, such funds or assets in any manner except for the
exclusive benefit of the Company. The Managing Members and the
Company may not permit the Limited Members to contract away the
fiduciary duty owed to the Limited Members by the Managing
Members under the common law.
6.5 PROHIBITED TRANSACTIONS. Notwithstanding anything to the
contrary contained herein, the Managing Members and Affiliates of
the Managing Members (i) may not receive interest and other
financing charges or fees on loans made to the Company in excess of
the amounts that would otherwise be charged by unaffiliated lending
institutions on comparable loans for the same purpose and in the
same locality of the Property if the loan is made in connection with
a particular Property, (ii) may not require a prepayment charge or
penalty on any loan from the Managing Members to the Company, (iii)
may not provide financing to the Company that is payable over a
period exceeding 48 months or for which more than 50% of the
principal is due in more than 24 months, (iv) may not grant to
themselves an exclusive listing for the sale of any Property, (v)
may not directly or indirectly pay or award any commissions or other
compensation to any person engaged by a potential investor for
investment advice as an inducement to such adviser to advise the
purchaser of the Units, provided, however, that this provision shall
not prohibit the normal sales commissions payable to a registered
broker-dealer or other properly licensed person for selling the
Units, (vi) may not commingle Company funds with the funds of any
other person, (vii) may not sell property to, purchase property
from, or lease property to or from the Company, provided that the
Company may purchase real property from the Managing Members or
their Affiliates (but not from affiliated programs unless the
interest purchased by the Company from the affiliated program is
equal to or smaller than the interest retained by the affiliated
program and the joint venture so created complies with section 6.6
of this agreement) if the Managing Members or their Affiliates
purchased the property in their own name and temporarily held title
thereto for a period not in excess of twelve months for the purpose
of facilitating the acquisition of the property, the borrowing of
money, the obtaining of financing for the Company or any other
purpose related to the business of the Company, and the property is
purchased by the Company for a price no greater than the price paid
by the Managing Members or their Affiliates plus Acquisition
Expenses in accordance with the provisions of this agreement, and
any profit or loss on such property during such period is paid to or
charged against the Company, and there is no other benefit arising
out of such transaction to the Managing Members or their Affiliates
apart from compensation otherwise permitted by this agreement (the
prohibitions of this Section 6.5(vii) shall also apply to any
program in which the Managing Members have an interest), (viii) may
not receive a commission or fee in connection with the reinvestment
or distribution of the proceeds of the resale, exchange or
refinancing of the Properties (ix) may not cause the Company to
incur indebtedness directly or indirectly related to the purchase of
properties, from any source, aggregating in excess of 60% of the
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purchase price of all Company Properties, (x) may not cause the
Company to invest in other limited partnerships or limited liability
companies, provided that joint venture arrangements set forth in
Section 6.6 shall not be prohibited, (xi) may not cause the Company
to acquire property in exchange for Units, (xii) may not cause the
Company to pay a fee to the Managing Members or their Affiliates for
insurance coverage or brokerage services, (xiii) may not cause the
Company to make loans or investments in real property mortgages
other than in connection with the purchase or sale of the Company's
properties, (xiv) may not cause the Company to operate in a manner
as to be classified as an "investment company" for purposes of the
Investment Company Act of 1940, (xv) may not cause the Company to
underwrite or invest in the securities of other issuers, except as
specifically discussed in Section 6.6 and in the Prospectus, (xvi)
may not cause the Company to incur the cost of that portion of
liability insurance that insures the Managing Members or their
Affiliates for any liability as to which such Managing Members or
their Affiliates are prohibited from being indemnified under Section
6.4., (xvii) may not receive a real estate commission in connection
with the purchase, sale or financing of a Property and will not
permit aggregate compensation to others in connection with the sale
of any Property to exceed a Competitive Real Estate Commission,
(xviii) may not receive an Acquisition Fee (including, without
limitation, Development Fee or Construction Fee) or permit such
Acquisition Fees, together with Acquisition Expenses paid to any
party, by the Company to exceed 18% of the total capital
contributions of Limited Members pursuant to Section 4.2 of this
agreement, (xix) may not cause the Company to incur Front-End Fees
to the extent that such fees would cause the Company's Investment in
Properties to be less than 80% of capital contributions, (xx) may
not receive any rebate or give-up nor participate in any reciprocal
business arrangement in circumvention of the NASAA Guidelines, nor
shall any Managing Member participate in any reciprocal business
arrangement that would circumvent the restrictions of such NASAA
Guidelines against dealing with affiliates or promoters, and (xxi)
may not cause the Company to make any loans or advances at any time
to the Managing Members or their Affiliates.
6.6 INVESTMENTS IN OTHER PROGRAMS. The Company may purchase
limited partnership or limited liability company interests of
another program. The Company may, however, invest (a) in general
partnerships or ventures that own and operate a particular property
provided the Company, either alone or together with any publicly-
registered Affiliate, acquires a controlling interest in such other
ventures or general partnerships, and such general partnerships or
joint venture does not result in duplicate fees, or (b) in joint
venture arrangements with another publicly-registered program
sponsored by the Managing Members or their Affiliates. For purposes
of Section 6.6(a), "controlling interest" means an equity interest
possessing the power to direct or cause the direction of the
management and policies of the Company or joint venture, including
the authority to:
(i) review all contracts entered into by the general Company
or joint venture that will have a material effect on its business
or property;
(ii) cause a sale or refinancing of the property or the
Company's interest therein subject in certain cases where
required by the Company or joint venture agreement, to limits as
to time, minimum amounts and/or a right of first refusal by the
joint venture Member or consent of the joint venture Member;
(iii) approve budgets and major capital expenditures, subject
to a stated minimum amount;
(iv) veto any sale or refinancing of the property, or,
alternatively, to receive a specified preference on sale or
refinancing proceeds; and,
(v) exercise a right of first refusal on any desired sale or
refinancing by the joint venture Member of its interest in the
property except for transfer to an Affiliate of the joint venture
Member.
For purposes of 6.6(b), the Company shall be permitted to
invest in joint venture arrangements with another publicly-
registered program or programs sponsored by the Managing Members or
their Affiliates for the purpose of acquiring a property from
unaffiliated parties only if all the following conditions are met:
(a) The two programs have substantially identical investment
objectives;
(b) There are no duplicate property management or other fees;
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(c) The Managing Members' compensation is substantially
identical in each program;
(d) In the event of a proposed sale of property held in the
joint venture by the other joint venture Member, the Company will
have a right of first refusal to purchase the other party's
interest; and
(e) The investment by each of the programs in the joint
venture must be on substantially the same terms and conditions.
6.7 UNIMPROVED OR NON-INCOME PRODUCING PROPERTY/PROPERTY
UNDER CONSTRUCTION.
(a) The Company may not acquire unimproved or non-income
producing property except in amounts and upon terms which can be
financed by the Limited Members' capital contributions or from
funds provided from operations. In no event shall the Company
acquire unimproved or non-income producing property exceeding 10%
of the total capital contributions of Limited Members pursuant to
Section 4.2 of this agreement. For purposes of this Section 6.7,
properties that are expected to produce income within two years
shall not be considered unimproved or non-income producing
properties.
(b) The Company may not acquire property which is under
construction unless completion is guaranteed at the purchase
price contracted for by (i) a completion bond, (ii) a written
guarantee by a person who, or entity that, has provided financial
statements demonstrating sufficient net worth and collateral, or
(iii) retention of a reasonable portion of the purchase price as
an offset in the event the seller does not perform.
6.8 INVESTMENTS IN JUNIOR TRUST DEEDS. The Company may not
invest in junior trust deeds and other similar obligations except to
the extent such investments arise upon sale of Properties. In no
event shall such investments exceed 10% of the gross assets of the
Company.
6.9 REQUIREMENT FOR REAL PROPERTY APPRAISAL. All Property
acquisitions by the Company will be supported by an appraisal
prepared by a competent, independent appraiser. The appraisal will
be maintained in the Company's records for at least five years and
will be available for inspection and duplication by any Limited
Member.
6.10 BALLOON PAYMENTS.
(a) Any Indebtedness of the Company (which shall, in any
event, be subject to the limitations contained in Section 6.5(ix)
of this agreement) which is not fully amortized in equal payments
over a period of not more than 30 years, shall have a maturity
date (due date) which is not earlier than ten years after the
date of purchase of the underlying property or two years after
the anticipated holding period of the property (provided such
holding period is at least seven years); provided, however, that
this Section 6.10(a) shall not limit the ability of the Company
to finance Properties using adjustable rate mortgages.
(b) The Company may not incur indebtedness of any kind,
including all-inclusive and wrap-around loans and interest-only
loans, in connection with the purchase of a Property, but may
assume indebtedness on operating properties that complies with
the provisions of this section 6.10 and section 6.5(ix).
(c) The provisions of this Section 6.10 shall not apply (but
the provisions of section 6.5(ix) shall apply) to indebtedness
representing, in the aggregate, 25% or less of the total purchase
price of all Properties acquired, or to interim financing,
including construction financing, with a full take-out
commitment.
6.11 SELLING COMMISSIONS.
(a) Except as otherwise provided in this Section 6.11, the
Company shall pay any and all Selling Commissions and expense
allowances in the amount of $100 per Unit sold in accordance with
the Dealer Manager Agreement with AEI Securities Incorporated.
The Company shall also reimburse the Dealer Manager for the bona
fide due diligence expenses of dealers selling Units to the
extent the aggregate of such reimbursements do not exceed $5.00
per Unit sold.
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(b) A registered principal or representative of AEI
Securities Incorporated or any other broker-dealer may purchase
Units net of commissions, at a per Unit purchase price of $920.
6.12 ROLL-UP TRANSACTIONS
(a) The Company shall not participate in any Roll-Up (i)
which would result in Limited Members having democracy rights in
the Roll-Up Entity which are less than those provided in this
Company Agreement (provided that, if the form of the Roll-Up
entity is other than a Company, the democracy rights shall
conform to those provided in this Company Agreement to the
greatest extent possible); (ii) which includes provisions that
would act to materially impede or frustrate the accumulation of
shares of any purchaser of the securities of the Roll-Up entity
(except to the extent required to preserve the tax status of the
Roll-Up Entity); (iii) which would limit the rights of Limited
Members to exercise voting rights in the securities of the Roll-
Up entity on the basis of the number of equity interests held by
such Limited Members; (iv) which would result in a Roll-Up Entity
which would have rights to access of records less than those of
the Company; or (v) which provides for the costs of the Roll-Up
to be borne by the Company and which is not approved by Limited
Members.
(b) No Roll-Up shall be conducted unless an appraisal of all
material Company assets has been obtained from a competent person
or entity that has no material relationship with the Managing
Members or their Affiliates and who is engaged to a substantial
extent in rendering opinions on the value of assets held by the
Company and is qualified to perform such appraisal. The
appraisal shall be based on an evaluation of all relevant
information, assuming an orderly liquidation of the Company's
assets over a 12-month period, and shall indicate the value of
the Company's material assets as of a date immediately preceding
announcement of the proposed Roll-Up. A summary of the appraisal
shall be included in a report to the Limited Members in
connection with the Proposed Roll-Up and if such report is a part
of a prospectus used to offer securities in the Roll-Up Entity,
the appraisal shall be filed with the SEC and the states in
connection with the registration statement for the offering.
(c) Any Limited Member who votes against a Roll-Up that is
completed, shall be given the option to (i) accept the securities
in the Roll-Up Entity in the Roll-Up, or (ii) either one of (x)
remaining a Limited Member in the Company or (y) receiving cash
in the amount of the appraised value of the assets of the
Company.
VII. PROVISIONS APPLICABLE TO LIMITED MEMBERS
The following provisions shall apply to the Limited Members,
and the Limited Members hereby agree thereto.
7.1 LIABILITY. The Limited Members shall be liable with
respect to the Company only to the extent of the amount of the
contribution to capital made by such Limited Members as provided in
Section 4.2. The Units are nonassessable.
7.2 NO PARTICIPATION IN MANAGEMENT. No Limited Member shall
take any part or participate in the conduct of, or have any control
over, the business of the Company, and no Limited Member shall have
any right or authority to act for or to bind the Company; provided,
however, that the Company may not sell all or substantially all of
the assets of the Company without the prior written consent of a
majority of the Limited Members, by interest.
7.3 NO WITHDRAWAL OR DISSOLUTION. No Limited Member shall at
any time withdraw from the Company except as provided in this
agreement. No Limited Member shall have the right to have the
Company dissolved or to have his or her contribution to the capital
of the Company returned except as provided in this agreement. The
death or bankruptcy of a Limited Member shall not dissolve or
terminate the Company.
7.4 CONSENT. To the fullest extent permitted by law, each of
the Limited Members hereby consents to the exercise by the Managing
Member of all the rights and powers conferred on the Managing Member
by this agreement.
7.5 POWER OF ATTORNEY. Each of the Limited Members and the
Special Managing Member hereby irrevocably constitute and appoint
the Managing Member his or her or its true and lawful attorney, in
his or her or its name, place and stead to make, swear to, execute,
acknowledge and file:
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(a) this Operating Agreement and any and all certificates of
formation of the Company, and any amendments thereto that may be
required by the Limited Liability Company Act, including
amendments required for the reflection of return of capital to
any Member or the contribution of any additional capital, and the
continuation of the business of the Company by a substitute
and/or additional Managing Member;
(b) any certificate or other instrument and any amendments
thereto that may be required to be filed by the Company in order
to accomplish the business and the purposes of the Company,
including any business certificate, fictitious name certificate
or assumed name certificate;
(c) any cancellation of such certificates of formation, this
Operating Agreement and any and all other documents and
instruments that may be required upon the dissolution and
liquidation of the Company;
(d) new certificates of formation and any and all documents
and instruments that may be required to effect a continuation of
the business of the Company as provided in this agreement; and
(e) any amended operating agreement or certificate of
formation that has been duly adopted hereunder or authorized
hereby.
It is expressly intended that the foregoing power of attorney
is (1) coupled with an interest and shall survive the bankruptcy,
death, incompetence or dissolution of any person hereby giving such
power and (2) does not affect the Limited Members' rights to approve
or disapprove any amendments to this agreement or other matters as
provided elsewhere herein.
If a Limited Member assigns his or her interest in the
Company, as provided in Article IX, the foregoing power of attorney
shall survive the delivery of the instruments effecting such
assignment for the purpose of enabling the Managing Member to sign,
swear to, execute and acknowledge and file any and all amendments to
the certificates of formation of the Company and other instruments
and documents necessary to effectuate the substitution of the
assignee as a Limited Member.
7.6 LIMITATION OF ACQUISITION OF EQUITY SECURITIES OF THE
MANAGING MEMBERS. The Limited Members (excluding the Managing
Members or their Affiliates who purchase Limited Liability Company
Units) shall not own, directly or indirectly, individually or in the
aggregate, more than 20% of the outstanding equity securities of
either of any Managing Member or its Affiliates.
The phrase "own, directly or indirectly" used herein shall
have the meaning set forth in Section 318 of the Internal Revenue
Code of 1954, as currently in effect or as hereafter amended. As of
the date hereof, such term includes ownership by a Limited Member,
his or her spouse, children, grandchildren, parents, any Company of
which the Limited Member or any of the foregoing is a member, any
estate or trust of which the Limited Member or any of the foregoing
is the beneficiary and any corporation at least 50% owned in the
aggregate by said Limited Member or any of the foregoing.
7.7 RIGHT TO PRESENT UNITS FOR PURCHASE.
(a) Beginning 36 months from the date of the Prospectus, each
Limited Member shall have the right, subject to the provisions of
this Section 7.7, to present his or her Units to the Company for
purchase by submitting notice on a form supplied by the Company
to the Managing Member specifying the number of Units he or she
wishes repurchased. Such notice must be postmarked after January
1 but before January 31, and after July 1 but before July 31 of
each year. On March 31 and September 30 of each year, and
subject to the limitations set forth below, the Managing Member
shall cause the Company to purchase the Units of Limited Members
who have tendered their Units to the Company. The purchase price
shall be equal to eighty percent (80%) of the Net Value of the
Company's assets divided by the number of Units outstanding. The
Managing Members shall publish the repurchase price offered for
Units based on the Net Value of the Company's assets on the first
business day of January and July of each year. The Company will
not be obligated to purchase in any year any number of Units such
that such Units, when aggregated with all other transfers of
Units that have occurred since the beginning of the same calendar
year (excluding Permitted Transfers) would exceed five percent
(5%) of the total number of Units outstanding on January 1 of
such year. In the event requests for purchase of Units received
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in any given year exceed the five percent (5%) limitation, the
Units to be purchased will be determined based on the postmark
date of the written notice of Limited Members tendering Units.
Any Units tendered but not selected for purchase in any given
year will be considered for purchase in subsequent years only if
the Limited Member retenders his or her Units. 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 nor shall the Company
purchase any Units in violation of applicable legal requirements.
(b) For purposes of all calculations pursuant to Article V of
this agreement, any Net Cash Flow or Net Proceeds of Sale used to
repurchase Units or to repay borrowings that were used to
repurchase Units shall be deemed distributed to the remaining
Limited Members pro rata based on the ratio of the number of
Units owned to all Units outstanding after such repurchase.
7.8 VOTING RIGHTS. To the extent permitted under the Limited
Liability Company Act, as amended, the Limited Members may, by vote
of a majority of the outstanding Units (excluding Units held by the
Managing Members for their own accounts), and without the
concurrence of the Managing Members:
(1) amend this Operating Agreement in accordance with
the provisions of Article XI;
(2) remove the Managing Member and elect a new Managing
Member in accordance with Section 10.4 of this
agreement;
(3) approve or disapprove the sale of all or
substantially all of the assets of the Company;
(4) dissolve the Company in accordance with Section
12.1(g).
VIII. BOOKS OF ACCOUNT; REPORTS AND FISCAL MATTERS
8.1 BOOKS; PLACE; ACCESS. The Managing Member shall maintain
accurate books of account and each and every transaction shall be
entered therein. The Company records shall contain the names and
addresses of all Members. The books of account and the records
shall be kept at the office of the Company in St. Paul, Minnesota,
and any Member or his or her legal counsel may inspect and copy the
Company books and records at any time during ordinary business
hours. The Managing Member shall have no obligation to deliver or
mail to Limited Members copies of certificates of limited Company or
amendments thereto.
8.2 METHOD. The books of account shall be kept in accordance
with generally accepted accounting principles.
8.3 FISCAL YEAR. The fiscal year of the Company shall end on
December 31 of each year.
8.4 ANNUAL REPORT. At the Company's expense, the books of
account shall be audited at the close of each fiscal year by a firm
of independent public accountants selected by the Managing Member,
and a copy of its report shall be transmitted within 120 days after
the close of such fiscal year to the Members and to such state
securities commissioners as may be required by the rules and
regulations of the various states.
The annual report shall contain (a) a balance sheet as of year
end, a statement of operations for the year then ended, a statement
of Members' equity, and statement of cash flows, all of which shall
be audited with a report containing an unqualified opinion expressed
thereon, or an opinion containing no material qualification of an
independent public accountant, (b) a report of the activities of the
Company during the period covered by the report and (c) the amount
of any fees or other reimbursements to the Managing Members or any
Affiliates of the Managing Members during the fiscal year to which
such annual report relates, including information required by
Section 6.2. Such report shall set forth distributions to Limited
Members for the period covered thereby and shall separately identify
distributions from (i) cash flow from operations during the period,
(ii) cash flow from operations during a prior period that had been
held as reserves, (iii) proceeds from the disposition of property
and investments and (iv) reserves from the gross proceeds of the
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offering originally obtained from the Limited Members. The
financial information contained in the annual report will be
prepared on the GAAP basis. The Managing Member also shall make
available to each Limited Member, upon request, a copy of any annual
reports that the Company may be required to file with the Securities
and Exchange Commission within 90 days after the close of the period
to which such reports relate.
8.5 QUARTERLY REPORTS. During the life of the Company, the
Managing Member shall prepare and distribute to all Members within
60 days after the end of each quarter and to such state securities
commissioners as may be required by the rules and regulations of the
various states, a quarterly summary of Company financial results.
Such quarterly reports shall contain (a) a current condensed balance
sheet, which may be unaudited, (b) a condensed operating statement
for the quarter then ended, which may be unaudited, (c) a condensed
cash flow statement for the quarter then ended, which may be
unaudited, and (d) other pertinent information regarding the Company
and its activities during the quarter covered by the report. Such
quarterly reports shall also contain a detailed statement setting
forth the services rendered, or to be rendered, by the Managing
Members or their Affiliates and the amount of the fees received.
