SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
Of The Securities Exchange Act Of 1934
For the Fiscal Year Ended: December 31, 1995
Commission file number: 0-14264
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
(Name of Small Business Issuer in its Charter)
State of Minnesota 41-1525197
(State or other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization) Identification No.)
1300 Minnesota World Trade Center, St. Paul, Minnesota 55101
(Address of Principal Executive Offices)
(612) 227-7333
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No
Check if disclosure of delinquent filers in response to Rule 405
of Regulation S-B is not contained in this Form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for year ended December 31, 1995 were
$589,592.
As of February 29, 1996, there were 6,819 Units of limited
partnership interest in the registrant outstanding and owned by
nonaffiliates of the registrant, which Units had an aggregate
market value (based solely on the price at which they were sold
since there is no ready market for such Units) of $6,819,000.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has not incorporated any documents by reference
into this report.
Transitional Small Business Disclosure Format:
Yes No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
AEI Real Estate Fund 85-B Limited Partnership (the
"Partnership" or the "Registrant") is a limited partnership which
was organized pursuant to the laws of the State of Minnesota on
September 17, 1985. The registrant is comprised of Net Lease
Management 85-B, Inc. (NLM) as Managing General Partner, Robert
P. Johnson as the Individual General Partner, and purchasers of
partnership units as Limited Partners. The Partnership offered
for sale up to $7,500,000 of limited partnership interests (the
"Units") (7,500 Units at $1,000 per Unit) pursuant to a
registration statement effective July 31, 1985. The Partnership
commenced operations on September 17, 1985 when minimum
subscriptions of 1,300 Limited Partnership Units ($1,300,000)
were accepted. The Partnership's offering terminated February 4,
1986 when the maximum subscription limit of 7,500 Limited
Partnership Units ($7,500,000) was reached.
The Partnership was organized to acquire, initially on a
debt-free basis, existing and newly constructed commercial
properties located in the United States, to lease such properties
to tenants under triple net leases, to hold such properties and
to eventually sell such properties. From subscription proceeds,
the Partnership purchased ten properties, including partial
interests in two properties, totaling $6,231,904. The balance of
the subscription proceeds was applied to organization and
syndication costs, working capital reserves and distributions,
which represented a return of capital. The properties are all
commercial, single tenant buildings leased under triple net
leases, except for one property where the Partnership is
responsible for real estate taxes.
The Partnership will hold its properties until the General
Partners determine that the sale or other disposition of the
properties is advantageous in view of the Partnership's
investment objectives. In deciding whether to sell properties,
the General Partners will consider factors such as potential
appreciation, net cash flow and income tax considerations. In
addition, certain lessees have been granted options to purchase
properties after a specified portion of the lease term has
elapsed. It is anticipated that the Partnership will sell its
properties within twelve years after acquisition. At any time
prior to selling the properties, the Partnership may mortgage one
or more of its properties in amounts not exceeding 50% of the
fair market value of the property.
Leases
Although there are variations in the specific terms of the
leases, the following is a summary of the general terms of the
Partnership's leases. The properties are leased to various
tenants under noncancelable triple net leases, which are
classified as operating leases. Under a triple net lease, the
lessee is responsible for all real estate taxes, insurance,
maintenance, repairs and operating expenses for the property.
The initial lease terms are for 10 to 20 years. The leases
provide for base annual rental payments, payable in monthly
installments, and contain rent clauses which entitle the
Partnership to receive additional rent in future years based on
stated rent increases or if gross receipts for the property
exceed certain specified amounts, among other conditions.
The leases provide the lessees with two to four five-year
renewal options subject to the same terms and conditions as the
initial lease. Certain lessees have been granted options to
purchase the property. Depending on the lease, the purchase
price is either determined by a formula, or is the greater of the
fair market value of the property or the amount determined by a
formula. In all cases, if the option were to be exercised by the
lessee, the purchase price would be greater than the original
cost of the property.
ITEM 1. DESCRIPTION OF BUSINESS. (Continued)
Major Tenants
During 1995, three of the Partnership's lessees each
contributed more than ten percent of the Partnership's total
rental revenue. The major tenants in aggregate contributed 71%
of the Partnership's total rental revenue in 1995. It is
anticipated that, based on the minimum rental payments required
under the leases, each major tenant will continue to contribute
more than ten percent of the Partnership's total rental revenue
in 1996 and future years. Any failure of these major tenants
could materially affect the Partnership's net income and cash
distributions.
Competition
The Partnership is a minor factor in the commercial real
estate business. There are numerous entities engaged in the
commercial real estate business which have greater financial
resources than the Partnership. At the time the Partnership
elects to dispose of its properties, the Partnership will be in
competition with other persons and entities to find buyers for
its properties.
Employees
The Partnership has no direct employees. Management
services are performed for the Partnership by AEI Fund
Management, Inc., an affiliate of AFM.
ITEM 2. DESCRIPTION OF PROPERTIES.
Investment Objectives
The Partnership's investment objectives were to acquire
existing or newly-developed commercial properties throughout the
United States that offer the potential for (i) preservation and
protection of the Partnership's capital; (ii) partially tax-
deferred cash distributions from operations which may increase
through rent participation clauses or mandated rent increases;
and (iii) long-term capital gains through appreciation in value
of the Partnership's properties realized upon sale. The
Partnership does not have a policy, and there is no limitation,
as to the amount or percentage of assets that may be invested in
any one property. However, to the extent possible, the General
Partners attempt to diversify the type and location of the
Partnership's properties.