The Managing Member also shall make available to each Limited
Member, upon request, a copy of any reports that the Company may be
required to file with the Securities and Exchange Commission within
45 days after the close of the period to which such reports relate.
8.6 SPECIAL REPORTS. The Managing Member shall have
prepared, as of the end of each quarter in which a Property is
acquired, a special report of real property acquisitions within the
quarter. Such special reports shall be distributed to the Limited
Members for each quarter in which a Property is acquired until all
proceeds available from the offering of Units are invested or
returned to the Limited Members as provided in Section 4.5. Such
special reports shall describe the Properties acquired and shall
include a description of the geographic location and the market upon
which the Managing Member is relying. The special report shall
include all facts that reasonably appear to materially influence the
value of the Property, including, but not limited to, the date and
amount of the appraised value, the purchase price and terms of the
purchase, the amount of proceeds in the Company that remain
unexpended or uncommitted and any Acquisition Expenses paid by the
Company to the Managing Members or their Affiliates in connection
with real property acquisitions within the quarter.
8.7 TAX RETURNS; TAX INFORMATION. Within 75 days after the
close of each fiscal year, all necessary tax information shall be
transmitted to all Members and to such state securities
commissioners as may be required by the rules and regulations of the
various states.
8.8 BANK ACCOUNTS. Except as otherwise described in the
Prospectus, the Managing Member shall select a bank account or
accounts for the funds of the Company, and all funds of every kind
and nature received by the Company shall be deposited in such
account or accounts. The Managing Member shall designate from time
to time the persons authorized to withdraw funds from such accounts.
The funds of the Company will not be commingled with funds of any
other person or entity.
8.9 TAX ELECTIONS. In the event of a transfer of all or part
of the Company interest of any Member, the Company, in the sole
discretion of the Managing Member, may elect pursuant to Section 754
of the Internal Revenue Code of 1986 (or any successor provisions)
to adjust the basis of the assets of the Company. The Managing
Member shall be the "tax matters Member" for the Company as that
term is defined in Section 6231 of the Internal Revenue Code of
1986, as amended.
8.10 INVESTOR LIST. In addition to the other records
maintained by the Company, the Company shall maintain at all times,
in alphabetical order and on white paper with printing in not less
than 10 point type, a list of Limited Members, including the names,
addresses and business telephone numbers of the Limited Members and
the number of Units held by each, which shall be updated at least
quarterly to reflect changes in the information contained therein.
The list of Limited Members shall be available for inspection by any
Limited Member or such Limited Member's designated agent at the
office of the Company upon request of such Limited Member. In
addition, a copy of the Limited Member list shall be mailed to any
Limited Member requesting the same within ten (10) days of the
receipt of a written request. The Company may charge a reasonable
fee to such Limited Member to cover the costs of reproduction and
postage. The purposes for which such list may be requested by the
Limited Members shall include, without limitation, matters relating
to voting rights of the Limited Members and the exercise of rights
of the Limited Members under federal proxy laws. If the Managing
Member neglects or refuses to exhibit, produce or mail a copy of
the Limited Member list as requested, the Managing Member shall be
liable for the costs, including attorneys' fees, incurred by the
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Limited Member in compelling the production of the list and for the
actual damages suffered by the Limited Member by reason of such
refusal or neglect. It shall be a defense that the actual purpose
and reason for the request for inspection or for a copy of the
Limited Member list is to secure such list or other information for
the purpose of selling such list or copies thereof, or of using the
same for a commercial purpose other than in the interest of the
applicant as a Limited Member relative to the affairs of the
Company. The Managing Member may require that the Limited Member
requesting such list to represent that the list is not requested for
a commercial purpose unrelated to the Limited Member's interest in
the Company. For all such purposes, the acquisition of additional
Units shall be considered a commercial purpose unrelated to the
Limited Member's interest in the Company. The Managing Member may
also require, as a condition to making such list available, (i) that
the list be requested under the signature of the Limited Member of
record rather than a person or entity holding a power of attorney for
such Limited Member; and (ii) whenever the Managing Member has a
reasonable belief that such list will be used to solicit purchases of
Units, that the requesting Limited Member agree to provide materials
to the persons solicited, and to the Managing Member for review and
comment prior to use, generally complying with the disclosure
requirements of Section 14(d) of the Securities Exchange Act of 1934
and Rule 14d-6 promulgated thereunder, including, without limitation,
the price at which the Fund last agreed to repurchase Units and the
price at which Units were last purchased in any secondary trading
service that is published. The remedies set forth in this section
8.10 shall be in addition to, and not by way of limitation of,
remedies available to Limited Members under federal law, or the laws
of any state.
IX. ASSIGNMENT OF LIMITED MEMBER'S INTEREST
The Company interest of a Limited Member shall be represented
by a Certificate of Participation. The form and content of the
Certificate of Participation shall be determined by the Managing
Member. The Company interest of a Limited Member may not be
assigned, pledged, mortgaged, sold or otherwise disposed of, and no
Limited Member shall have the right to substitute an assignee in his
or her place, except as provided in this Article IX.
9.1 LIMITED MEMBERS.
(a) Other than pursuant to a Permitted Transfer, no Limited
Member shall transfer or assign any part of his or her interest
in the Company, and no such transfer or assignment shall be
recognized by the Company but shall be null and void, if such
transfer or assignment, when added to all other transfers or
assignments made during the same fiscal year, other than (A)
Permitted Transfers, (B) Qualified Matching Service Transfers, or
(C) transfers pursuant to the repurchase provisions of section
7.7 of this agreement, would constitute transfers of in excess of
two percent (2%) of Company interests outstanding. The Managing
Member may request such information from a transferring Limited
Member as is necessary to determine whether a transfer is a
Permitted Transfer or a Qualified Matching Service Transfer. The
Managing Member may refuse to affect any transfer if the
transferring Limited Member is unable, or refuses, to demonstrate
that the transfer is a Permitted Transfer or Qualified Matching
Service Transfer or if the Managing Member is not able to verify,
to its satisfaction, that the transfer will qualify for a safe
harbor under Treasury Regulation 1.7704-1(e) or (g).
(b) Except as provided in Section 9.1(a), each Limited Member
may transfer or assign all or part of his or her interest in the
Company as provided in the Limited Liability Company Act;
provided, however, that no transfer or assignment shall be
effective until written notice thereof is received by the
Managing Member and the Managing Member approves such transfer or
assignment. Such approval shall be granted unless the Managing
Member determines that the transfer will cause a violation of the
provisions of this agreement, including the percentage
limitations referred to in Section 9.1(a) above. In any case
that a transfer is not permitted for any reason other than
pursuant to the limitations set forth in section 9.1(a), the
decision to prohibit the transfer shall be supported by an
opinion of counsel. All transfers or assignments of interests in
the Company occurring during any month shall be deemed effective
(i.e., the transferee shall become a Limited Member of record) on
the last day of the calendar month in which written notice
thereof is received by the Managing Member.
(c) No assignee of all or part of the Company interests of
any Limited Member shall have the right to become a substitute
Limited Member unless (i) his or her assignor has stated such
intention in the instrument of assignment, (ii) such assignee
shall pay all expenses in connection with such admission as a
substitute Limited Member, as described in Section 9.2 and (iii)
such the transfer to such assignee has been made in compliance
with Section 9.1(a).
(d) No purported sale, assignment or transfer by a Limited
Member of less than two and one-half Units (two Units for
transfers by Qualified Plans and Individual Retirement Plans)
will be permitted or recognized, except by gift, inheritance,
intra-family transfers, family dissolutions, transfers to
Affiliates or by operation of law.
(e) If a Limited Member dies, his or her executor,
administrator or trustee, or if he or she is adjudged incompetent
or insane, his or her committee guardian or conservator, or if he
or she becomes bankrupt, the receiver or trustee of his or her
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estate, shall have the rights of a Limited Member for the purpose
of settling or managing his or her estate and such power as the
decedent or incompetent possessed to assign all or any part of
his or her Units and to join with the assignee thereof in
satisfying conditions precedent to such assignee becoming a
substitute Limited Member. The death, dissolution or
adjudication of incompetency or bankruptcy of a Limited Member
shall not dissolve the Company.
(f) By executing and adopting this agreement, each Limited
Member hereby consents to the admission of additional or
substitute Limited Members by the Managing Member and to any
assignee of his or her Units becoming a substitute Limited
Member.
9.2 DOCUMENTS AND EXPENSES. As a condition to admission as a
substitute Limited Member, an assignee of all or part of the Company
interest of any Limited Member or the legatee or distributee of all
or any part of the Company interest of any Limited Member shall
execute and acknowledge such instruments, in form and substance
satisfactory to the Managing Member, as the Managing Member shall
deem necessary or advisable to effectuate such admission and to
confirm the agreement of the person being admitted as such
substitute Limited Member to be bound by all of the terms and
provisions of this agreement. Such assignee, legatee or distributee
shall pay all reasonable expenses, not exceeding $100, in connection
with such admission as a substitute Limited Member.
9.3 ACQUIT COMPANY. In the absence of written notice to the
Company of any assignment of a Company interest, any payment to the
assigning Member or his or her executors, administrators or
representatives shall acquit the Company of liability to the extent
of such payment to any other person who may have an interest in such
payment by reason of an assignment by the Member or by reason of
such Member's death or otherwise.
9.4 RESTRICTION ON TRANSFER. Notwithstanding the foregoing
provisions of this Article IX, no sale or exchange of a Company
interest may be made if the interest sought to be sold or exchanged,
when added to the total of all other Company interests sold or
exchanged within the period of 12 consecutive months prior thereto,
would result in the termination of the Company under section 708 of
the Internal Revenue Code of 1986 (or any successor section).
9.5 ENDORSEMENT ON CERTIFICATE. The foregoing provisions
governing the assignment of the Company interest of a Limited Member
shall be indicated by an endorsement on the certificate evidencing
such Limited Member's interest in the Company, in the form as
determined from time to time by the Managing Member.
X. DEATH, WITHDRAWAL, EXPULSION AND REPLACEMENT OF THE MANAGING
MEMBERS
10.1 DEATH. In the event of the death of the Special
Managing Member, the estate of the Special Managing Member shall
assume all of his obligations under this agreement and be
responsible for their discharge. The estate may elect to withdraw
from the Company only upon satisfaction of the conditions in Section
10.2 applicable to the Special Managing Member.
10.2 WITHDRAWAL. The Managing Member may not withdraw from
the Company without first providing 90 days' written notice to the
Limited Members of its intent to so withdraw and providing a
substitute Managing Member to the Company that shall be accepted by
a vote of not less than a majority, by interest, of the Limited
Members (excluding any Limited Company Units held by any Managing
Member for its own account); provided, however, that nothing in this
agreement shall be deemed to prevent the merger, consolidation or
reorganization of the Managing Member into or with a successor
entity controlled by, or under common control with, a Managing
Member, and such successor entity shall be deemed to be the Managing
Member of the Company for all purposes and effects and shall succeed
to and enjoy all rights and benefits and bear all obligations and
burdens conferred or imposed hereunder upon the Managing Member.
The Limited Members shall vote to accept or reject the proposed
substitute Managing Member in person or by proxy at a meeting called
by the Managing Member for such purpose in accordance with Section
11.1 of this agreement.
The Special Managing Member may not withdraw from the Company
prior to December 31, 2000.
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10.3 EXPULSION. A Managing Member shall be expelled without
further action for "cause," which means (1) final judicial
determination or admission of its bankruptcy or insolvency, (2)
withdrawal from the Company without providing a substitute Managing
Member in accordance with Section 10.2 or (3) final judicial
determination that it (i) was grossly negligent in its failure to
perform its obligations under this agreement, (ii) committed a fraud
upon the Members or upon the Company, (iii) committed a felony in
connection with the management of the Company or its business or
(iv) was in material breach of its obligations under this agreement.
This section does not limit the right of the Limited Members to
remove the Managing Members upon a majority vote of the Limited
Members.
10.4 REMOVAL AND REPLACEMENT OF MANAGING MEMBERS. In the
event of (i) the wrongful withdrawal of a Managing Member or the
expulsion of a Managing Member under circumstances that the Company
lacks a Managing Member or (ii) the written proposal of Limited
Members holding 10% or more of the issued and outstanding Units, and
upon providing not less than 10 nor more than 60 days' written
notice by certified mail to all Members, the Limited Members may
call a meeting of the Company for the purpose of removing or
replacing any or all of the Managing Members. At such meetings, any
of the Managing Members may be removed or replaced without cause by
a vote (rendered in person or by proxy) of a majority, by interest,
of the Limited Members (excluding Units held by the Managing Members
for their own accounts).
10.5 PAYMENT FOR REMOVED MANAGING MEMBER'S INTEREST. Upon the
expulsion, withdrawal or removal of a Managing Member, the Company
shall pay to the terminated Managing Member all amounts then accrued
and owing to the terminated Managing Member and an amount equal to
the then present fair market value of the terminated Managing
Member's interest in the Company determined by agreement of the
terminated Managing Member and the Company, or, if they cannot
agree, by arbitration in accordance with the then current rules of
the American Arbitration Association. The expense of arbitration
shall be borne equally by the terminated Managing Member and the
Company. The fair market value of the terminated Managing Member's
interest shall be the amount the terminated Managing Member would
receive upon dissolution and termination of the Company assuming
that such dissolution or termination occurred on the date of the
terminating event and the assets of the Company were sold for their
then fair market value without any compulsion on the part of the
Company to sell such assets. In the case of a voluntary withdrawal,
the withdrawing Managing Member shall be paid the fair market value
of its or his interest by the issuance by the Company of a non-
interest bearing unsecured promissory note providing for payment of
principal from distributions that the withdrawing Managing Member
otherwise would have been entitled to receive under this agreement
had such Managing Member not withdrawn. In the case of an
involuntary termination, the terminated Managing Member shall be
paid the fair market value of its or his interest by the issuance by
the Company of a promissory note with a five year maturity payable
in five equal installments of principal and interest at the
prevailing market rate of interest.
10.6 FAILURE TO ADMIT SUBSTITUTE MANAGING MEMBER. In the
event that a substitute Managing Member has not been appointed and
admitted as provided in Section 10.4 so that there is no Managing
Member acting, the Company shall then be dissolved, terminated and
liquidated.
XI. AMENDMENT OF AGREEMENT AND MEETINGS
11.1 GENERAL. Either Managing Member may, at any time,
propose an amendment to this agreement and shall notify all Members
thereof in writing, together with a statement of the purpose(s) of
the amendment and such other matters as the Managing Member deems
material to the consideration of such amendment. If such proposal
does not adversely affect the rights of the Limited Members, such
proposal shall be considered adopted and this agreement deemed
amended. At any time, Limited Members holding not less than 10% of
the issued and outstanding Units may propose an amendment to this
agreement, or a meeting of Limited Members to consider any other
proposal for which the Limited Members may vote hereunder, including
the sale of all or substantially all of the assets of the Company.
Upon the request in writing to the Managing Member of any person
entitled to call a meeting, or in the event a proposal of a Managing
Member adversely effects the rights of Limited Members, or in the
event of objection by 10% of Limited Members by interest to such a
proposal, the Managing Member shall call a special meeting of all
Members, in each case at a location convenient to Limited Members,
to consider the proposal at the time requested by the person
requesting the meeting which shall be not less than 15 nor more than
60 days after receipt of such request. Written notice of the
meeting shall be given to all Members either personally or by
certified mail not less than 10 nor more than 60 days before the
meeting, but in any case where a meeting is duly called by request
of Limited Members, not more than 10 days after receipt of such
request. Included in the notice shall be a detailed statement of
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the action proposed, including a verbatim statement of the wording
of any resolution or amendment proposed. The notice shall provide
that Limited Members may vote in person or by proxy. The
affirmative vote of a majority, by interest, of the Limited Members
(excluding any Units held by the Managing Members for their own
accounts) shall decide the matter, without the consent of the
Managing Members. In any event, however, no such amendment shall
affect the allocation of economic interests to the Members or alter
the allocation of Company management responsibilities and control
without the approval of each Managing Member and a majority by
interest, of the Limited Members, except as otherwise provided in
Article X.
11.2 ALTERNATIVE TO MEETINGS. As an alternative to voting at
meetings of the Company pursuant to this and other Articles of this
agreement, the Limited Members may consent to and approve by written
action any matter that the Limited Members may consent to and
approve by vote at a meeting. In order to consent to and approve
the matter, the same percentage of Limited Members, by interest,
must sign the written action as is required by vote at a meeting;
provided, however, that written notice is given to all Members at
least 15 days before solicitation of signatures is begun.
XII. DISSOLUTION AND LIQUIDATION
12.1 EVENTS CAUSING DISSOLUTION. The Company shall be
dissolved only upon the occurrence of one or more of the following
events:
(a) the expiration of the term set forth in Section 1.4;
(b) the occurrence of any event that, under the laws of the
jurisdictions governing the Company shall dissolve the
Company;
(c) the bankruptcy of the Company or any of the Managing
Members;
(d) the withdrawal or the expulsion of a Managing Member if a
substitute Managing Member has not been timely admitted
as provided in Article X, with the result that there is no
Managing Member acting;
(e) the decree of court that other circumstances render a
dissolution of the Company equitable or required by law;
(f) the sale or other disposition of all or substantially all
of the assets of the Company; and
(g) at any time by the affirmative vote of a majority, by
interest, of the Limited Members (excluding Units held
by the Managing Members for their own accounts) at a
meeting called in accordance with Section 11.1 of this
agreement.
12.2 CONTINUATION OF BUSINESS. Except as provided in Section
12.3, upon the dissolution of the Company for any reason, the
business of the Company and title to the property of the Company
shall be vested in the Company continuing the business. Upon any
such dissolution no Member, nor his or her legal representatives,
shall have the right to an account of his or her interest as against
the Company continuing the business, and no Member, nor his or her
legal representatives, as against the Company continuing the
business, shall have the right to have the value of his or her
interest as of the date of dissolution ascertained nor have any
right as a creditor or otherwise with respect to the value of his or
her interest.
12.3 LIQUIDATION AND WINDING UP. If dissolution of the
Company should be caused by reason of (a) an event that makes it
unlawful for the business of the Company to be carried on or for the
Members to carry it on in the Company, (b) the bankruptcy of the
Company, (c) the withdrawal or expulsion of a Managing Member and no
substitute Managing Member has been timely admitted as provided in
Article X, with the result that there is no Managing Member acting,
(d) a decree of court that other circumstances render a dissolution
and winding up of the affairs of the Company equitable or required
by law, (e) the sale of all or substantially all of the assets of
the Company, (f) the express will of Limited Members as provided in
Section 12.1(g) above, the Company shall be liquidated and the
Managing Member (or the person or persons selected by a decree of
court to carry out the winding up of the affairs of the Company)
shall wind up the affairs of the Company.
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The Managing Member or the person winding up the affairs of
the Company shall promptly proceed to liquidate the Company. No
distribution upon liquidation in kind of property and assets shall
be made to Limited Members. In settling the accounts of the
Company, the assets and the property of the Company shall be
distributed in the following order of priority:
(a) To the payment of all debts and liabilities of the
Company, including loans by Members that are secured by
mortgages, but excluding any other loans or advances that may
have been made by the Members to the Company, in the order of
priority as provided by law;
(b) To the establishment of any reserves deemed necessary by
the Managing Member or the person winding up the affairs of the
Company for any contingent liabilities or obligations of the
Company;
(c) To the repayment of any unsecured loans or advances that
may have been made by any Members to the Company in the order of
priority as provided by law;
(d) Any remaining balance will be distributed to the Members
pro rata based on each Member's positive capital account balance,
after giving effect to allocations pursuant to Sections 5.1 and
5.3 and after taking into account all capital account adjustments
for the Company taxable year during which liquidation occurs
(other than those made pursuant to this Section 12.3(d)).
XIII. MISCELLANEOUS PROVISIONS
13.1 INTERPRETATION. The terms and provisions of this
agreement shall be governed by and construed in accordance with the
laws of the State of Delaware. All references herein to Articles
and Sections refer to Articles and Sections of this agreement. All
Article and Section headings are for reference purposes only and
shall not affect the interpretation of this agreement. The use of
the masculine gender, for all purposes of this agreement, shall be
deemed to refer to both male and female Members.
13.2 NOTICE. Any notice given in connection with the
business of the Company shall be duly given if mailed, by certified
or registered mail, postage prepaid: if to the Company, to the
principal office of the Company set forth in Section 1.3 or to such
other address as the Company may hereafter designate by notice to
the Members; if to the Managing Member or the Special Managing
Member, to the address set forth in Section 1.3 or such other
address as such Managing Members may hereafter designate by notice
to the Company; if to the Limited Members, to the addresses set
forth in the subscription agreement executed by each Limited Member
or to such other address as such Limited Members may hereafter
designate by notice to the Company.
13.3 SUCCESSORS AND ASSIGNS. Except as herein otherwise
provided to the contrary, this agreement shall be binding upon and
inure to the benefit of the parties hereto and their personal
representatives, assigns and successors.
13.4 COUNTERPARTS. This agreement may be executed in several
counterparts, and all so executed shall constitute one agreement,
binding on all parties hereto, notwithstanding that all of the
parties are not signatory to the original or the same counterpart.
13.5 SEVERABILITY. In the event that any provision of this
agreement shall be held to be invalid, the same shall not affect the
validity of the remainder of this agreement or the validity or the
formation of the Company as a limited Company under the Limited
Liability Company Act.
IN WITNESS WHEREOF, this agreement has been executed as of the
______ day of _____________________1998.
LIMITED MEMBERS MANAGING MEMBERS
I. By AEI Fund Management XXI, Inc., AEI Fund Management XXI, Inc.
A-25
attorney-in-fact Managing Member
By________________________ By____________________________
Robert P. Johnson, President Robert P. Johnson, President
___________________________
Robert P. Johnson,
Special Managing Member
A-26
EXHIBIT B
PRIOR PERFORMANCE TABLES
The information presented in the following tables represents the
historical experience of all public real estate programs organized by
the Manager or their Affiliates during the periods indicated. Limited
Members in the Fund should not assume that they will experience returs
if any, comparable to those experienced by investors in such prior real
estate programs.
Additional information relating to the performance of prior
programs is contained in Part II of the Registratioin Statement, of
which this Prospectus is a part of, that has been filed with the
Securities and Exchange Commission. Such information may be
obtained by contacting Mr. Robert P. Johnson, President, AEI Fund
Management XXI, Inc., 1300 Minnesota World Trade Center, 30 East
Seventh Street, Saint Paul, Minnesota 55101.
The programs included in the following tables have investment
objectives similiar to those of the Partnership, including protection
of capital, distribution of partially "tax sheltered" cash flow
from operations, and capital appreciation.
Table Index Description Page
I Experience in Raising and Investing Funds B-2
II Compensation to Sponsors B-3
III Operating Results of Prior Partnerships B-4
IV Results of Completed Programs B-7
V Sales or Disposals of Properties B-8
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(Unaudited)
The following table provides information at December 31, 1997, as to the
experience of the General Partners and their Affiliates in raising and
investing funds with respect to all prior public programs closed in the
last five years.
AEI AEI
Net Lease Net Lease AEI AEI
Income & Income & Income & Income &
Growth Growth Growth Growth
Fund XIX Fund XX Fund XXI Fund XXII
Dollar Amount Offered $30,000,000 $24,000,000 $24,000,000 $24,000,000
Dollar Amount Raised $21,151,928 $24,000,000 $24,000,000 $ 7,655,996
Percentage of Amount
Raised 100.0% 100.0% 100.0% 100.0%
Less Offering Expenses:
Selling Commissions
and Discounts 7.0 8.0 8.0 8.0
Organizational
Expenses 7.3 5.7 5.6 7.0
Other (a) 4.2 2.2 4.3 2.3
Less Reserves 0.1 0.1 0.1 .1
----------- ----------- ----------- ------------
Percent Available
for Investment 81.4% 84.0% 82.0% 82.6%
=========== =========== =========== ============
Acquisition Costs:
Prepaid Items and
Fees Related
to Purchase of
Property 0.0% 0.0% 0.0% 0.0%
Investment in
Properties (b) 81.4 84.0 73.2(c) 10.0(c)
Acquisition Fees 0.0 0.0 0.0 0.0
----------- ----------- ----------- -----------
Total Acquisition Cost 81.4% 84.0% 73.2% 10.0%
=========== =========== =========== ===========
Percent Leverage 0.0% 0.0% 0.0% 0.0%
Date Offering Began Feb. 91 Jan. 93 Feb. 95 Jan. 97
Length of Offering
(months) 24 24 24 (d)
Months to Invest 90% of
Amount Available for
Investment (measured
from beginning of
offering) 34 38 36 (c)
(a) Represents distributions in excess of net cash flow (return of capital).
(b) Includes cash down payments and capitalized costs and expenses related
to the purchase of properties, including the cost of appraisals,
attorney's fees, expenses of personnel in investigating properties, and
overhead allocated to such activities.
(c) Acquisitions are in process.
(d) Represents subscriptions accepted through December 31, 1997. Offering
had not closed as of December 31, 1997.
B-2
TABLE II
COMPENSATION TO SPONSORS
(Unaudited)
The following table provides information as to the compensation paid to
the General Partners and their Affiliates during the period from February,
1991 to December 31, 1997 for all prior public programs closed in the last
five years.
AEI AEI
Net Lease Net Lease AEI AEI
Income & Income & Income & Income &
Growth Growth Growth Growth
Fund XIX Fund XX Fund XXI Fund XXII
Type of Compensation
Date Offering Commenced Feb. 91 Jan. 93 Feb. 95 Jan. 97
Dollar Amount Raised $21,151,928 $24,000,000 $24,000,000 $ 7,655,996
Amount Paid to Sponsors
From Proceeds of Offering:
Underwriting Fees (a) 407,378 471,307 466,013 157,120
Acquisition Expenses
D purchase option on
property 0 0 0 0
D real estate
commission 0 0 0 0
D expense
reimbursement 931,909(c) 793,843(c) 516,519(c) 87,531(c)
Organization Offering
Expenses 345,490 227,451 359,605 153,494
Dollar Amount of Cash
Generated From
Operations Before
Deducting Payments
to Sponsors 10,317,099 7,164,836 2,968,812 115,975
Amount Paid to Sponsors
From Operations:
Property Management
Fees (b) 0 0 0 0
Partnership
Management Fees (b) 0 0 0 0
Reimbursements 1,623,883 1,099,934 625,158 137,864
Leasing Commissions 0 0 0 0
Participation in Cash
Distributions 98,322 66,085 33,800 5,331
Dollar Amount of Property
Sales and Refinancing
Before Deducting
Payments to Sponsors:
- cash 8,607,297 3,548,896 520,790 0
- notes 2,216,982 0 0 0
Amount Paid to Sponsors
From Property Sales
and Refinancing:
Real Estate
Commissions 0 0 0 0
Incentive Fees 0 0 0 0
Participation in Cash
Distributions 9,537 7,109 3,520 0
(a) Does not include fees paid to AEI Incorporated which were reallowed
to participating dealers.
(b) Although not paid a fixed fee for property management and
partnership management, the General Partners and Affiliates were
reimbursed at their Cost for the provision of such services. Such
reimbursements are reflected under the line item "Amount Paid to
Sponsors From OperationsDReimbursements."
(c) The Partnerships received reimbursements from the lessees in the
form of financing fees, commitment fees and expense reimbursements
to offset these costs. The reimbursements received by Fund XIX,
Fund XX, Fund XXI and Fund XXII totaled $627,692, $355,010, $342,001
and $11,414, respectively.
B-3
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PARTNERSHIPS
(Unaudited)
The following tables provide information as to the results of all prior
programs closed in the past five years for each year of the five years (or
from inception if formed after January 1, 1992) ended December 31, 1997.
<CAPTION>
AEI NET LEASE INCOME & GROWTH FUND XIX
Years Ended December 31
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Gross Revenues from Operations $ 1,837,921 $ 2,407,235 $ 2,282,282 $ 2,124,542 $ 1,792,599
Profit on Sale of Properties 155,035 431,484 969,054 571,927 77,703
Less:
Operating Expenses 291,635 291,636 292,268 352,591 360,253
Depreciation 194,173 373,799 369,226 340,721 313,146
Real Estate Impairment 0 0 0 0 1,310,484
Minority Interest in Net
Operating Income 58,188 165,801 311,287 0 0
----------- ----------- ----------- ----------- -----------
Net Income (Loss)-GAAP Basis $ 1,448,960 $ 2,007,483 $ 2,278,555 $ 2,003,157 $ (113,581)
=========== =========== =========== =========== ===========
Taxable Income (Loss):
-from operations $ 1,210,836 $ 1,470,087 $ 1,206,527 $ 1,500,668 $ 952,997
-from gain on sale 157,420 438,278 933,622 588,768 93,755
=========== =========== =========== =========== ===========
Cash Generated (Deficiency)From Operations $ 1,158,331 $ 2,099,865 $ 1,466,120 $ 1,929,889 $ 1,423,151
Cash Generated From Sales 574,859 1,765,130 5,367,636 1,334,525 675,838
Cash Generated From Refinancing 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Cash Generated From Operations,
Sales and Refinancing 1,733,190 3,864,995 6,833,756 3,246,414 2,098,989
Less: Cash Distributions to Investors
-from operating cash flow 1,158,331 1,915,568 1,466,120 1,799,923 1,423,151
-from sales and refinancing 0 165,972 419,246 121,458 247,028
-from cash reserves (a) 735,571 0 224,365 0 109,996
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions (160,712) 1,783,455 4,724,025 1,325,033 318,814
Less: Special Items (Not Including
Sales and Refinancing) 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions and
Special Items $ (160,712) $ 1,783,455 $ 4,724,025 $ 1,324,787 $ 318,814
=========== =========== =========== =========== ===========
Tax and Distribution Data
Per $1,000 Invested (b)
Federal Income Tax Results:
Ordinary Income (Loss)
-from operations 58 69 57 70 45
-from recapture 8 7 23 4 1
Capital Gain (Loss) 0 13 20 24 3
Cash Distributions to Investors:
Source (on GAAP basis)
-Investment Income 69 94 99 90 0
-Return of Capital 21 3 0 0 84
Cash Distributions to Investors:
Source (on cash basis)
-Sales 0 8 20 6 12
-Refinancing 0 0 0 0 0
-Operations 55 89 69 84 67
-Cash Reserves (a) 35 0 10 0 5
Amount (in percentage terms) remaining
invested in program properties at the
end of the last period reported in the
Table 0 0 0 0 100%
</TABLE>
(a) Represents initial capital or cash retained from prior years' cash flow.
(b) Based on an investment of a weighted average unit outstanding.
<TABLE>
B-4
TABLE III (Continued)
OPERATING RESULTS OF PRIOR PARTNERSHIPS
(Unaudited)
<CAPTION>
AEI NET LEASE INCOME & GROWTH FUND XX
Years Ended December 31
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Gross Revenues from Operations $ 139,288 $ 1,046,839 $ 1,852,292 $ 2,359,797 $ 2,003,892
Profit on Sale of Properties 0 0 225,180 87,281 472,575
Less:
Operating Expenses 114,321 297,038 292,122 255,505 354,554
Depreciation 6,008 124,146 251,092 381,794 390,066
Real Estate Impairment 0 0 0 0 626,800
Minority Interest in Net Operating Income 0 0 19,454 0 0
----------- ----------- ----------- ----------- -----------
Net Income (Loss)-GAAP Basis $ 18,959 $ 625,655 $ 1,514,804 $ 1,809,779 $ 1,105,047
=========== =========== =========== =========== ===========
Taxable Income (Loss):
-from operations $ 127,265 $ 809,315 $ 1,275,827 $ 1,720,326 $ 1,274,296
-from gain on sale 0 0 223,456 85,640 469,188
=========== =========== =========== =========== ===========
Cash Generated (Deficiency)From Operations $ 126,644 $ 637,370 $ 1,583,637 $ 2,145,303 $ 1,604,421
Cash Generated From Sales 0 0 988,838 461,077 2,098,981
Cash Generated From Refinancing 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Cash Generated From Operations,
Sales and Refinancing 126,644 637,370 2,572,475 2,606,380 3,703,402
Less: Cash Distributions to Investors
-from operating cash flow 64,800 637,370 1,467,084 2,034,864 1,604,421
-from sales and refinancing 0 0 486,375 100,571 124,011
-from cash reserves (a) 0 216,850 0 0 388,234
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions 61,844 (216,850) 619,016 470,945 1,586,736
Less: Special Items (Not Including
Sales and Refinancing) 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions and
Special Items $ 61,844 $ (216,850) $ 619,016 $ 470,945 $ 1,586,736
=========== =========== =========== =========== ===========
Tax and Distribution Data
Per $1,000 Invested (b)
Federal Income Tax Results:
Ordinary Income (Loss)
-from operations 28 58 53 72 53
-from recapture 0 0 2 1 4
Capital Gain (Loss) 0 0 7 3 15
Cash Distributions to Investors:
Source (on GAAP basis)
-Investment Income 4 45 63 75 46
-Return of Capital 10 16 18 14 43
Cash Distributions to Investors:
Source (on cash basis)
-Sales 0 0 20 4 5
-Refinancing 0 0 0 0 0
-Operations 14 45 61 85 68
-Cash Reserves (a) 0 16 0 0 16
Amount (in percentage terms) remaining
invested in program properties at the
end of the last period reported in the
Table 0 0 0 0 98%
(a) Represents initial capital or cash retained from prior years' cash flow.
(b) Based on an investment of a weighted average Unit outstanding.
</TABLE>
<TABLE>
B-5
TABLE III (Continued)
OPERATING RESULTS OF PRIOR PARTNERSHIPS
(Unaudited)
<CAPTION>
AEI INCOME & GROWTH FUND XXI
August 31, 1994
(Operations Commenced) Years Ended December 31
to December 31, 1994 1995 1996 1997
<S> <C> <C> <C> <C>
Gross Revenues from Operations $ 0 $ 263,399 $ 1,341,753 $ 1,513,094
Profit on Sale of Properties 0 0 0 106,551
Less:
Operating Expenses 2,915 144,180 278,563 348,934
Depreciation 0 11,687 150,958 251,272
Real Estate Impairment 0 0 0 580,200
----------- ----------- ----------- -----------
Net Income (Loss)-GAAP Basis $ (2,915) $ 107,532 $ 912,232 $ 439,239
=========== =========== =========== ===========
Taxable Income (Loss):
-from operations $ 0 $ 245,581 $ 1,135,292 $ 937,374
-from gain on sale 0 0 0 102,599
=========== =========== =========== ===========
Cash Generated (Deficiency) From Operations $ (14) $ 171,812 $ 1,098,924 $ 966,562
Cash Generated From Sales 0 0 0 520,790
Cash Generated From Refinancing 0 0 0 0
----------- ----------- ----------- -----------
Cash Generated From Operations,
Sales and Refinancing (14) 171,812 1,098,924 1,487,352
Less: Cash Distributions to Investors
-from operating cash flow 0 171,812 1,098,924 966,562
-from sales and refinancing 0 0 0 352,009
-from cash reserves (a) 0 21,611 75,670 720,708
----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions (14) (21,611) (75,670) (551,927)
Less: Special Items (Not Including
Sales and Refinancing) 0 0 0 0
----------- ----------- ----------- -----------
Cash Generated (Deficiency)
After Cash Distributions and
Special Items $ (14) $ (21,611) $ (75,670) $ (551,927)
=========== =========== =========== ===========
Tax and Distribution Data
Per $1,000 Invested (b)
Federal Income Tax Results:
Ordinary Income (Loss)
-from operations 0 35 64 39
-from recapture 0 0 0 0
Capital Gain (Loss) 0 0 0 4
Cash Distributions to Investors:
Source (on GAAP basis)
-Investment Income 0 15 52 18
-Return of Capital 0 13 14 66
Cash Distributions to Investors:
Source (on cash basis)
-Sales 0 0 0 14
-Refinancing 0 0 0 0
-Operations 0 25 62 40
-Cash Reserves (a) 0 3 4 30
Amount (in percentage terms) remaining
invested in program properties at the
end of the last period reported in the
Table 0 0 0 99%
(a) Represents initial capital or cash retained from prior years' cash flow.
(b) Based on an investment of a weighted average Unit outstanding.
</TABLE>
B-6
TABLE III (Continued)
OPERATING RESULTS OF PRIOR PARTNERSHIPS
(Unaudited)
AEI INCOME & GROWTH FUND XXII
July 31, 1996 Year Ended
(Operations Commenced) December 31,
to December 31, 1996 1997
Gross Revenues from Operations $ 0 $ 116,807
Profit on Sale of Properties 0 0
Less:
Operating Expenses 357 138,339
Depreciation 0 668
Real Estate Impairment 0 0
----------- -----------
Net Loss - GAAP Basis $ (357) $ (22,200)
=========== ===========
Taxable Income (Loss):
-from operations $ 0 $ 114,913
-from gain on sale 0 0
=========== ===========
Cash Generated (Deficiency)From Operations $ (57) $ 139,614
Cash Generated From Sales 0 0
Cash Generated From Refinancing 0 0
----------- -----------
Cash Generated From Operations,
Sales and Refinancing (57) 139,614
Less: Cash Distributions to Investors
-from operating cash flow 0 77,357
-from sales and refinancing 0 0
-from cash reserves (a) 0 0
----------- -----------
Cash Generated (Deficiency)
After Cash Distributions (57) 62,257
Less: Special Items (Not Including
Sales and Refinancing) 0 0
----------- -----------
Cash Generated (Deficiency)
After Cash Distributions and
Special Items $ (57) $ 62,257
=========== ===========
Tax and Distribution Data
Per $1,000 Invested (b)
Federal Income Tax Results:
Ordinary Income (Loss)
-from operations 0 30
-from recapture 0 0
Capital Gain (Loss) 0 0
Cash Distributions to Investors:
Source (on GAAP basis)
-Investment Income 0 0
-Return of Capital 0 20
Cash Distributions to Investors:
Source (on cash basis)
-Sales 0 0
-Refinancing 0 0
-Operations 0 20
-Cash Reserves (a) 0 0
Amount (in percentage terms) remaining
invested in program properties at the
end of the last period reported in the
Table 0 100%
(a) Represents initial capital or cash retained from prior years' cash flow.
(b) Based on an investment of a weighted average Unit outstanding.
B-7
TABLE IV
RESULTS OF COMPLETED PROGRAMS
None of the public partnerships sponsored by the General
Partners or their Affiliates have completed operations.
B-8
<TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
(Unaudited)
The following table provides information with respect to
sales or disposals of property by prior programs during the past
three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Net Lease Taco Cabana
Income & Growth Waco,
Fund XIX Texas (b) May 92 Jan. 95 138,351 0 0 0 138,351 0 95,180 95,180 34,648
AEI Real Estate Hardee's
Fund 85-A Sierra Vista,
Arizona July 86 Mar. 95 296,020 0 0 0 296,020 0 580,050 580,050 710,275
AEI Net Lease Applebee's
Income & Growth Aurora,
Fund XIX Colorado(b) Dec. 92 Mar. 95 141,542 0 0 0 141,542 0 111,589 111,589 30,721
AEI Net Lease SportsTown
Income & Growth Greensboro,
Fund XIX North
Carolina(c) May 94 Apr. 95 2,942,532 0 341,701 0 3,284,233 0 2,917,284 2,917,284 295,998
AEI Net Lease Applebee's
Income & Growth Aurora,
Fund XIX Colorado(b) Dec.92 June 95 299,759 0 0 0 299,759 0 235,846 235,846 71,105
AEI Net Lease Taco Cabana
Income & Growth Waco,
Fund XIX Texas(b) May 92 June 95 131,257 0 0 0 131,257 0 93,637 93,637 39,535
AEI Net Lease Applebee's
Income & Growth Aurora,
Fund XIX Colorado(b) Dec.92 June 95 216,443 0 0 0 216,443 0 173,417 173,417 52,344
AEI Real Estate Cheddar's
Fund 86-A Columbus,
Ohio(d) June 90 July 95 314,826 0 0 0 314,826 0 306,711 306,711 201,737
</TABLE> B-9
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C><C> <C> <C>
AEI Real Estate Cheddar's
Fund XVIII Columbus,
Ohio (d) June 90 July 95 1,259,320 0 0 0 1,259,320 0 1,306,192 1,306,192 805,116
AEI Net Lease Applebee's
Income & Growth Crestview Hills,
Fund XIX Kentucky(b) June 93 July 95 238,320 0 0 0 238,320 0 185,056 185,056 46,450
AEI Real Estate Fair Muffler
Fund 85-A Ashwaubenon,
Wisconsin Oct. 85 July 95 299,874 0 0 0 299,874 0 230,134 230,134 311,572
AEI Net Lease Black-Eyed Pea
Income & Growth Davie,
Fund XIX Florida Aug. 94 July 95 184,971 0 1,556,982 0 1,741,953 0 1,781,075 1,781,075 209,831
AEI Real Estate Applebee's
Fund 86-A Fort Myers,
Florida Feb. 88 July 95 1,646,608 0 0 0 1,646,608 0 1,179,405 1,179,405 1,152,645
AEI Real Estate Applebee's
Fund XVI Columbia,
South
Carolina(e) May 88 July 95 990,453 0 0 0 990,453 0 723,823 723,823 716,868
AEI Real Estate Applebee's
Fund XVII Columbia,
South
Carolina(e) May 88 July 95 715,545 0 0 0 715,545 0 534,973 534,793 516,452
AEI Net Lease HomeTown Buffet
Income & Growth Albuquerque,
Fund XX New Mexico(b)Sept.93 Aug. 95 365,678 0 0 0 365,678 0 309,413 309,413 70,539
</TABLE> B-10
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Real Estate Hardee's
Fund 85-A Wayne,
Nebraska Dec. 85 Aug. 95 474,530 0 0 0 474,530 0 447,944 447,944 619,736
AEI Real Estate Applebee's
Fund XVII Hampton,
Virginia July 88 Aug. 95 1,747,127 0 0 0 1,747,127 0 1,287,072 1,287,072 1,326,976
AEI Real Estate Applebee's
Fund XVIII Memphis,
Tennessee Aug. 89 Sept. 95 1,444,822 0 0 0 1,444,822 0 1,126,919 1,126,919 951,090
AEI Net Lease Applebee's
Income& Growth Temple Terrace,
Fund XIX Florida(b) Oct. 93 Sept. 95 215,211 0 0 0 215,211 0 163,548 163,548 41,808
AEI Net Lease HomeTown Buffet
Income& Growth Albuquerque,
Fund XX New Mexico(b) Sept.93 Oct. 95 180,622 0 0 0 180,622 0 136,866 136,866 33,862
AEI Net Lease HomeTown Buffet
Income& Growth Albuquerque,
Fund XX New Mexico(b) Sept.93 Oct. 95 270,352 0 0 0 270,352 0 207,742 207,742 51,603
AEIReal Estate Jiffy Lube
Fund XVI Dallas,
Texas(e) Dec. 87 Oct. 95 161,218 0 0 0 161,218 0 154,781 154,781 146,941
AEIReal Estate Jiffy Lube
Fund XVII Dallas,
Texas(e) Mar. 88 Oct. 95 483,653 0 0 0 483,653 0 454,300 454,300 396,126
</TABLE> B-11
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEIReal Estate Jiffy Lube
Fund XVI Garland,
Texas(e) Dec. 87 Oct. 95 322,443 0 0 0 322,443 0 301,884 301,884 277,244
AEIReal Estate Jiffy Lube
Fund XVII Garland,
Texas (e) Feb. 88 Oct. 95 322,442 0 0 0 322,442 0 303,108 303,108 265,759
AEIReal Estate Applebee's
Fund XVII Richmond,
Virginia Sept.88 Oct. 95 1,755,975 149,463 0 0 1,905,438 0 1,375,732 1,375,732 1,291,422
AEIReal Estate Applebee's
Fund XVII Virginia Beach,
Virginia(b) Oct. 88 Nov. 95 1,496,613 0 0 0 1,496,613 0 1,106,638 1,106,638 1,087,649
AEINetLease HomeTown Buffet
Income&Growth Albuquerque,New
FundXIX Mexico(b) Sept.93 Dec. 95 172,186 0 0 0 172,186 0 138,494 138,494 36,594
AEI Net Lease Applebee's
Income &Growth Temple Terrace,
Fund XIX Florida(b) Oct. 93 Dec. 95 171,714 0 0 0 171,714 0 126,414 126,414 35,449
AEI Net Lease Applebee's
Income& Growth Crestview Hills,
Fund XIX Kentucky(b) Jun. 93 Dec. 95 172,924 0 0 0 172,924 0 134,587 134,587 40,579
AEI Net Lease Applebee's
Income& Growth Crestview Hills,
Fund XIX Kentucky(b) Jun. 93 Dec. 95 172,910 0 0 0 172,910 0 134,586 134,586 40,579
</TABLE> B-12
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Lease Auto Max
Income & Growth St. Paul,
Fund 84-A Minnesota May 85 Mar. 96 327,622 0 0 0 327,622 0 302,540 302,540 436,484
AEI Real Estate Super 8
Fund XV Hot Springs,
Arkansas(f) Apr.88 Mar. 96 663,386 0 0 0 663,386 0 581,541 581,541 635,940
AEI Real Estate Super 8
Fund XVI Hot Springs,
Arkansas(f) Apr.88 Mar. 96 663,386 0 0 0 663,386 0 583,653 583,653 635,834
AEI Net Lease HomeTown Buffet
Income &Growth Tucson,
Fund XIX Arizona(b) Jun.93 Apr. 96 201,357 0 0 0 201,357 0 164,251 164,251 55,127
AEI RealEstate Office Building
Fund 86-A Kearney,
Nebraska Dec.86 Apr. 96 329,785 0 0 0 329,785 0 434,623 434,623 236,988
AEI Net Lease Applebee's
Income& Growth Crestview Hills,
Fund XIX Kentucky(b) June 93 Apr. 96 86,495 0 0 0 86,495 0 63,334 63,334 22,161
AEI RealEstate Taco Cabana
Fund XVIII New Braunfels,
Texas May 92 May 96 962,298 0 0 0 962,298 0 784,045 784,045 431,686
AEI Net Lease Applebee's
Income &Growth Crestview Hills,
Fund XIX Kentucky(b) June 93 May 96 216,781 0 0 0 216,781 0 158,335 158,335 56,433
</TABLE> B-13
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Lease Auto Max
Income& Growth St. Paul,
Fund 84-A Minnesota May 85 May 96 401,778 9,254 0 0 411,032 60,000 340,650 400,650 558,426
AEI Net Lease Applebee's
Income & Growth Temple Terrace,
Fund XIX Florida(b) Oct.93 June 96 87,119 0 0 0 87,119 0 60,501 60,501 21,024
AEI RealEstate Taco Cabana
Fund XVIII San Antonio,
Texas(b) July 91 Aug. 96 217,259 0 0 0 217,259 0 158,441 158,441 100,302
AEIReal Estate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Sept.96 123,933 0 0 0 123,933 0 108,418 108,418 3,925
AEI Real Estate Danny's Family
Fund XVII Car Wash
Phoenix,
Arizona Feb. 89 Sept.96 1,690,844 0 0 0 1,690,844 0 1,688,271 1,688,271 1,544,183
AEI Net Lease Arby's/Mrs. Winner's
Income & Growth Smyrna,
Fund XX Georgia(b) May 94 Sept.96 181,497 0 0 0 181,497 0 152,813 152,813 39,599
AEI Real Estate Taco Cabana
Fund XVIII San Antonio,
Texas,(b) Jul. 91 Oct. 96 173,913 0 0 0 173,913 0 122,467 122,467 80,899
AEI Real Estate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Oct. 96 147,152 0 0 0 147,152 0 127,551 127,551 5,677
</TABLE> B-14
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C><C> <C> <C> <C> <C> <C> <C>
AEI Net Lease Applebee's
Income & Growth Crestview Hills,
Fund XIX Kentucky(b) June 93 Oct. 96 224,036 0 0 0 224,036 0 172,104 172,104 70,701
AEI Net Lease Taco Cabana
Income & Growth Round Rock,
Fund XIX Texas July 94 Nov. 96 303,049 0 660,000 0 963,049 0 784,210 784,210 437,864
AEI Net Lease Applebee's
Income& Growth Temple Terrace,
Fund XIX Florida(b) Oct. 93 Nov. 96 215,688 0 0 0 215,688 0 152,674 152,674 62,188
AEI Net Lease Arby's/Mrs. Winner's
Income& Growth Smyrna,
Fund XX Georgia(b) May 94 Dec. 96 279,580 0 0 0 279,580 0 240,680 240,680 67,468
AEI RealEstate Taco Cabana
Fund XVIII San Antonio,
Texas(b) July 91 Dec. 96 216,663 0 0 0 216,663 0 153,084 153,084 104,707
AEIReal Estate Applebee's
Fund XVIII Destin,
Florida(b) Nov. 91 Dec. 96 191,781 0 0 0 191,781 0 141,215 141,215 91,618
AEI RealEstate Applebee's
Fund XVIII Destin,
Florida(b) Nov. 91 Dec. 96 168,333 0 0 0 168,333 0 123,976 123,976 80,435
AEIReal Estate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Jan. 97 176,383 0 0 0 176,383 0 150,060 150,060 11,427
</TABLE> B-15
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C><C> <C> <C>
AEI Net Lease Applebee's
Income& Growth Temple Terrace,
Fund XIX Florida(b) Oct. 93 Jan. 97 175,838 0 0 0 175,838 0 122,139 122,139 51,877
AEI Net Lease Arby's/Mrs. Winner's
Income &Growth Smyrna,
Fund XX Georgia(b) May 94 Jan. 97 224,838 0 0 0 224,838 0 196,635 196,635 57,179
AEIReal Estate Sizzler
Fund XVI Kings Island,
Ohio(g) Jan. 90 Jan. 97 149,201 0 0 0 149,201 0 468,140 468,140 131,616
AEIReal Estate Sizzler
Fund XVII Kings Island,
Ohio(g) Jan. 90 Jan. 97 315,229 0 0 0 315,229 0 1,048,666 1,048,666 279,192
AEIReal Estate Sizzler
Fund XVIII Kings Island,
Ohio(g) Jan. 90 Jan. 97 19,867 0 0 0 19,867 0 66,093 66,093 17,519
AEIReal Estate Children's World
Fund XV Moreno Valley,
California May 87 Jan. 97 1,301,342 0 0 0 1,301,342 0 963,717 963,717 1,195,705
AEIet Lease Rally's
Income& Growth Brownsville,
Fund XIX Texas July 93 Feb. 97 250,000 0 0 0 250,000 0 281,713 281,713 81,507
AEI Net Lease Rally's
Income& Growth Edinburg,
Fund XIX Texas July 93 Feb. 97 250,000 0 0 0 250,000 0 281,761 281,761 81,528
</TABLE> B-16
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures<F26>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEIReal Estate Automax
Fund XV Minneapolis,
Minnesota June 86 Feb.97 411,993 0 0 0 411,993 0 388,800 388,800 539,623
AEIReal Estate Taco Cabana
Fund XVIII San Antonio,
Texas(b) July 91 Feb.97 192,268 0 0 0 192,268 0 133,503 133,503 95,414
AEIReal Estate Applebee's
Fund XVIII Destin,
Florida(b) Nov. 91 Mar.97 230,971 0 0 0 230,971 0 175,029 175,029 117,929
AEIReal Estate Champps
Fund XVIII Columbus,
Ohio(b) Aug. 96 Mar.97 220,067 0 0 0 220,067 0 181,887 181,887 10,447
AEIReal Estate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Mar.97 42,331 0 0 0 42,331 0 36,092 36,092 3,449
AEIReal Estate Applebee's
Fund XVIII Destin,
Florida(b) Nov. 91 Mar.97 231,740 0 0 0 231,740 0 175,028 175,028 118,592
AEIReal Estate Champps
Fund XVIII Columbus,
Ohio(b) Aug. 96 Mar.97 219,568 0 0 0 219,568 0 181,886 181,886 11,039
AEIReal Estate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Mar.97 219,996 0 0 0 219,996 0 187,574 187,574 18,517
</TABLE> B-17
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures<F26>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Net Lease Arby's/Mrs. Winner's
Income & Growth Smyrna,
Fund XX Georgia(b) May 94 Apr. 97 185,171 0 0 0 185,171 0 166,517 166,517 53,623
AEI RealEstate Champps
Fund XVIII Columbus,
Ohio(b) Aug. 96 July 97 368,142 0 0 0 368,142 0 304,040 304,040 30,138
AEI Net Lease Arby's/Mrs. Winner's
Income & Growth Smyrna,
Fund XX Georgia(b) May 94 Aug 97 174,495 0 0 0 174,495 0 152,812 152,812 54,721
AEI RealEstate Applebee's
Fund XVIII Destin,
Florida (b) Nov 91 Sept.97 216,157 0 0 0 216,157 0 160,443 160,443 118,263
AEI RealEstate Applebee's
Fund XVIII Destin,
Florida(b) Nov 91 Sept.97 263,568 0 0 0 263,568 0 198,898 198,898 147,315
AEI RealEstate Sizzler
Fund XVIII Fairfield,
Ohio Mar.91 Sept.97 528,476 0 0 0 528,476 0 1,608,265 1,608,265 208,636
AEI RealEstate Taco Cabana
Fund XVIII San Antonio,
Texas (b) July 91 Sept.97 267,448 0 0 0 267,448 0 180,533 180,533 143,024
AEI Net Lease Arby's/Mrs. Winner's
Income & Growth Smyrna
Fund XX Georgia (b) May 94 Sept.97 224,663 0 0 0 224,663 0 180,203 180,203 67,210
</TABLE> B-18
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures<F26>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Net Lease Applebee's
Income & Growth Middletown,
Fund XX Ohio (b) July 94 Sept.97 135,839 0 0 0 135,839 0 107,517 107,517 37,838
AEI Income & Champps
Growth Fund Columbus,
XXI Ohio (b) Aug. 96 Sept.97 225,622 0 0 0 225,622 0 189,156 189,156 21,417
AEI RealEstate Taco Cabana
Fund XVIII San Antonio,
Texas (b) July 91 Oct. 97 226,316 0 0 0 226,316 0 147,978 147,978 118,031
AEI Net Lease Arby's/Mrs. Winner's
Income & Growth Smyrna,
Fund XX Georgia(b) May 94 Oct. 97 169,721 0 0 0 169,721 0 136,955 136,955 51,473
AEI Net Lease Applebee's
Income & Growth Middletown,
Fund XX Ohio (b0 July 94 Oct. 97 275,421 0 0 0 275,421 0 217,027 217,027 77,008
Net Lease Rio Bravo
Income & Growth St. Paul,
Fund 84-A Minnesota(b) Feb. 85 Oct. 97 177,504 0 0 0 177,504 0 202,961 202,961 267,864
AEI RealEstate Taco Cabana
Fund XVIII San Antonio,
Texas (b) July 91 Oct. 97 226,315 0 0 0 226,315 0 147,977 147,977 118,888
Net Lease Chi-Chi's
Income & Growth Appleton,
Fund 84-A Wisconsin(b) Feb. 85 Nov. 97 276,279 0 0 0 276,279 0 246,174 246,174 398,842
</TABLE> B-19
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI RealEstate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Nov. 97 296,961 0 0 0 296,961 0 237,846 237,846 38,903
AEI Income & Champps
Growth Fund Columbus,
XXI Ohio (b) Aug. 96 Nov. 97 295,168 0 0 0 295,168 0 239,850 239,850 29,608
AEI RealEstate Tractor Supply
Fund XVIII Bristol,
Virginia(b) Apr. 96 Nov. 97 182,816 0 0 0 182,816 0 150,061 150,061 25,256
AEI Net Lease Applebee's
Income & Growth Middletown,
Fund XX Ohio(b) July 94 Dec. 97 227,960 0 0 0 227,960 0 177,891 177,891 66,211
Net Lease Gingham's
Income & Growth St. Charles,
Fund 84-A Missouri(b) July 85 Dec. 97 226,762 0 0 0 226,762 0 232,334 232,334 278,773
AEI Net Lease Applebee's
Income & Growth Middletown,
Fund XX Ohio (b) July 94 Dec. 97 225,225 0 0 0 225,225 0 175,756 175,756 66,207
AEI Net Lease Applebee's
Income & Growth Middletown,
Fund XX Ohio (b) July 94 Dec. 97 218,596 0 0 0 218,596 0 170,775 170,775 64,386
Net Lease Rio Bravo
Income & Growth St. Paul,
Fund 84-A Minnesota(b) Feb. 85 Dec. 97 271,675 0 0 0 271,675 0 302,919 302,919 404,755
</TABLE> B-20
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Real J.T. McCord's
Estate Fund Irving,
XVI Texas Dec. 87 Dec. 97 741,635 0 0 0 741,635 0 1,147,333 1,147,333 35,207
AEI Net Lease Applebee's
Income & Growth Middletown
Fund XX Ohio(b) July 94 Jan. 98 239,893 0 0 0 239,893 0 177,891 177,891 68,324
AEI Income & Champps
Growth Fund Columbus
XXI Ohio(b) Aug. 96 Jan. 98 227,414 0 0 0 227,414 0 189,156 189,156 26,890
Net Lease Chi-Chi's
Income & Growth Appleton
Fund 84-A Wisconsin(b) Feb. 85 Jan. 98 170,985 0 0 0 170,985 0 153,193 153,193 252,160
AEI Net Lease Champps
Income & Growth Lyndhurst
Fund XX Ohio (b) Apr. 96 Jan. 98 184,032 0 0 0 184,032 0 149,183 149,183 25,949
AEI Net Lease Champps
Income & Growth Columbus,
Fund XXI Ohio(b) Aug. 96 Feb. 98 181,855 0 0 0 181,855 0 132,408 132,408 20,481
AEI Real Estate am/pm
Fund 86-A Mini Market
Carson City,
Nevada Aug. 87 Feb. 98 955,401 0 0 0 955,401 0 779,896 779,896 1,103,787
</TABLE> B-21
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI RealEstate am/pm
Fund XVII Mini Market
Carson City,
Nevada Nov. 88 Feb. 98 850,996 0 0 0 850,996 0 703,871 703,871 872,915
AEI Income & Champps
Growth Fund Columbus,
XXI Ohio (b) Aug. 96 Mar. 98 226,394 0 0 0 226,394 0 165,510 27,455
Net Lease Rio Bravo
Income& Growth St. Paul,
Fund 84-A Minnesota (b) Feb. 85 Apr. 98 198,039 0 0 0 198,039 0 222,627 222,627 302,865
AEI Net Lease Red Line
Income &Growth Burgers
Fund XIX Houston,Texas Feb. 93 Apr. 98 0 0 0 0 0 0 303,629 303,629 104,350
Net Lease Chi-Chi's
Income& Growth Appleton,
Fund 84-A Wisconsin(b) Feb. 85 May 98 123,721 0 0 0 123,721 0 107,267 107,267 180,300
Net Lease Chi-Chi's
Income& Growth Appleton
Fund 84-A Wisconsin (b) Feb. 85 June 98 174,596 0 0 0 174,596 0 149,883 149,883 253,585
AEI RealEstate Tractor Supply
Fund 85-A Maryville,
Tennessee (b) Feb. 96 July 98 136,320 0 0 0 136,320 0 95,494 95,494 24,900
</TABLE> B-22
</PAGE>
<PAGE>
<TABLE>
The following table provides information with respect to sales or
disposals of property by prior programs during the past three years.
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS COSTS OF PROPERTIES, INCLUDING
AND GAAP ADJUSTMENTS CLOSING AND SOFT COSTS
Excess of
Total Property
Cash Purchase Adjustment Acquisition Operating
Received Money resulting Cost, Capital Cash
Net of Mortgage Mortgage from Original Improvements, Receipts
Date Date Closing Balance at Taken Back Application Mortgage Closing and OverExpen-
Program Property Acquired of Sale Costs Time of Sale by Program of GAAP Total Financing Soft Costs Total ditures(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AEI Income Champps
& Growth Columbus,
Fund XXI Ohio (b) Aug. 96 July 98 227,225 0 0 0 227,225 0 171,422 171,422 34,463
AEI RealEstate Sizzler
Fund 86-A Springboro,
Ohio (d) Aug. 98 July 98 25,000 0 0 0 25,000 0 89,097 89,097 7,608
AEI RealEsate Sizzler
Fund XVIII Springboro,
Ohio (d) Aug. 90 July 98 350,000 0 0 0 350,000 0 1,310,562 1,310,562 120,717
</TABLE>
[FN]
(a) Does not include deduction for partnership general and
administrative expenses not related to the properties.
(b) Sale of less than a majority interest in the property.
(c) The Partnership owned a 92.74194% interest in this property.
(d) This property was owned jointly by AEI Real Estate Funds 86-A and XVIII.
(e) This property was owned jointly by AEI Real Estate Funds XVI
and XVII.
(f) This property was owned jointly by AEI Real Estate Funds XV
and XVI.
(g) This property was owned jointly by AEI Real Estate Funds
XVI, XVII and XVIII.
</FN>
</PAGE> 179
EXHIBIT D
AEI INCOME & GROWTH FUND 23 LLC
SUBSCRIPTION AGREEMENT
(Including Power of Attorney)
Make Your Check Payable to "Fidelity Bank AEI Fund 23 Escrow"
IMPORTANT REPRESENTATIONS ARE MADE ON THIS FORM. PLEASE
READ CAREFULLY BEFORE SIGNING. PLEASE TYPE OR PRINT.
1. INVESTMENT [ ] Initial Investment [ ] Add-On to Existing Investment
Number of Units Amount of Investment
($1,000 x No. of Units) $
2. OWNERSHIP [ ] Tenants in Common [ ] IRA [ ] Taxable Trust
[ ] Uniform Gift to Minors Act of the State of
[ ] Individual [ ] Community Property [ ] Keogh [ ] Partnership
[ ] Joint Tenants [ ] Other (Explain)
[ ] Pension/Profit Sharing Plan [ ] Non-Taxable Trust Corporation
3. REGISTERED OWNER (Name of Trust, Partnership or Corporation, if
applicable. Give both names if jointly held.)
Last Name(s) First Name(s) Initial(s)
[ ] Mr. [ ] Ms.
[ ] Mr. [ ] Ms.
Mailing Address Street City State Zip Code Phone
Residential Address Street City State Zip Code Phone
4. QUARTERLY DISTRIBUTIONS AUTHORIZATION FOR AUTOMATIC
Please send my distribution checks to the DEPOSITS (ACH) _ Please
following address (Insert "same" if checks include a copy of voided check
are to be sent to mailing address. Insert or savings deposit slip.
name, address, account number and phone I authorize AEI Fund Management,
number if checks are to be sent to a Inc., and Fidelity Bank of Edina,
financial institution.) Minnesota, to initiate variable
entries to my checking or savings
account. This authority will
remain in effect until I notify
AEI in writing to cancel in such
Name and complete address: time as to afford AEI a
reasonable opportunity to act on
the cancellation.
Phone Number
Financial Institution Name and
Address
(Please Print):
Account Type (Circle One):
[ ] Checking [ ] Savings [ ] Other
Account Number:
Office Use Only: Bank Routing No.
Trans. Code
5. DISTRIBUTION REINVESTMENT PLAN (Expires after the offering period.)
Do you wish to participate in the distribution reinvestment plan [ ] Yes [ ] No
(If you elect to participate by checking "Yes," rental income and
other Fund income included in "Net Cash Flow" will not be distributed
to you but instead will be applied to the purchase of additional Units,
or fractional Units, at $1,000 per Unit as long as such purchase continues
to comply with applicable securities laws and the Fund has not
distributed proceeds from sale or refinancing of properties.)
6. INVESTOR REPRESENTATIONS (Each of the following MUST BE INITIALED BY
INVESTOR for this Subscription Agreement to be accepted)
[ ] I have received a copy of the Prospectus of the Partnership,
dated (the "Prospectus")*.
[ ] I understand that there will be no public market for the
Units and that it may not be possible to liquidate readily
an investment in the Partnership.
[ ] I meet the suitability standards set forth in the Prospectus
under the heading "Who May Invest" and as further specified
in Exhibit C to the Prospectus and am purchasing Units for
my own account.
[ ] I hereby make, constitute and appoint the General Partner,
or either of them, with full power of substitution, my true
and lawful attorney for the purposes and in the manner
provided in Section 7.5 of the Agreement, which section of
the Agreement is incorporated herein by reference and hereby
made a part hereof.
*Your broker is obligated to provide you with a copy of the
Prospectus five days before you subscribe. If you did not
receive the Prospectus five days in advance, you have the
right to withdraw your subscription until those five days
have elapsed.
NOTE: SIGNATURES AUTHORIZING THIS INVESTMENT MUST APPEAR ON
THE REVERSE SIDE OF THIS FORM.
Please turn over
ANY MISSING SIGNATURES WILL DELAY ORDER PROCESSING.
7. INVESTOR SIGNATURES AND CERTIFICATIONS
IMPORTANT FORM W-9 CERTIFICATION INSTRUCTIONS: YOU MUST CROSS OUT ITEM
(2) BELOW IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON
YOUR TAX RETURN. However, if after being notified by the IRS that you
were subject to backup withholding you received another notification
from the IRS that you are no longer subject to backup withholding, do not
cross out item (2). Under penalties of perjury I certify that:: (1)
The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), AND (2) I am
not subject to backup withholding either because I have not been notified
by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends,
or the IRS has notified me that I am no longer subject to backup
withholding.
IMPORTANT CHECK ONE:
THE INVESTOR IS A UNITED STATES CITIZEN. Check Here [ ]
THE INVESTOR IS A FOREIGN INVESTOR. Check Here [ ]
(Nonresident Alien or Individual, Foreign Corporation,
Foreign Partnership, or Foreign Trust or Estate).
(I/WE ARE AUTHORIZED TO ENTER INTO THIS SUBSCRIPTION AGREEMENT ON BEHALF OF
THE PERSON(s) OR ENTITY(s) LISTED IN 3 ABOVE) NEITHER A BROKER, DEALER,
INVESTMENT ADVISER NOR ANY OF THEIR AGENTS MAY SIGN ON BEHALF OF AN
INVESTOR. (Custodians must sign for custodial accounts. All other forms of
registration must be signed by the investing parties.)
Investor Signature(s) [X] [X]
Print Name & Capacity Print Name & Capacity
Tax ID Number Tax ID Number
Primary
BROKER/DEALER INFORMATION (Registered representative signature required
for processing. Please type or print.)
Broker/Dealer Firm Registered Representative Name
Registered Representative's Office Address
City State Zip Code Phone (including area code)
To substantiate compliance with Appendix F to Article 3, Section 34 of
the NASD's Rules of Fair Practice, the undersigned registered representative
hereby certifies as follows:
1. I have reasonable grounds to believe, based on information obtained from
the Subscriber concerning investment objectives, other investments,
financial situations and needs and other information known to me, that
investment in the Fund is suitable for such Subscriber in light of
income, finnancial position, net worth and other suitability
characteristics.
2. I have discussed with the Subscriber the risks associated with and the
liquidity of an investment in the Fund.
Dated:
Signature Registered Representative
AEI Fund Management XXI, Inc., as Manager AEI Fund Management XXI, Inc.
of the Fund, hereby accepts this
Subscription Agreement this day of By
19 .
ATTEST Its
Return Subscription Agreement to:
AEI Fund Management, Inc.
1300 Minnesota World Trade Center
30 East Seventh Street
St. Paul, MN 55101
651-227-7333
651-227-7705 (fax)
800-328-3519
CONSENT TO ELECTRONIC DELIVERY OF REPORTS
By initialing one of the boxes below, you will be consenting
to delivery of periodic reports by AEI Income & Growth Fund 23 LLC
to you electronically. These reports would include
<bullet> annual reports that contain audited financial statements;
<bullet> quarterly reports containing unaudited condensed financial
statements;
<bullet> property sales reports; [and
<bullet> your K-1 income tax information].
You have the option of either (1) having these reports sent to the
e-mail address you designate below, or (2) agreeing to download
these reports from our web site once you have been notified by e-
mail that they have been posted. You must have an e-mail address to
use this service.
If you elect to receive these reports electronically, you will
not receive paper copies of the reports in the mail, unless you
later revoke your consent. You may revoke your consent and receive
paper copies at any time by notifying us in writing at:
AEI Securities Incorporated,
1300 Minnesota World Trade Center
30 East Seventh Street
Saint Paul, MN 55101
If you agree to accept reports electronically, please complete
the following enrollment information:
Name of Investor:
E-Mail Address:
(I understand that I must immediately advise the Fund
at the address above if my e-mail address changes)
Form of Delivery (please check one):
Please deliver the full report directly to my e-mail address
above. I understand that the report will be delivered in Word
for Windows 7.0, or in a more current version of Word for
Windows. I understand that if I cannot read this word
processing format, I must immediately inform AEI Income &
Growth Fund 23 LLC at the above address.
Please post the report on your web site, or in a hyperlink
from your web site, and advise me by e-mail to the address
above when it is posted.
Signature(s) X
AEI INCOME & GROWTH FUND 23 LLC
SUBSCRIPTION AGREEMENT INSTRUCTIONS
INVESTOR To purchase Units of the currently effective Limited
INSTRUCTIONS Partnership, complete and sign the Subscription
Agreement and deliver it to your broker, together
with your check. YOUR CHECK SHOULD BE MADE PAYABLE TO:
FIDELITY BANK AEI FUND 23 ESCROW. In order to invest,
it is necessary that all items on the Subscription
Agreement be completed.
1. INVESTMENT Limited Liability Company interests in the Fund are
being offered in units of $1,000. Insert the number of
Units to be purchased, multiply the dollar amount of
the investment ($1,000 x No. of Units). An individual,
partnership, corporation, trust, association or other
legal entity must purchase a minimum of two and one-
half ($2,500) Units. The minimum investment for an
Individual Retirement Account, Keogh Plan or other
Qualified Plan is at least two ($2,000) Units.
According to state law, individuals in Nebraska must
purchase a minimum of five ($5,000) Units.
2. OWNERSHIP Check the appropriate box indicating the manner in
which title is to be held. Please note that the box
checked must be consistent with the number of
signatures appearing in Section 7. (See Instruction
7). In the case of partnerships, corporations,
custodianships or trusts, the box checked must be
consistent with the legal title (registration).
PARTICIPANTS IN IRAS AND KEOGH PLANS SHOULD NOTE THE PURCHASE OF LP UNITS
DOES NOT IN ITSELF CREATE THE PLAN; YOU MUST CREATE THE PLAN THROUGH A
BONAFIDE CUSTODIAN OR TRUSTEE WHO WILL EXECUTE THE SUBSCRIPTION AGREEMENT.
3. REGISTERED Please type or print the exact name (registration)
OWNER that the investor desires on the account. If the
investor is an individual, a partnership or a
corporation, please include in this space the
complete name and title in which the investment
is to be held. If the investor is a trust such as
an IRA or Keogh Plan, please include the name and
address of the trustee and the trust name. In the
case of a trust or custodian investment including
IRAs, Keogh Plans and other trusts or
custodianships, quarterly distributions and
investment correspondence will normally be sent
to the trustee or custodian at the mailing address.
The plan participant will receive correspondence
at home. ALL ACCOUNTS MUST SUPPLY THE INVESTOR'S
RESIDENTIAL ADDRESS (FOR BLUE SKY REGISTRATION
PURPOSES).
4. QUARTERLY After impounds are met, Fidelity Bank will release
DISTRIBUTIONS the interest earned during the impound period to
(Automatic the designated address (distribution reinvestment
deposits does not apply to impound interest).The Partnership
or checks) will then commence distributions of cash available
for distribution to investors. Please insert "same"
if the checks are to be mailed to the mailing
address. Please insert the name and address of the
financial institution as well as the account number,
if checks are to be sent to a bank, savings and loan,
or other financial institution or destination.
For Electronic Direct Deposit through ACH, a voided check or savings
deposit slip is required.
5. DISTRIBUTION Answer the question by checking yes or no if
REINVESTMENT investor elects to participate in the Distribution
Reinvestment Plan.
6. INVESTOR To comply with securities regulations,the investor
REPRESENTATIONS MUST make the representations in this Subscription
Agreement. ALL FOUR SPACES MUST BE INITIALED BY THE
INVESTOR.
7. INVESTOR IRS regulations require our escrow bank to have the
CERTIFICATIONS W-9 SIGNATURES AND certification completed for all
Limited Partners. This certifies that the taxpayer
is not subject to backup withholding. If
certification is not completed, the escrow agent
must legally withhold, and pay to the IRS, 20% of
the taxpayer's escrow interest. Read the Subscription
Agreement carefully for additional W-9 Certification
Instructions. If the investor is a Nonresident Alien
or Individual, Foreign Corporation, Foreign
Partnership or Foreign Trust or Estate, please check
the Foreign Status Certification box. To authorize
the investment, sign in the space(s) provided. If
title is to be held as joint tenancy or tenants in
common, at least two signatures are required. In the
case of community property, only one investor
signature is required (see reverse side for details
on required signatures). ALL INVESTORS AND/OR PLAN
PARTICIPANTS MUST PROVIDE SOCIAL SECURITY NUMBERS.
Trusts, corporations, partnerships, custodians and
estates MUST ADDITIONALLY FURNISH a tax
identification number.
BROKER/DEALER IT IS NECESSARY THAT ALL ITEMS BE FULLY INFORMATION
COMPLETED. INCLUDE REGISTERED REPRESENTATIVE'S NAME
AND BRANCH OFFICE ADDRESS. THE REGISTERED
REPRESENTATIVE MUST SIGN AND DATE WHERE INDICATED
IN ORDER FOR THE APPLICATION TO BE ACCEPTED.
COMPLETE THE REGISTERED REPRESENTATIVE'S TELEPHONE
NUMBER. IN SOME CASES, THE HOME OFFICE MUST ALSO
SIGN THE APPROVAL.
IMPORTANT MISSING SIGNATURES OR INVESTOR REPRESENTATIONS WILL
DELAY ORDER PROCESSING. ORIGINAL SIGNATURES ARE
REQUIRED.
No person has been authorized Investors are not to
in connection with this offering to construe the contents of this
give any information or to make any prospectus as legal or tax
representation other than those advice. Each Investor should
contained in this Prospectus. This consult his or her own
Prospectus does not constitute an counsel, accountant and other
offer or solicitation in any state financial advisors (and be
or other jurisdiction to any person responsible for their fees)
to whom it is unlawful to make such regarding the legal, tax and
offer or solicitation. Neither the investment aspects of this
delivery of this Prospectus nor any offering.
sale hereunder shall under any
circumstances create an implication
that there has been no change in
the Fund's affairs since the date
hereof. If, however, any material
change in the Fund's affairs occurs
at any time when this Prospectus is
required to be delivered, this
Prospectus will be amended or
supplemented accordingly. 24,000 Units
TABLE OF CONTENTS
SUMMARY OF THE OFFERING
WHO MAY INVEST
RISK FACTORS AEI INCOME & GROWTH
CAPITALIZATION
ESTIMATED USE OF PROCEEDS FUND 23 LLC
INVESTMENT OBJECTIVES AND POLICIES
PROPERTIES
MANAGERS
PRIOR PERFORMANCE ___________________
COMPENSATION TO MANAGERS
AND AFFILIATES PROSPECTUS
CONFLICTS OF INTEREST
CASH DISTRIBUTIONS AND TAX ___________________
ALLOCATIONS
INCOME TAX ASPECTS
RESTRICTIONS ON TRANSFER
SUMMARY OF OPERATING AGREEMENT
REPORTS TO INVESTORS
PLAN OF DISTRIBUTION
SALES MATERIALS
LEGAL PROCEEDINGS
EXPERTS AEI Securities Incorporated
LEGAL OPINION
FINANCIAL STATEMENTS F-1
Operating Agreement Exhibit A
Prior Performance Tables Exhibit B
Certain State Suitability
Requirements Exhibit C
Subscription Agreement Exhibit D
Until ________, 1998 (25
days after the date of this
Prospectus), all dealers effecting
transactions in the Common Stock
offered hereby, whether or not
participating in this distribution,
may be required to deliver a
Prospectus. This is in addition to
the obligation of dealers to
deliver a Prospectus when acting as
Underwriters and with respect to
their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Operating Agreement provides that any losses sustained by
the Manager Members arising out of their activities on behalf of the
Fund will be reimbursed by the Fund unless such losses were the
result of their negligence or misconduct. Reference is made to
Section 6.5 of the Operating Agreement which is attached to the
Prospectus as Exhibit A.
The Registrant will agree to indemnify the nonaffiliated
Dealers and their controlling persons, and the Dealers will agree to
indemnify the Registrant and its controlling persons, against
certain liabilities, including liabilities under the Securities Act
of 1933. Reference is made to the Dealer-Manager Agreement and the
Dealer Agreement filed as Exhibits 1.1 and 1.2, respectively.
For information regarding the Registrant's undertaking to
submit to adjudication the issue of indemnification for violation of
the securities laws see Item 26 hereof.
Item 25. Other Expenses of Issuance and Distribution.
Other expenses in connection with the registration of the
securities hereunder (other than commissions and dealer expenses),
which will be paid by the Registrant, will be substantially as
follows:
Amount
Item Minimum Maximum
SEC fees $ 6,672 $ 6,672
NASD fees 2,900 2,900
Blue sky expenses 10,000* 60,000*
Legal 20,000* 115,000*
Printing 7,500* 75,000*
Accounting 3,000* 13,000*
Literature (printing and mailing) 9,500* 80,000*
Postage, etc. 1,000* 60,000*
Personnel charges for subscription
processing, etc. 6,928* 390,000*
Travel expenses - 25,000*
Dealer due diligence reimbursement 7,500 120,000
Miscellaneous - 12,428*
---------- ----------
Total 75,000* 960,000*
========== ==========
* Estimated.
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits.
Exhibit No. Description
1.1 Form of Dealer-Manager Agreement
1.2 Form of Dealer Agreement
3.1 Certificate of Formation
3.2 Form of Operating Agreement
included as Exhibit A to Prospectus
5 Opinion of Dorsey & Whitney LLP as to the
legality of the securities being
registered, including consent
8 Opinion of Dorsey & Whitney LLP as to tax
matters, including consent
10 Form of Impoundment Agreement with
Fidelity Bank, Edina, Minnesota
24 Consent of Independent Public Accountants
Item 28. Undertakings.
The Registrant undertakes (a) to file, during the period in
which offers or sales are being made, a post-effective amendment to
this Registration Statement to include any prospectuses required by
Section 10(a)(3) of the Securities Act of 1933 and to include any
material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change to such information in the Registration Statement, (b) that
for the purpose of determining any liability under the Act each such
post-effective amendment may be deemed to be a new registration
statement relating to the securities offered therein and the
offering of such securities at that time may be deemed to be the
initial bona fide offering thereof, (c) that all post-effective
amendments will comply with the applicable forms, rules and
regulations of the Commission in effect at the time such post-
effective amendments are filed, and (d) to remove from registration
by means of a post-effective amendment any of the securities being
registered which remain at the termination of the offering.
The Registrant undertakes to send to each Limited Member at
least on an annual basis a detailed statement of any transactions
with the Managing Members or their Affiliates, and of fees,
commissions, compensation and other benefits paid, or accrued to the
Managing Members or their Affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the
services performed.
The Registrant undertakes to provide to the Limited Members
the financial statements required by Form 10-K for the first full
fiscal year of operations of the Fund.
The Registrant undertakes to file a sticker supplement
pursuant to Rule 424(b)(3) under the Act during the distribution
period describing each property not identified in the prospectus at
such time as there arises a reasonable probability that such
property will be acquired and to consolidate such information in a
post-effective amendment filed at least once every three months,
with the information contained in such supplement or post-effective
amendment provided simultaneously to the existing Limited Members.
Each sticker supplement shall disclose all compensation and fees
received by the Managing Members and their Affiliates in connection
with any such acquisition.
The Registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the
financial statements and any additional information required by Form
S-11, to reflect each commitment (i.e., the signing of a binding
purchase agreement) made after the end of the distribution period
involving the use of 10% or more (on a cumulative basis) of the net
proceeds of the offering and to provide the information contained in
such report to the Limited Members at least once each quarter after
the distribution period of the offering has ended.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Managing Members of the
Registrant pursuant to the Operating Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a Managing Member of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by a Managing
Member in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
The following table provides information with respect to properties
acquired in the past three years.
<CAPTION>
Net Lease Net Lease
Income & Income &
Growth Growth AEI Real Estate AEI Real Estate AEI Real Estate
Fund 84-A Fund 84-A Fund 85-A Fund 85-A Fund XV
Champps Champps
Americana Americana Applebee's Tractor Supply Denny's
Schaumburg, Columbus, Harlingen, Maryville, Greenville,
Name, Location and Illinois Ohio Texas Tennessee Texas
Type of Property Restaurant Restaurant Restaurant Retail Store Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 11,158 (b) 4,994 19,050 4,927
Date of Purchase 12/31/97 8/11/98 12/21/95 2/14/96 1/10/96
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $594,301(a) $414,400(a) $1,360,000 $831,600(a) $999,900
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 25,619 (c) 33,470 5,458 28,532
Total Acquisition Cost $619,920 $0 $1,393,470 $837,058 $1,028,432
</TABLE>
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been made.
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
<CAPTION>
AEI Real Estate AEI Real Estate AEI Real Estate AEI Real Estate AEI Real Estate
Fund XV Fund XV Fund XV Fund XVI Fund XVI
Timber Lodge Champps
Tractor Supply Steakhouse Americana Applebee's Caribou Coffee
Maryville, St. Cloud, Troy, Victoria, Marietta,
Name, Location and Tennessee Minnesota Michigan Texas Georgia
Type of Property Retail Store Restaurant Restaurant Restaurant Store
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 19,050 6,981 11,089 4,994 4,254
Date of Purchase 2/14/96 11/18/97 9/3/98 3/22/96 8/15/97
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $214,200(a) $485,005(a) $1,295,206(a) $1,300,860
$1,235,000
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 5,205 25,630 (c) 34,695 12,571
Total Acquisition Cost $219,405 $510,635 $0 $1,335,555 $1,247,571
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of December 31, 1997.
(c) A final allocation of capital costs has not been completed.
</TABLE>
II-5
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI REAL ESTATE FUND XVII
<CAPTION>
Timber Lodge Champps Timber Lodge
Steakhouse TGI Friday's Americana Steakhouse Champps
St. Cloud, Greensburg, Troy, Rochester, Dayton,
Name, Location and Minnesota Pennsylvania Michigan Minnesota Ohio
Type of Property Restaurant Restaurant Restaurant Restaurant Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 6,981 4,510 11,089 6,981 (b)
Date of Purchase 11/18/97 12/10/97 9/3/98 9/3/98 8/28/98
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $485,005(a) $990,000(a) $1,295,206(a) $1,916,220 $259,138 (a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 11,487 19,045 (c) (c) (c)
Total Acquisition Cost $493,492 $1,009,045 $0 $0 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed.
</TABLE>
II-6
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI REAL ESTATE FUND XVIII
<CAPTION>
Champps Champps
Tractor Supply Americana Fuddrucker's Americana Tumbleweed
Bristol, Columbus, Thornton, Troy, Chillicothe,
Name, Location and Virginia Ohio Colorado Michigan Ohio
Type of Property Retail Store Restaurant Restaurant Restaurant Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 18,750 8,170 4,977 11,089 (b)
Date of Purchase 4/10/96 8/29/96 7/30/97 9/3/98 4/13/98
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $1,068,849(d) $816,906(a) $1,380,342 $1,190,794(a) 216,915(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 25,518 9,164 25,429 (c) (c)
Total Acquisition Cost $1,094,367 $826,070 $1,405,771 $0 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed
(d) Represents a partial ownership interest in such property. The
Partnership's Individual General Partner purchased the remaining
interest.
</TABLE>
II-7
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI REAL ESTATE FUND XVIII (Continued)
Champps
Tumbleweed Old Country Buffet Americana
Columbus, Northlake, Dayton,
Name, Location and Ohio Illinois Ohio
Type of Property Restaurant Restaurant Restaurant
Gross Leasable Space (b) (b) (b)
Date of Purchase 5/1/98 5/18/98 8/28/98
Mortgage Financing at
Date of Purchase 0 0 0
Cash Down Payment 503,832 $330,000 $703,376(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0
Other Cash Expenditures
Expensed 0 0 0
Other Cash Expenditures
Capitalized (c) (c) (c)
Total Acquisition Cost $0 $0 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed
II-8
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI NET LEASE INCOME & GROWTH FUND XIX
<CAPTION>
Champps
Media Play Garden Ridge Party City Americana Tumbleweed
Apple Valley, Pineville, Gainesville, Troy, Chillicothe,
Name, Location and Minnesota North Carolina Georgia Michigan Ohio
Type of Property Retail Store Retail Store Retail Store Restaurant Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 49,944 141,220 10,528 11,089 (b)
Date of Purchase 12/21/95 3/28/96 12/18/97 9/3/98 4/13/98
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $1,368,098(a) $3,560,481(a) $1,370,475 $1,190,794(a) $192,813(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 21,268 54,897 64,834 (c) (c)
Total Acquisition Cost $1,389,366 $3,615,378 $1,435,309 $0 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed.
</TABLE>
II-9
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI NET LEASE INCOME & GROWTH FUND XX
<CAPTION>
Applebee's Applebee's Denny's Media Play Garden Ridge
Lafayette, Brownsville, Grapevine, Apple Valley, Pineville,
Name, Location and Louisiana Texas Texas MinnesotaNorth Carolina
Type of Property Restaurant Restaurant Restaurant Retail Store Retail Store
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 5,432 6,088 4,943 49,944 141,220
Date of Purchase 1/17/95 8/31/95 11/21/95 12/21/95 3/28/96
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $1,125,000 $1,320,000 $1,287,240 $1,368,097(a) $1,616,415 (a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 51,559 58,736 67,481 54,604 50,678
Total Acquisition Cost $1,176,559 $1,378,736 $1,354,721 $1,422,701 $1,667,093
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s), or Individual General Partner, owns the
remaining interest.
</TABLE>
II-10
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI NET LEASE INCOME & GROWTH FUND XX (Continued)
Champps Champps Champps
Americana Americana Americana
Lyndhurst, Schaumburg, Columbus,
Name, Location and Ohio Illinois Ohio
Type of Property Restaurant Restaurant Restaurant
Gross Leasable Space 8,170 11,158 (b)
Date of Purchase 4/10/96 12/31/97 8/11/98
Mortgage Financing at
Date of Purchase 0 0 0
Cash Down Payment $2,381,945(a) $1,640,981(a) $621,600(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0
Other Cash Expenditures
Expensed 0 0 0
Other Cash Expenditures
Capitalized 78,449 35,214 (c)
Total Acquisition Cost $2,460,394 $1,676,195 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been made.
II-11
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI INCOME & GROWTH FUND XXI
<CAPTION>
Champps
Arby's Media Play Garden Ridge Americana Denny's
Montgomery, Apple Valley, Pineville, Columbus, Covington,
Name, Location and Alabama Minnesota North Carolina Ohio Louisiana
Type of Property Restaurant Retail Store Retail Store Restaurant Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 2,965 49,944 141,220 8,170 4,880
Date of Purchase 5/31/95 12/21/95 3/28/96 8/29/96 3/19/97
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $750,000(a) $1,409,555(a) $3,560,481(a) $1,764,794(a) $1,255,489
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 4,104 4,505 83,910 44,086 49,459
Total Acquisition Cost $754,104 $1,414,060 $3,644,391 $1,808,880 $1,304,948
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
</TABLE>
II-12
<TABLE>
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI INCOME & GROWTH FUND XXI (Continued)
<CAPTION>
Champps Champps Champps Champps
Caribou Coffee Americana Americana Americana Americana
Charlotte, San Antonio, Schaumburg, Livonia, Dayton,
Name, Location and North Carolina Texas Illinois Michigan Ohio
Type of Property Store Restaurant Restaurant Restaurant Restaurant
<S> <C> <C> <C> <C> <C>
Gross Leasable Space 4,411 8,680 11,158 9,154 (b)
Date of Purchase 7/31/97 12/23/97 12/31/97 5/19/98 6/29/98
Mortgage Financing at
Date of Purchase 0 0 0 0 0
Cash Down Payment $1,273,375(a) $2,753,700 $2,199,801(a) $4,087,000 $462,747(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0 0 0 0
Other Cash Expenditures
Expensed 0 0 0 0 0
Other Cash Expenditures
Capitalized 37,223 79,657 56,661 23,406 (c)
Total Acquisition Cost $1,310,598 $2,833,357 $2,256,462 $4,110,406 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed.
</TABLE>
II-13
TABLE VI (Continued)
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(Unaudited)
AEI INCOME & GROWTH FUND XXII
Champps
TGI Friday's Americana
Greensburg, Dayton,
Name, Location and Pennsylvania Ohio
Type of Property Restauran Restaurant
Gross Leasable Space 4,510 (b)
Date of Purchase 12/10/97 6/29/98
Mortgage Financing at
Date of Purchase 0 0
Cash Down Payment $660,000(a) $425,727(a)
Contract Purchase
Price Plus
Acquisition Fee 0 0
Other Cash Expenditures
Expensed 0 0
Other Cash Expenditures
Capitalized 8,144 (c)
Total Acquisition Cost $668,144 $0
(a) Represents a partial ownership interest in such property. An
affiliated partnership(s) owns the remaining interest.
(b) Cash down payment represents purchase of land. Restaurant is under
construction as of September 15, 1998.
(c) A final allocation of capital costs has not been completed.
II-14
SIGNATURES
In accordance with the requirements of the Securities Act of 1933
the Registrant certifies that it has reasonable grounds to believe
that it meets the requirements for filing on Form SB-2 and has
authorized this Registration Statement to be signed on its behalf by
the undersigned, in the City of St. Paul, State of Minnesota,
on November 13, 1998.
AEI INCOME & GROWTH FUND 23 LLC
By AEI Fund Management XXIII, Inc.
Managing Member
By /s/ROBERT P. JOHNSON
Robert P. Johnson, President
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in
the capacities and on the dates stated.
MANAGING Member
AEI Fund Management XXI, Inc. Date
By /s/ROBERT P. JOHNSON Sole Director and November 13, 1998
Robert P. Johnson President (principal executive
officer)
By/s/ MARK E. LARSON Chief Financial November 13, 1998
Mark E. Larson Officer and Treasurer
(principal financial
and accounting officer)
INDIVIDUAL Managing Member
By /s/ROBERT P. JOHNSON Individual Managing November 13, 1998
Robert P. Johnson Member
AEI INCOME & GROWTH FUND 23 LLC
REGISTRATION STATEMENT
ON FORM SB-2
EXHIBITS
Exhibit No. Description Page
1.1 Form of Dealer-Manager Agreement
1.2 Form of Dealer Agreement
3.1 Certificate of Formation
3.2 Form of Operating Agreement
included as Exhibit A to Prospectus
5 Opinion of Dorsey & Whitney LLP as to
the legality of the securities being
registered, including consent
8 Opinion of Dorsey & Whitney LLP as to
tax matters, including consent
10 Form of Impoundment Agreement with
Fidelity Bank, Edina, Minnesota
24 Consent of Independent Public Accountants
Exhibit 1.1
AEI INCOME & GROWTH FUND 23 LLC
DEALER-MANAGER AGREEMENT
, 1998
AEI Incorporated
1300 Minnesota World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Dear Sirs:
AEI Income & Growth Fund 23 LLC, a Delaware limited
liability company (the "Fund") for which AEI Fund Management XXI,
Inc. ("AFM") and Robert P. Johnson, are managing members (the
"Managers") proposes to issue and sell up to $24,000,000 aggregate
principal amount of units of limited liability company interest (the
"Units"). Such Units are to be sold for cash for $1,000 each and
the minimum purchase by any one person shall be two and one-half
Units ($2,500), except that tax-qualified retirement plans will be
permitted to purchase two Units ($2,000) unless applicable state law
requires a larger purchase for such plans. In connection therewith,
the Fund hereby agrees with each of you (the "Dealer-Managers") as
follows:
1. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Dealer-Manager and
each dealer with whom the Dealer-Manager has entered into, or will
enter into, a Dealer Agreement in the form attached as EXHIBIT A to
this Agreement (said dealers being hereinafter called the
"Dealers"), that:
1.1 A registration statement (File No. ________) with
respect to the Fund has been prepared by the Managers in accordance
with applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "SEC") thereunder, covering the Units.
Said registration statement, which includes a preliminary
prospectus, was filed with the SEC on , 1998.
Copies of such registration statement and each amendment thereto,
and copies of each preliminary prospectus included in such
registration statement and each such amendment, have been or will
be delivered to the Dealer-Manager. (The registration statement
and the prospectus included therein at such date as finally amended
and revised at the effective date of the registration statement are
hereinafter referred to, respectively, as the "Registration Statement"
and the "Prospectus," except that if the prospectus first filed by the
Fund pursuant to Rule 424(b) under the Securities Act shall differ
from the Prospectus, the term "Prospectus" shall also include the
prospectus filed pursuant to Rule 424(b)).
1.2 AFM has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Minnesota with corporate power and authority to own its
properties and conduct its business as described in the Prospectus.
The authorized and outstanding capital stock and the financial
position of AFM is as set forth in the Prospectus as of the dates
stated therein, and there has been no material adverse change
therein since such dates.
1.3 The Fund has been duly and validly organized and
formed as a limited liability company under the Delaware Limited
Liability Company Act. The Fund intends to use the funds received
from the sale of the Units as set forth in the Prospectus.
1.4 The Registration Statement and Prospectus comply or
will comply with the Securities Act and the Rules and Regulations
and do not and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; provided however, that the foregoing provisions of this
Section 1.4 do not extend to such statements contained in or omitted
from the Registration Statement or Prospectus as are primarily
within the knowledge of the Dealer-Manager or any of the Dealers and
are based upon information furnished by the Dealer-Manager in
writing to the Managers specifically for inclusion therein.
1.5 No consent, approval, authorization or other order of
any governmental authority is required in connection with the
execution or delivery by the Managers of this Agreement or the
issuance and sale by the Fund of the Units, except such as may be
required under the Securities Act or state securities laws.
1.6 There are no actions, suits or proceedings pending,
or to the knowledge of the Managers threatened, against the Fund or
the Managers or any of their property, at law or in equity or before
or by any federal or state commission, regulatory body or
administrative agency or other governmental body, domestic or
foreign, which will have a material adverse effect on the business
or property of the Fund or the Managers.
1.7 The execution and delivery of this Agreement, the
consummation of the transactions herein contemplated and compliance
with the terms of this Agreement by the Fund through its Managers
will not conflict with, or constitute a default under, any charter,
bylaw, indenture, mortgage, deed of trust, lease or rule or
regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, having
jurisdiction over the Fund or the Managers, or any of their
property, except to the extent that the enforceability of the
indemnity or contribution provisions contained in Section 4 of this
Agreement may be limited under applicable securities laws.
1.8 The Fund has full legal right, power and authority to
enter into this Agreement and to perform the transactions
contemplated hereby, except to the extent that the enforceability of
the indemnity or contribution provisions contained in Section 4 of
this Agreement may be limited under applicable securities laws.
1.9 At the time of the issuance of the Units, the Units
will have been duly authorized and validly issued, and upon payment
therefor, will be fully paid and nonassessable, subject to the
requirement that the limited members not participate in the
management or control of the business of the Fund, and will conform
to the description thereof contained in the Prospectus.
1.10 The financial statements contained in the
Registration Statement and the Prospectus fairly present the
financial condition of the Fund and AFM and the results of their
respective operations as of the dates and for the periods therein
specified; such financial statements have been prepared in
accordance with generally accepted principles of accounting
consistently maintained throughout the period involved; and Boulay,
Heutmaker, Zibell & Co. who have rendered an opinion on certain of
such financial statements, are independent public accountants within
the meaning of the Securities Act and the Rules and Regulations.
2. COVENANTS OF THE FUND
The Fund covenants and agrees with the Dealer-Manager
that:
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2.1 It will, at no expense to the Dealer-Manager, furnish
to each Dealer-Manager such number of printed copies of the
Registration Statement, including all amendments and exhibits
thereto, as such Dealer-Manager may reasonably request. It will
similarly furnish to the Dealer-Manager, and others designated by
the Dealer-Manager, as many copies as it may reasonably request of
(i) the Prospectus in final form and of every form of supplemental
or amended prospectus, (ii) this Agreement, and (iii) any other
printed sales literature or other materials (provided that the use
of said sales literature and other materials has been first approved
for use by the Managers and all appropriate regulatory agencies)
which the Dealer-Manager may reasonably request in connection with
the offering of the Units.
2.2 It will furnish such proper information and execute
and file such documents as may be necessary to qualify the Units for
offer and sale under the "blue sky" laws of such jurisdictions as
the Dealer-Manager may reasonably designate and will file and make
in each year such statements and reports as may be required under
such laws. It will furnish to the Dealer-Manager, upon request, a
copy of all documents filed by the Fund or the Managers in
connection with any such qualification.
2.3 It will: (i) use its best efforts to cause the
Registration Statement to become effective; (ii) furnish copies of
any proposed amendment or supplement of the Registration Statement
or Prospectus to each Dealer-Manager; (iii) file every amendment or
supplement to the Registration Statement or the Prospectus that may
be required by the SEC; and (iv) if at any time the SEC shall issue
any stop order suspending the effectiveness of the Registration
Statement, use their best efforts to obtain the lifting of such
order at the earliest possible time.
2.4 If at any time when a prospectus relating to the
Units is required to be delivered under the Securities Act any event
occurs as a result of which, in the opinion of either the Managers
on behalf of the Fund or the Dealer-Manager, the Prospectus or any
other prospectus then in effect would include an untrue statement of
a material fact or, in view of the circumstances under which they
were made, omit to state any material fact necessary to make any
statement therein not misleading, they will promptly notify the
Dealer-Manager thereof (unless the information shall have been
received from the Dealer-Manager) and will effect the preparation of
an amended or supplemental prospectus which will correct such
statement or omission. The Fund will then promptly prepare such
amended or supplemental prospectus or prospectuses as may be
necessary to comply with the requirements of Section 10 of the
Securities Act.
3. OBLIGATIONS AND COMPENSATION OF DEALER-MANAGERS
3.1 The Fund hereby appoints the Dealer-Manager as its
agent and principal distributor for the purposes of selling for cash
up to 24,000 Units through the Dealers, all of whom shall be members
of the National Association of Securities Dealers, Inc. ("NASD").
The Dealer-Manager may also sell Units for cash directly to its own
clients and customers at the public offering price and subject to
the terms and conditions stated in the Prospectus. The Dealer-
Manager hereby accepts such agency and distributorship and agrees to
use its best efforts to sell the Units on said terms and conditions.
The Dealer-Manager represents to the Fund and the Managers that it
is a member of the NASD and that it and its employees and
representatives have all the required licenses, registrations and
approvals necessary to act under this Agreement.
3.2 Promptly after the effective date of the Registration
Statement, the Dealer-Manager and the Dealers shall commence the
offering of the Units for cash to the public in jurisdictions in
which the Units are registered or qualified for sale or in which
such offering is otherwise permitted. The Dealer-Manager shall be
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the processing broker-dealer responsible for handling, processing
and documentation of investor funds. The Dealer-Manager agrees that
it will cause each Dealer with whom it executes a Dealer Agreement
to transmit all checks received from investors for Units, together
with a subscription agreement in the form attached to the Prospectus
as Exhibit D properly completed by the investor and the investor's
registered representative and all other investor documentation, to
the Dealer-Manager by noon of the business day following receipt.
The Dealer-Manager shall transmit to Fidelity Bank, Edina,
Minnesota, each prospective investor's check in payment of Units by
noon of the second business day following receipt by the Dealer-
Manager. All checks shall be made payable to "Fidelity Bank --AEI
Real Estate Escrow," and if the Dealer-Manager receives checks made
payable to any other person or entity it shall promptly return such
checks to the investor. All subscriptions shall be subject to
acceptance by the Managers on behalf of the Fund. No subscription
agreement will be accepted unless the broker's representation
contained therein has been duly completed by the registered
representative soliciting such subscription. The Dealer-Manager and
the Dealers will suspend or terminate offering of the Units upon
request of the Managers at any time and will resume offering the
Units upon subsequent request of the Managers.
3.3 (a) As compensation for the services rendered by the
Dealer-Manager and as reimbursement for any expenses incurred by
Dealer-Manager, the Fund shall pay to the Dealer-Manager from the
gross proceeds of the offering, a selling commission and a non-
accountable expense allowance from the gross proceeds of all Units
sold by the Dealer-Manager, and the Dealers with whom such Dealer-
Manager has executed a Dealer Agreement, and accepted and confirmed
by the Fund equal to 10% of the Gross Proceeds from sale of Units.
(b) The Fund will reimburse the Dealer-Manager for the
bona fide due diligence expenses of Dealers charged to the Dealer-
Manager to the extent such expenses do not exceed 1/2 of one percent
(.5%) of the Gross Proceeds from sale of Units.
(c) Notwithstanding the foregoing, no commission
payments, due diligence expense reimbursement or accountable expense
reimbursement or amounts whatsoever with respect to the Fund will be
paid or owing to the Dealer-Manager under this Section 3.3 unless
and until subscriptions for 1,500 Units in the Fund have been
accepted by the Fund. The Fund and the Managers will not be liable
or responsible to any Dealer for direct payment of commissions to
such Dealer, it being the sole and exclusive responsibility of the
Dealer-Manager for payment of commissions to such Dealers.
3.4 The Dealer-Manager represents and warrants to the
Fund, the Managers, and each person and firm which signs the
Registration Statement, that the information under the caption "Plan
of Distribution" in the Prospectus and all other information
furnished to the Managers by the Dealer-Manager in writing expressly
for the use in the Registration Statement, any preliminary
prospectus, the Prospectus, or any amendment or supplement thereto,
does not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
3.5 The Dealer-Manager represents that it has reasonable
grounds to believe, based on information obtained from the Fund and
the Managers through the Prospectus or other materials, that all
material facts relating to a sale of the Units (including facts
relating to the items set forth in Section 3(b) of NASD Rule 2810)
are adequately and accurately disclosed and provide a basis for
evaluating an investment in the Fund.
3.6 The Dealer-Manager covenants not to execute any
subscriptions in the Fund on behalf of a customer for which it holds
a discretionary account without the prior written approval of such
customer.
3.7 The Dealer-Manager covenants that it will maintain
subscription agreements with respect to Investors in the Fund and
other documents relating to the suitability of the Investors in the
Fund for a period of not less than six years after the termination
of the offering with respect to the Fund.
3.8 In recommending the purchase of Units, and before
confirming any sale of such Units to a customer, the Dealer-Manager
shall have reasonable grounds to believe, on the basis of
information obtained from such customer concerning his or her
investment objectives, other investments, financial condition and
needs, and any other information known to the Dealer-Manager, that
(a) the customer is or will be in a financial position appropriate
to enable him to realize to a significant extent the benefits
described in the Prospectus, including the benefits described under
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the caption "Income Tax Aspects;" (b) the customer has a fair market
net worth sufficient to sustain the risks inherent in an investment
in the Fund, including loss of investment and lack of liquidity; and
(c) an investment in the Fund is otherwise suitable for the
customer.
3.9 The Dealer-Manager covenants not to execute any
subscription in the Fund prior to informing the subscribing customer
of all pertinent facts relating to the liquidity and marketability
of the Units during the term of the investment.
4. INDEMNIFICATION
4.1 Subject to the limitations contained in Section
6.5(b) of the Operating Agreement of the Fund, the Fund will
indemnify and hold harmless the Dealers, their officers and
directors and each person, if any, who controls such Dealers within
the meaning of Section 15 of the Securities Act, from and against
any losses, claims, damages or liabilities, joint or several, to
which such Dealers, their officers and directors, or such
controlling persons may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact
contained (A) in the Registration Statement, or any post-effective
amendment thereto or in the Prospectus or any amendment or
supplement to the Prospectus or (B) in any "blue sky" application or
other document executed by the Fund on its behalf specifically for
the purpose of qualifying any or all of the Units for sale under the
securities laws of any jurisdiction based upon written information
furnished by the Fund under the securities laws thereof (any such
application, document or information being hereinafter called a
"Blue Sky Application"), or (ii) the omission or alleged omission to
state in the Registration Statement, the Prospectus or any
supplement therein or any post-effective amendment therein, or in
any Blue Sky Application, a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading; and will
reimburse each such Dealer, its officers and directors and each such
controlling person for any legal or other expenses reasonably
incurred by such Dealer, its officers and directors, or such
controlling person in connection with investigating or defending
such loss, claim, damage, liability or action; provided, however,
that the Fund will not be liable in any such case to the extent that
such loss, claim, damage or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with
written information furnished to the Fund or the Managers by or on
behalf of any Dealer specifically for use with reference to such
Dealer in the preparation of the Registration Statement or any such
post-effective amendment therein or any such Blue Sky Application or
any such preliminary prospectus or the Prospectus or any such
amendment or supplement thereto; and provided further that the Fund
will not be liable in any case if it is determined that such Dealer
was at fault in connection with the loss, claim, damage, liability
or action. This Indemnity Agreement will be in addition to any
liability which the Fund may otherwise have.
4.2 The Dealer-Manager, jointly and severally, agrees to
indemnify and hold harmless the Fund, the Managers, its officers and
directors, each person or firm which has signed the Registration
Statement and each person, if any, who controls the Fund or the
Managers within the meaning of Section 15 of the Securities Act,
against any losses, claims, damages or liabilities to which any of
the aforesaid parties may become subject, under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective
amendment thereto, the Prospectus or any amendment or supplement
thereto, or any Blue Sky Application, or the omission or alleged
omission to state in the Registration Statement or any post-
effective amendment thereto, the Prospectus or any amendment or
supplement thereto, or in any Blue Sky Application, any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Managers by or
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on behalf of such Dealer-Manager specifically for use with reference
to the Dealer-Manager in the preparation of the Registration
Statement or any such preliminary prospectus or the Prospectus or
any such amendment or supplement thereto, or (ii) any unauthorized
use of sales materials or use of unauthorized verbal representations
concerning the Units by the Dealer-Manager, and will reimburse the
aforesaid parties, in connection with investigating or defending
such loss, claim, damage, liability or action. This Indemnity
Agreement will be in addition to any liability that the Dealer-
Manager may otherwise have.
4.3 Each Dealer severally will indemnify and hold
harmless the Fund, the Dealer-Manager, the Managers, and each of
their directors and officers who has signed the Registration
Statement and each person, if any, who controls the Fund, the Dealer-
Manager and the Managers within the meaning of Section 15 of the
Securities Act from and against any losses, claims, damages or
liabilities to which the Fund, the Dealer-Manager, the Managers, or
any such director, officer or controlling person may become subject,
under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
or any post-effective amendment thereto, the Prospectus or any
amendment or supplement thereto, or any Blue Sky Application, or the
omission or alleged omission to state in the Registration Statement
or any post-effective amendment thereto, the Prospectus or any
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which
they were made, not misleading, in each case to the extent, but only
to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Fund, Managers
or Dealer-Manager by or on behalf of such Dealer specifically for
use with reference to such Dealer in the preparation of the
Registration Statement or any such post-effective amendments thereto
or any such Blue Sky Application or the Prospectus or any such
amendment or supplement thereto, or (ii) any unauthorized use of
sales materials or use of unauthorized verbal representations
concerning the Units by such Dealer, and will reimburse the Fund,
the Dealer-Manager, the Managers, any director or officer or
controlling person thereof, in connection with investigating or
defending any such loss, claim, damage, liability or action. This
Indemnity Agreement will be in addition to any liability which such
Dealer may otherwise have.
4.4 Promptly after receipt by an indemnified party under
this Section 4 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against any indemnifying party under this Section 4, notify in
writing the indemnifying party of the commencement thereof, and the
omission so to notify the indemnifying party will relieve it from
any liability under this Section 4 as to the particular item for
which indemnification is then being sought, but not from any other
liability which it may have to any indemnified party. In case any
such action is brought against any indemnified party, and it
notifies any indemnifying party of the commencement thereof, the
indemnifying party will be entitled, to the extent it may wish,
jointly with any other indemnifying party similarly notified, to
participate in the defense thereof, with separate counsel. Such
participation shall not relieve such indemnifying party of the
obligation to reimburse the indemnified party for reasonable legal
and other expenses (subject to Section 4.5) incurred by such
indemnified party in defending himself, except for such expenses
incurred after the indemnifying party has deposited funds sufficient
to effect the settlement, with prejudice, of the claim in respect of
which indemnity is sought. Any such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of
any claim or action effected without the consent of such
indemnifying party.
4.5 The indemnifying party shall pay all legal fees and
expenses of the indemnified party in the defense of such claims or
actions; provided, however, that the indemnifying party shall not be
obliged to pay legal expenses and fees to more than one law firm in
connection with the defense of similar claims arising out of the
same alleged acts or omissions giving rise to such claims
notwithstanding that such actions or claims are alleged or brought
by one or more parties against more than one indemnified party. In
the case such claims or actions are alleged or brought against more
than one indemnified party, then the indemnifying party shall only
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be obliged to reimburse the expenses and fees of the one law firm
which has been selected by a majority of the indemnified parties
against which such action is finally brought, and in the event a
majority of such indemnified parties are unable to agree on which
law firm for which expenses or fees will be reimbursable by the
indemnifying party then payment shall be made to the first law firm
of record representing an indemnified party against the action or
claim. Such law firm shall be paid only to the extent of services
performed by such law firm and no reimbursement shall be payable to
such law firm on account of legal services performed by another law
firm.
4.6 The Indemnity Agreements contained in this Section 4
shall remain operative and in full force and effect regardless of
(i) any investigation made by or on behalf of the Dealer-Manager or
the Managers or the Fund, or any officer or director of any of them,
or by or on behalf of the Fund, the Dealer-Manager or the Managers,
(ii) delivery of any Units and payment therefor, and (iii) any
termination of this Agreement. A successor of any Dealer or of any
of the parties to this Agreement, as the case may be, shall be
entitled to the benefits of the Indemnity Agreements contained in
this Section 4.
5. SURVIVAL OF PROVISIONS
The respective agreements, representations and warranties
of the Fund and the Dealer-Manager set forth in this Agreement shall
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on
behalf of the Dealer-Manager or any Dealer or any person controlling
the Dealer-Manager or any Dealer or by or on behalf of the Managers
or any person controlling the Managers, to (iii) the acceptance of
any payment for the Units.
6. APPLICABLE LAW
This Agreement is executed and delivered in, and its
validity, interpretation and construction shall be governed by, the
laws of the State of Minnesota.
7. COUNTERPARTS
This Agreement may be executed in any number of
counterparts. Each counterpart, when executed and delivered, shall
be an original contract; but all counterparts, when taken together,
shall constitute one and the same Agreement.
8. SUCCESSORS AND AMENDMENT
8.1 This Agreement shall inure to the benefit of, and be
binding upon, the Dealer-Manager, the Managers, the Fund and its
respective successors. Nothing in this Agreement is intended or
shall be construed to give to any other person any right, remedy or
claim, except as otherwise specifically provided herein. This
Agreement shall inure to the benefit of the Dealers to the extent
set forth in Sections 1 and 4 hereof.
8.2 This Agreement may be amended by the written
Agreement of the Dealer-Managers and the Managers.
9. TERM
Any party to this Agreement shall have the right to
terminate this Agreement on ten (10) days' written notice.
10. DISTRIBUTION REINVESTMENT PLAN
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Notwithstanding any other provision in this Agreement, if
any customer of a Dealer participates in the distribution
reinvestment plan of the Fund (the "Plan") and has designated a
Dealer as a broker-dealer entitled to receive commissions on
reinvestment of Net Cash Flow of the Fund, the Dealer-Manager shall
be entitled to receive commissions on such reinvestment at the rates
set forth in paragraph 3.3(a) (and no other reimbursement or
commission), all of which shall be reallowed to the relevant Dealer,
but only if Dealer-Manager confirms that such Dealer has complied
with the following conditions:
a. Neither Dealer-Manager, the Fund nor the Managers have
received any notification from such customer of the customer's
election to revoke the designation of Dealer as a broker-dealer
entitled to such commission;
b. Dealer-Manager has confirmed that Dealer reasonably
believes, based on information received from the
customer within the previous twelve months, that
the customer continues to meet the suitability
requirements set forth in the Prospectus and as
required by paragraph 8(f) of this Agreement;
c. Dealer has forwarded all communications to such
customers, including annual and quarterly reports,
distributed for such purpose to Dealer from the
Dealer Manager.
11. CONFIRMATION
The Managers hereby agree and assume the duty to confirm
on behalf of themselves, and on behalf of dealers or brokers who
sell the Units, all orders for purchase of Units accepted by the
Managers. Such confirmations will comply with the applicable rules
of such other jurisdictions to the extent the Managers are advised
of such laws in writing by the Dealer-Manager.
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below
for that purpose, whereupon this letter and your acceptance shall
constitute a binding Agreement between us as of the date first above
written.
Very truly yours,
AEI INCOME & GROWTH FUND 23 LLC
By AEI FUND MANAGEMENT XXI, INC.
By
Robert P. Johnson
Its President
We hereby agree to the terms hereof.
AEI SECURITIES INCORPORATED
By
Robert P. Johnson
Its President
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Exhibit 1.2
AEI INCOME & GROWTH FUND 23 LLC
PARTICIPATING DEALER AGREEMENT
, 1998
Dear Sirs:
AEI Incorporated, as dealer-manager (the "Dealer-Manager")
for AEI Income & Growth Fund 23 LLC, a Delaware limited liability
company (the "Fund") and for which AEI Fund Management XXI, Inc.
("AFM") and Robert P. Johnson will serve as managing members (the
"Managers"), invites you ("Dealer") to participate in the
distribution of units (the "Units"), subject to the terms set forth
below.
The Dealer-Manager has entered into, or will enter into,
an Agreement with the Fund called the Dealer-Manager Agreement, a
copy of which has been provided to you. By your acceptance of this
Agreement, you will become one of the Dealers referred to in such
Dealer-Manager Agreement between the Fund and the Dealer-Manager and
will be entitled to and subject to the indemnification provisions
contained in such Agreement, including the provisions of such
Agreement (Section 4) wherein the Dealers severally agree to
indemnify and hold harmless the Managers and the Dealer-Manager and
each officer and director thereof, and each person, if any, who
controls the Managers and Dealer-Manager within the meaning of the
Securities Act of 1933. Except as otherwise specifically stated
herein, all terms used in this Agreement have the meanings provided
in the Dealer-Manager Agreement. The Units being sold are offered
solely through broker-dealers who are members of the National
Association of Securities Dealers, Inc. (the "NASD").
1. BEST EFFORTS
Dealer hereby agrees to use its best efforts to sell the
Units for cash on the terms and conditions stated in the Prospectus.
Nothing in this Agreement shall be deemed or construed to make
Dealer an employee, agent, representative or partner of the Dealer-
Manager or the Managers, and Dealer is not authorized to act for the
Dealer-Manager or the Managers or to make any representations on
their behalf except as set forth in the Prospectus and in such other
printed information furnished to Dealer by the Dealer-Manager or the
Managers to supplement the Prospectus ("supplemental information").
2. SUBMISSION OF ORDERS
Dealer shall transmit to the Dealer-Manager, as processing
broker-dealer, each prospective investor's check in payment of Units
together with a subscription agreement in the form attached to the
Prospectus as Exhibit D, properly completed by the investor and the
investor's registered representative, and all other investor
documentation by noon of the next business day following receipt by
Dealer. The Dealer-Manager shall transmit all investor checks to
Fidelity Bank, Edina, Minnesota by the end of the second business
day after receipt by the Dealer-Manager. All checks shall be made
payable to "Fidelity Bank --AEI Real Estate Escrow," and Dealer
agrees to return promptly all investor checks made payable to any
other person or entity to the investor. All subscriptions shall be
subject to acceptance by AFM on behalf of the Fund. No subscription
agreement will be accepted unless the registered representative
soliciting such order has completed and signed the representation
contained on the reverse side of the Subscription Agreement.
3. PRICING
Subject to Section 4 (a) below, Units shall be offered to
the public at the offering price of $1,000 per Unit payable in cash.
A minimum initial purchase of two and one-half Units ($2,500) is
required, except that tax-qualified retirement plans, including
individual retirement accounts and Keogh plans, will be permitted to
purchase two Units ($2,000) unless applicable state law requires a
larger purchase. Additional investments may be made in cash in
multiples of one (1) Unit. The Units are nonassessable and limited
members will not be required to contribute further sums to the
capital of the Fund.
4. DEALER'S COMMISSIONS AND EXPENSES
(a) Dealer's selling commission applicable to the total
public offering price of Units sold by Dealer which it is authorized
to sell hereunder shall be equal to of the gross offering
proceeds from Units sold by or through Dealer. The parties hereby
agree that the foregoing amounts are not in excess of the usual and
customary distributors' or sellers' commission received in the sale
of securities similar to the Units, that the Dealer's interest in
the offering is limited to such payments from the Dealer-Manager and
Dealer's indemnity referred to in Section 4 of the Dealer-Manager
Agreement, that the Fund and the Managers are not liable or
responsible for the direct payment of such commission to the
Dealers, and that the Dealer is not in privity of contract with the
Fund or the Managers even though it is entitled to certain benefits
deriving therefrom.
(b) The Dealer-Manager may also reimburse Dealer for
actual out-of-pocket expenses of Dealer incurred in connection with
such Dealer's due diligence review related to the offering in an
amount not to exceed 1/2 of 1% of the gross proceeds from all Units
sold by Dealer.
5. PAYMENT
Notwithstanding any other provision of this Agreement,
Dealer-Manager shall not be liable to any Dealer for payment of
selling commissions, or any expenses of any kind, until after
subscriptions for the minimum 1,500 Units have been received and
accepted. Payments for selling commissions for the sale of the
minimum 1,500 Units will be made by the Dealer-Manager to Dealer
within twenty (20) days after acceptance by the Fund of
subscriptions for such minimum, or earlier at the election of the
Dealer-Manager. Thereafter, commissions shall be paid on the 20th
day of each month for Units sold and accepted in the preceding
month, but in no event before the Dealer-Manager is first paid by
the Fund. Payment of such commissions shall be deemed acceptance of
confirmation of orders.
6. RIGHT TO REJECT ORDERS OR CANCEL SALES
All orders, whether initial or additional, are subject to
acceptance by, and shall only become effective upon, confirmation by
the Managers on behalf of the Fund, and the Managers reserve the
right to reject any order for any reason. Orders not accompanied by
a Subscription Agreement and the required check in payment for the
Units may be rejected. Issuance and delivery of the Units will be
made only after actual receipt of payment therefor. If any check is
not paid upon presentment, or if the Fund is not in actual receipt
of clearinghouse funds or cash, certified or cashier's check or the
equivalent in payment for the Units within fifteen (15) days of
sale, the Managers reserve the right to cancel the sale without
notice. In the event an order is rejected, canceled or rescinded
for any reason, Dealer agrees to return to the Dealer-Manager any
compensation theretofore paid with respect to such order.
-2-
7. PROSPECTUS AND SUPPLEMENTAL INFORMATION
Dealer is not authorized or permitted to give, and will
not give, any information or make any representation concerning the
Units except as set forth in the Prospectus and supplemental
information thereto. The Dealer-Manager will supply Dealer with
reasonable quantities of the Prospectus, any supplements thereto and
any amended Prospectus, as well as any supplemental information, for
delivery to investors and Dealer will deliver a copy of the
Prospectus and all supplements thereto and any amended Prospectus to
each investor to whom an offer is made prior to or simultaneously
with the first solicitation of an offer to sell the Units to a
prospective investor, and thereafter at the request of the Managers
or the Dealer-Manager.
8. REPRESENTATIONS OF DEALER.
(a) Dealer agrees that it will not show or give to any
investor or reproduce any material or writing which is supplied to
it by the Dealer-Manager or any of the Dealer-Manager's wholesalers,
employees or salesmen and marked "dealer-only" or otherwise bearing
a legend denoting that it is not to be used with respect to dealings
with members of the public. Dealer agrees that it will not use in
connection with the offer or sale of Units any material or writing
which relates to another program supplied to it by the Managers,
the Dealer-Manager or any of the Dealer-Manager's wholesalers,
employees or salesmen and bearing a legend which states that such
material may not be used in connection with the offer or sale of any
securities other than the program to which it relates. Dealer
further agrees that it will not use in connection with the offer or
sale of Units any materials or writings which have not been
previously approved by the Dealer-Manager and the Managers.
(b) Dealer agrees, if the Dealer-Manager so requests, to
furnish a copy of any revised preliminary Prospectus to each person
to whom it has furnished a copy of any previous preliminary
Prospectus, and further agrees that it will itself mail or otherwise
deliver all preliminary and final Prospectuses required for
compliance with the provisions of Rule l5c2-8 under the Securities
Exchange Act of 1934. Regardless of the termination of this
Agreement, Dealer will deliver a Prospectus in transactions in the
Units as required herein for a period of 90 days from the effective
date of the Registration Statement or such longer period as may be
required by the Securities Act of 1933.
(c) On becoming a Dealer, and in offering and selling
Units, you agree to comply with all the applicable requirements
under the Securities Act of 1933, and the Securities Exchange Act of
1934, including, without limitation, the provisions of Rule l0b-6,
Rule l0b-7 and Rule l5c2-4 under the Securities Exchange Act.
Notwithstanding the termination of this Agreement or the payment of
any amount to you, you agree to pay your proportionate share of any
claim, demand or liability asserted against you and the other
Dealers on the basis that the Dealers or any of them constitute an
association, unincorporated business or other separate entity,
including in each case your proportionate share of any expenses
incurred in defending against any such claim, demand or liability.
(d) Dealer represents that it has reasonable grounds to
believe, based on information obtained from the Fund through the
Prospectus or other materials, that all material facts relating to a
sale of the Units (including the facts relating to items set forth
in Section 3(b) of NASD Rule 2810) are adequately and accurately
disclosed and provide a basis for evaluating an investment in the
Fund. If a Dealer has relied on an evaluation of such information
made by another member of the NASD, such Dealer represents that it
has reasonable grounds to believe such evaluation was conducted with
due care, that it has received the consent of such other member to
its reliance, and that such other member is not one of the Managers
or an affiliate of one of the Managers.
(e) Dealer shall not execute any subscription on behalf
of any customer for which it holds a discretionary account without
the prior written approval of the customer. Dealer shall maintain
records substantiating the suitability determination pursuant to
subparagraph 8(f) for a period of at least six years after
termination of the offering with respect to the Fund.
-3-
(f) In recommending the purchase of Units, and before
confirming any sale of such Units to a customer, the Dealer shall
have reasonable grounds to believe, on the basis of information
obtained from such customer concerning his or her investment
objectives, other investments, financial condition and needs, and
any other information known to Dealer, that (a) the customer is or
will be in a financial position appropriate to enable him to realize
to a significant extent the benefits described in the Prospectus,
including the benefits described under the caption "Income Tax
Aspects"; (b) the customer has a fair market net worth sufficient to
sustain the risks inherent in an investment in the Fund, including
loss of investment and lack of liquidity; and (c) an investment in
the Fund is otherwise suitable for the customer.
(g) Prior to executing a transaction in the Units on
behalf of a customer, Dealer will inform the customer of all
pertinent facts relating to the liquidity and marketability of the
Units during the term of the investment.
(h) Dealer will comply with NASD Rules 2730, 2740, 2420
and 2750 in connection with the offer and sale of the Units.
9. LICENSE AND ASSOCIATION MEMBERSHIP
Dealer's acceptance of this Agreement constitutes a
representation to the Managers and the Dealer-Manager that Dealer is
a properly registered or licensed securities broker-dealer, duly
authorized to sell Units under federal and state securities laws and
regulations in all states where it offers or sells Units, and that
it is a member in good standing of the NASD. This Agreement shall
automatically terminate if Dealer ceases to be a member in good
standing of such association, or in the case of a foreign dealer, to
so conform. Dealer agrees to notify the Dealer-Manager immediately
if Dealer ceases to be a member in good standing, or in the case of
a foreign dealer, to so conform. The Dealer also hereby agrees to
abide by the Rules of Fair Practice of the NASD.
10. LIMITATION OF OFFER
Dealer will offer Units only to persons who meet the
financial qualifications set forth in the Prospectus or in any
suitability letter or other letter or memorandum sent to it by the
Managers or the Dealer-Manager and will make offers only to persons
in the states in which it is advised in writing that the Units are
qualified for sale or that such qualification is not required.
11. TERMINATION AND AMENDMENT
Dealer will suspend or terminate its offer and sale of
Units upon the request of the Managers or the Dealer-Manager at any
time and will resume its offer and sale of Units hereunder upon
subsequent request of the Managers of the Dealer-Manager. Either
party may terminate this Agreement by written notice. Such
termination shall be effective forty-eight (48) hours after the
mailing of such notice. This Agreement is entire and supersedes all
prior Agreements, if any, between the parties hereto.
This Agreement may be amended at any time by the Dealer-
Manager by written notice to Dealer and any such amendment shall be
deemed accepted by Dealer upon placing an order for sale of Units
after he has received such notice.
12. NOTICE
All notices will be in writing and will be duly given when
mailed to the Dealer-Manager at the address given above, and to
Dealer when mailed to the address specified by it below.
-4-
13. ATTORNEYS' FEES; CONSTRUCTION
In any action to enforce the provisions of this Agreement
or to secure damages for its breach, the prevailing party shall
recover its costs and reasonable attorneys' fees. This Agreement
shall be construed under the laws of the State of Minnesota and
shall take effect when signed by Dealer and countersigned and dated
by the Dealer-Manager.
Dated: AEI SECURITIES INCORPORATED
By
Its
-5-
We have read the foregoing Agreement and we hereby accept
and agree to the terms and conditions therein set forth. We hereby
represent that the list below of jurisdictions in which we are
registered or licensed as a broker or dealer and are fully
authorized to sell securities is true and correct and we agree to
advise you of any change in such list during the term of this
Agreement.
Dated: , 1998
(Dealer's Firm Name)
(Address)
(City and State)
Home Office Telephone No.
By
Authorized Signature:
President, Vice President,
Partner or Proprietor
(Print or Type Name and Title)
Commission Checks to be (Name)
mailed to:
*Identification No.
(Address)
(City and State)
(*Show your employer identification number as assigned by the
Internal Revenue Service or, if you operate as an individual, your
Social Security number.)
-6-
CERTIFICATE OF FORMATION
OF
AEI INCOME & GROWTH FUND 23, LLC
This certificate of Formation of AEI Income & Growth Fund 23, LLC
(the "Company") is executed and filed by the undersigned as authorized
person, to form a limited liability company under the Deleware Limited
Liability Company Act (the "Act").
1. The name of the Company is AEI Income & Growth Fund 23, LLC.
2. The address of the registered office of the Company in the
State of Delaware is The Corporation Trust Company, located at Corporation
Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware
19801.
3. The name and address of the registered agent for service of
process on the Company in the State of Delaware is The Corporation Trust
Company, located at Corporation Trust Center, 1209 Orange Street,
Wilimington, New Castle County, Delaware 19801.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
of Formation this 12th day of October, 1998.
By AEI Fund Management XXI, Inc.
Its Managing Member
/s/ ROBERT P JOHNSON
By Robert P Johnson
Its President
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 10/14/1998
981398736-2955675
AEI Fund Management XXI, Inc.
1300 Minnesota World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Re: AEI Income & Growth Fund 23 LLC
Gentlemen:
Reference is made to the Registration Statement on Form SB-2
being filed by you with the Securities and Exchange Commission on or
about the date hereof (the "Registration Statement") relating to the
offer and sale of up to 24,000 units of limited liability company
interest (the "Units") in AEI Income & Growth Fund 23 LLC (the
"Company"). AEI Fund Management XXI, Inc., a Minnesota corporation,
and Robert P. Johnson will be the managing members of the Company,
and purchasers of the Units will be the limited members thereof.
We are familiar with and have examined the Registration
Statement, the form of Operating Agreement of the Company included
in the Registration Statement and Exhibit A to the prospectus that
forms a part thereof, and such other records and documents, and have
satisfied ourselves as to such matters of fact, as we consider
relevant for the purposes of this opinion. Based thereon, we are of
the opinion that:
(a) The Company is a validly existing limited liability
company under the laws of the State of Delaware.
(b) Assuming that the Units are issued and sold in compliance
with all applicable state and federal securities laws (as to which
matters we express no opinion), when the Units have been issued and
sold upon the terms and in the manner set forth in the Registration
Statement, they will be, insofar as the laws of the State of
Delaware are concerned, validly issued.
(c) Under the terms of the Operating Agreement of the Company,
in the form in which is appears in the Registration Statement, and
the provisions of the Limited Liability Company Act as it is
presently in effect in the State of Delaware, the Units, when so
issued by the Company, will be fully paid and nonassessable except
to the extent that a limited member of such Company may have
liability in the future to the Company or its creditors for (i) the
amount of cash, property or services that such limited member has
promised in writing to contribute to the capital of the Company but
has not so contributed, (ii) the amount of any distribution to any
such limited member by the Company when, after giving effect to such
distribution, the liabilities of the Company, other than liabilities
to members as a result of their contributions and other than
nonrecourse liabilities, exceed the fair value of the assets of the
Company, other than such portion of the assets securing nonrecourse
indebtedness equal to the amount of such indebtedness (an "Asset
Deficiency")if the limited member new of the Asset Deficiency at the
time of such distribution.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this firm in
the Registration Statement.
Dated: October 30, 1998
Very truly yours,
DORSEY & WHITNEY LLP
AEI Fund Management XXI, Inc.
1300 Minnesota World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Gentlemen:
We have acted as your counsel in connection with the proposed
public offering of up to 24,000 limited liability company units in
AEI Income & Growth Fund 23 LLC (the "Company"). In such capacity
we have examined the Registration Statement on Form SB-2 being filed
with the Securities and Exchange Commission on or about the date
hereof (the "Registration Statement"), the Preliminary Prospectus
included in the Registration Statement (the "Prospectus"), the
Operating Agreement included in the Registration Statement as
Exhibit A, and such other additional instruments and documents as we
have deemed necessary or appropriate for purposes of this opinion.
In our examination, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures and
the capacity of each party executing a document to so execute such
document.
Our opinion is based upon the facts described in the
Registration Statement and upon facts as they have been represented
to us by you or have been determined by us as of this date. Any
alteration of such facts may adversely affect our opinion.
Our opinion is based upon existing law and currently applicable
Treasury Department regulations, current published administrative
positions of the Internal Revenue Service contained in revenue
rulings and revenue procedures, and judicial decisions, all of which
are subject to change prospectively and retroactively. An opinion
of counsel is predicated upon all of the facts and conditions set
forth in the opinion and is based upon counsel's analysis of the
statutes, regulatory interpretations and case law in effect as of
the date of the opinion. It is not a guaranty of the current status
of the law and should not be accepted as a guaranty that a court of
law or an administrative agency will concur in the opinion. In
issuing our opinion, which is more fully contained in the Prospectus
in the section "Income Tax Aspects," we have followed the relevant
professional standards, including American Bar Association Formal
Opinion 346 (Revised), January 29, 1982, which direct a lawyer in
issuing a tax shelter opinion to consider all material tax issues
and to address fully and fairly in any offering materials all such
issues that involve the reasonable possibility of a challenge by the
Internal Revenue Service. We have also been guided by Treasury
Department Circular 230, which governs lawyers practicing before the
Treasury Department.
Based upon the foregoing:
(i) we hereby confirm the specific opinions attributed to us
in the section of the Prospectus entitled "Income Tax
Aspects," and
(ii) we hereby confirm that it is our opinion that the
material tax benefits, in the aggregate, that are a
significant feature of an investment in the Company are
more likely than not to be realized as contemplated in the
"Income Tax Aspects" section of the Prospectus, subject to
the qualifications stated therein.
This opinion of counsel is based solely upon the facts set
forth herein and in the Prospectus. To the extent that any facts
contained in the Prospectus or in this opinion prove not to be true
it is possible that the conclusion in this opinion might be changed.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the
captions "Legal Opinions" and "Experts" in the Prospectus.
Dated: October 30, 1998
Very truly yours,
DORSEY & WHITNEY LLP
Exhibit 10
AEI INCOME & GROWTH FUND 23 LLC
IMPOUNDMENT AGREEMENT
THIS IMPOUNDMENT AGREEMENT, made and entered into this
day of , 1998, by and among AEI INCOME & GROWTH
FUND 23 LLC, (the "Fund"), AEI Securities Incorporated ("AEI") and
Fidelity Bank, Edina, Minnesota (the "Bank");
WITNESSETH THAT:
WHEREAS, the Fund proposes to issue and sell to the public
up to 24,000 units of limited liability company interest (the
"Units"), at a subscription price of $1,000 per Unit, and has
entered into an agreement (the "Dealer-Manager Agreement") with AEI
Securities Incorporated (the "Dealer-Manager") pursuant to which the
Dealer-Manager and various members of the National Association of
Securities Dealers, Inc. (collectively, the "Dealers") will offer
the Units for sale to the public for and on behalf of the Fund; and
WHEREAS, the Dealer-Manager Agreement provides that all
funds received by Dealers in connection with the sale of Units shall
be transmitted to the Dealer-Manager as processing broker-dealer and
promptly deposited in an escrow account with the Bank until the
offering of Units is terminated or until the minimum $1,500,000 of
subscription proceeds have been obtained; and
WHEREAS, the Fund desires to have the Bank deposit such
funds in an escrow account until the termination of the offering of
Units, and the Bank has agreed to serve as Impoundment Agent for
such purpose.
NOW, THEREFORE, for and in consideration of the covenants
and agreements set forth below, the parties agree as follows:
l. APPOINTMENT OF IMPOUNDMENT AGENT; DELIVERY OF FUNDS TO
ESCROW ACCOUNT.
The Fund hereby appoints the Bank as Impoundment Agent to
receive and hold all proceeds from the sale of Units for the term of
this Impoundment Agreement, and to invest the same in such manner as
it shall be directed to in writing by the Fund. All subscription
checks shall be payable to "Fidelity Bank_AEI Real Estate Escrow."
Dealers shall transmit all subscription checks for Units to the
Dealer-Manager by noon of the business day following receipt of such
checks and the Dealer-Manager shall transmit all such checks, or
return unaccepted checks to subscribers, as soon as practicable
thereafter but in any event by the end of the second business day
following receipt of such checks by the Dealer-Manager.
2. IDENTITY OF SUBSCRIBERS; OWNERSHIP OF FUNDS DEPOSITED.
The Dealer-Manager shall deliver to the Impoundment Agent,
with each deposit of checks, a list which contains the names and
addresses of all persons who have subscribed for Units, the amount
of money tendered by each subscriber and the date on which the funds
were received from each subscriber. The Impoundment Agent shall
hold all funds received for the individual account of each
subscriber identified by the Dealer-Manager. The funds, as well as
any interest or income earned thereon, shall remain the
property of the subscribers until released to the Fund as
hereinafter provided, and shall not be subject to any liens by the
Impoundment Agent or judgments or claims against Dealers, the
Dealer-Manager or the Fund.
3. DISBURSEMENT OF FUNDS.
(a) After such time as the Impoundment Agent has received
not less than $1,500,000 in subscription amounts, the Impoundment
Agent shall forthwith notify the Commissioner of Securities for the
State of Minnesota or an agent thereof (the "Commissioner") in
writing of the escrow of such amounts. Upon receipt by the
Impoundment Agent of written authorization from the Commissioner,
said Impoundment Agent, on demand of AFM, shall pay over to the Fund
all or any portion of the impounded funds. If $1,500,000 in
subscription amount is not received by the Impoundment Agent during
the term of this Impoundment Agreement, then, within three business
days after the last day of the term of this Impoundment Agreement,
the Impoundment Agent shall notify the Commissioner in writing that
the conditions of this Impoundment Agreement have not been
satisfied, and shall within a reasonable time, but in no event more
than thirty (30) days after the last day of the term of this
Impoundment Agreement refund to each subscriber the face amount of
payments made in subscription for Units, together with his or her
pro rata share of interest or income, if any, earned on the funds
deposited in escrow, and shall then notify the Commissioner in
writing of such refund. After receipt by the Impoundment Agent of
written authorization for the initial release of funds hereunder,
the Impoundment Agent shall release to the Fund, from time to time,
any funds deposited pursuant to this Agreement, upon the written
request of the Fund and without any necessity of further
authorization from the Commission.
(b) The Fund shall send written notice of each request
for disbursement of funds which shall specify the subscriptions that
have been accepted on behalf of the Fund, the commissions and
nonaccountable expenses payable on such subscriptions, the
subscriptions that have been rejected, and the subscriptions that
have been deposited in escrow but upon which acceptance by the Fund
remains pending. In accordance with such notice, the Impoundment
Agent shall disburse funds:
(i) representing commissions and nonaccountable expenses
on accepted subscriptions_ directly to the Dealer-Manager;
(ii) representing accepted subscription proceeds net of
commissions and nonaccountable expenses_directly to the account
of the Fund as authorized in such notice;
(iii) representing interest accrued on accepted
subscriptions proceeds_directly to the subscribers; and
(iv) representing rejected subscription proceeds and
interest accrued thereon_directly to the subscribers.
All subscription proceeds upon which acceptance remains pending
shall be held by the Impoundment Agent for disbursement in
accordance with the direction contained in the next succeeding
notice.
4. TERM OF IMPOUNDMENT.
This Impoundment Agreement shall terminate on the 365th
day following the effective date of the registration statement
relating to the Units or on such earlier date as all funds are
released to the Fund as provided in Section 3 above; provided,
however, that if $1,500,000 in subscription amounts have been
received prior to the 365th day and the Fund elects to extend the
offering of Units in accordance with the registration statement
relating thereto, this Impoundment Agreement shall terminate upon
the expiration of such extension (but not, in any event, later than
the 730th day after the effective date). The Fund and the
Dealer-Manager may also terminate this Impoundment Agreement at any
time upon notice to the Impoundment Agent that the Fund has made a
decision to terminate the offer and sale of Units.
6. CONSENT OF COMMISSIONER TO RELEASE FUNDS.
Until the Impoundment Agent has received $1,500,000 in
subscription amounts no funds shall be released to the Fund
hereunder except upon the express written authorization of the
Commissioner. If the Commissioner finds that any conditions of this
Impoundment Agreement have not been satisfied, or that any
provisions of the Minnesota Securities Laws or regulations have not
been complied with, then he may withhold such authorization for
release of funds by the Impoundment Agent to the Fund and may direct
the Impoundment Agent to return the funds to the subscribers. After
the initial release of funds is authorized by the Commissioner, the
Impoundment Agent shall release funds, from time to time, to the
Fund upon written request.
7. FEE OF IMPOUNDMENT AGENT.
The Impoundment Agent shall receive reasonable
compensation for its services as Impoundment Agent. Such
compensation shall be paid by the Fund and shall not be subtracted
from the funds held in escrow by the Impoundment Agent. The fee
agreed upon for services rendered hereunder shall constitute full
compensation for the services of the Impoundment Agent performed
pursuant to this Impoundment Agreement; provided, however, that if
the Impoundment Agent renders any material services not contemplated
by this Impoundment Agreement, the Impoundment Agent shall be
reasonably compensated for such services.
8. REPRESENTATIONS OF IMPOUNDMENT AGENT. The Impoundment
Agent represents and warrants that:
(a) subscription proceeds deposited on behalf of each
subscriber will be insured by the Federal Deposit Insurance
Corporation to the maximum extent such proceeds would be
insured if deposited in individual accounts for each such
subscriber; and
(b) it will distribute to subscribers within the time
period prescribed by the Internal Revenue Code of 1986, as
amended, reports of all interest income earned on escrowed
funds.
Except as provided in this Section 8, the sole duty of the
Impoundment Agent shall be to receive funds from the sale of the
Units and hold them for release in accordance with the terms of this
Impoundment Agreement.
9. LIABILITY OF IMPOUNDMENT AGENT.
The Impoundment Agent may conclusively rely upon and shall
have no duty to verify any statement, certificate, notice, request,
consent, order or other document believed by it to be genuine and to
have been signed or presented by the proper party or parties. The
Impoundment Agent shall be under no obligation to institute or
defend any action, suit or proceeding in connection with this
Impoundment Agreement unless first indemnified to its satisfaction
by the Fund. The Impoundment Agent may consult counsel with respect
to any question arising under this Impoundment Agreement, and the
Impoundment Agent shall not be liable for any action taken or
omitted in good faith on advice of such counsel. All funds held by
the Impoundment Agent pursuant to this Impoundment Agreement shall
constitute trust property for the purposes for which they are held.
10. INSPECTION OF RECORDS.
Either the Fund or the Commissioner may, at any time
during regular business hours, inspect the records of the
Impoundment Agent, insofar as they relate to this Impoundment
Agreement, for the purpose of determining that the Impoundment Agent
is acting in compliance with the provisions of this Impoundment
Agreement.
11. BINDING EFFECT AND SUBSTITUTION OF IMPOUNDMENT AGENT.
The terms and conditions of this Impoundment Agreement
shall be binding upon the parties hereto and their respective
creditors, transferees, successors in interest and assigns, whether
by operation of law or otherwise. If for any reason the Bank should
be unable or unwilling to continue to assume its duties as
Impoundment Agent, nothing in this Impoundment Agreement shall
prevent the Fund from appointing an alternative Impoundment Agent.
IN WITNESS WHEREOF, the parties hereto have executed this
Impoundment Agreement on the date first above written.
AEI INCOME & GROWTH FUND 23LLC
By AEI Fund Management XXI, Inc.
By /s/ Robert P Johnson
Its President
FIDELITY BANK
By /s/ Andrew Feriancek
Its E.V.P
AEI Securities Incorporated
By /s/ Robert P Johnson
Its President
Accepted for filing
Commissioner of Commerce
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated
October 22, 1998 on the balance sheet of AEI Income & Growth Fund
23 Limited Liability Company as of October 22, 1998, and our
report dated November 9, 1998 on the balance sheet of AEI Fund
Management XXI, Inc. as of December 31, 1997 and September 30,
1998 in the Form SB-2 Registration Statement of AEI Income &
Growth Fund 23 Limited Liability Company dated on or about
November 13, 1998 and to the reference to our Firm under the
caption "Experts" in the Prospectus included therein.
/s/ BOULAY, HEUTMAKER, ZIBELL & CO. P.L.L.P.
Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Minneapolis, Minnesota
November 13, 1998