Description of Properties
The Partnership's properties are all commercial, single
tenant buildings. All the properties were acquired on a debt-
free basis and are leased to various tenants under noncancelable
triple net leases, which are classified as operating leases. The
only exception is the Partnership is responsible for the real
estate taxes on the Park Forest property. The Partnership holds
an undivided fee simple interest in the properties. At any time
prior to selling the properties, the Partnership may mortgage one
or more of its properties in amounts not exceeding 50% of the
fair market value of the property.
The Partnership's properties are subject to the general
competitive conditions incident to the ownership of single tenant
investment real estate. Since each property is leased under a
long-term lease, there is little competition until the
Partnership decides to sell the property. At this time, the
Partnership will be competing with other real estate owners, on
both a national and local level, in attempting to find buyers for
the properties. In the event of a tenant default, the
Partnership would be competing with other real estate owners, who
have property vacancies, to attract a new tenant to lease the
property. The Partnership's tenants operate in industries that
are very competitive and can be affected by factors such as
changes in regional or local economies, seasonality and changes
in consumer preference.
ITEM 2. DESCRIPTION OF PROPERTIES. (Continued)
The following table is a summary of the properties that
the Partnership acquired and owned as of December 31, 1995.
Purchase Total Property Annual Lease
Property Date Costs Lessee Payment
Auto Max J. D. Enterprises
Minneapolis, MN 6/6/86 $ 388,800 of Minnesota, Inc. $ 53,081
Fair Muffler
Park Forest, IL 8/14/86 $ 168,650 (F1)Tony Williams $ 31,200
Arby's Restaurant Select
Jackson, TN 10/14/86 $ 752,971 Beef VIII, Inc. $ 95,842
Fair Muffler Diana L. Franks &
Merrillville, IN 10/21/86 $ 304,432 Ernie R. Alverado $ 32,448
Applebee's Restaurant L & H Restaurant
Fort Worth, TX 10/31/86 $ 981,764 Corporation $ 90,000
Cheddar's Restaurant Phaedra
Fort Wayne, IN 12/31/86 $1,480,553 Partners Ltd. $ 192,920
Arby's Restaurant Circle Restaurant
Colorado Springs,CO 3/31/87 $ 447,177 Company $ 40,000
Children's World
Daycare Center Children's World
Sterling Heights, MI Learning
(16.3486%) 11/25/87 $ 143,392 Centers, Inc. $ 20,043
[FN]
(F1)The Partnership recognized $116,252 as an impairment of the
book value of this property in 1995.
[FN]
The properties listed above with a partial ownership
percentage are owned with affiliates of the Partnership. AEI
Real Estate Fund XVI Limited Partnership owns the remaining
interest in the Children's World property. Each Partnership owns
a separate, undivided interest in the property. No specific
agreement or commitment exists between the Partnerships as to the
management of their respective interests in the property, and the
Partnership that holds more than a 50% interest does not control
decisions over the other Partnership's interest.
The Lease terms are for 20 years except for the Auto Max
and Fort Worth properties (15 years), the Merrillville property
(10 years) and the Park Forest property, which is leased on a
month-to-month basis. Certain Leases contain renewal options
which may extend the Lease term an additional 5 to 20 years.
Pursuant to the Lease Agreements, the tenants are required
to provide proof of adequate insurance coverage on the properties
they occupy. The General Partners believe the properties are
adequately covered by insurance and consider the properties to be
well-maintained and sufficient for the Partnership's operations.
ITEM 2. DESCRIPTION OF PROPERTIES. (Continued)
For tax purposes, the Partnership's properties are
depreciated under the either the Accelerated Cost Recovery System
(ACRS) or the Modified Accelerated Cost Recovery System (MACRS),
depending on the date when it was placed in service. The largest
depreciable component of a property is the building which is
depreciated, using the straight-line method, over either 19 years
(ACRS) or 31.5 years (MACRS). The remaining depreciable
components of a property are personal property and land
improvements which are depreciated, using an accelerated method,
over 5 and 15 years, respectively. Since the Partnership has tax-
exempt Partners, the Partnership is subject to the rules of
Section 168(h)(6) of the Internal Revenue Code which requires a
percentage of the properties' depreciable components to be
depreciated over longer lives using the straight-line method. In
general the federal tax basis of the properties for tax
depreciation purposes is the same as the basis for book
depreciation purposes.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S PARTNERSHlP UNITS AND RELATED
SECURITY HOLDER MATTERS.
As of December 31, 1995, there were 730 holders of record
of the registrant's Limited Partnership Units. There is no other
class of security outstanding or authorized. The registrant's
Units are not a traded security in any market. However, the
Partnership may acquire Units from Limited Partners who have
tendered their Units to the Partnership. Such Units may be
acquired at a discount. The Partnership is not obligated to
purchase in any year more than 5% of the total number of Units
originally sold and in no event obligated to purchase Units if
such purchase would impair the capital or operation of the
Partnership.
During 1995, four Limited Partners redeemed a total of
25.3 Partnership Units for $15,046 in accordance with the
Partnership Agreement. In prior years, a total of sixty-four
Limited Partners redeemed 655.5 Partnership Units for $533,696.
The redemptions increase the remaining Limited Partners'
ownership interest in the Partnership.
Cash distributions of $4,281 and $4,575 were made to the
General Partners and $408,828 and $438,084 were made to the
Limited Partners in 1995 and 1994, respectively. The
distributions were made on a quarterly basis and represent Net
Cash Flow, as defined, except as discussed below. These
distributions should not be compared with dividends paid on
capital stock by corporations.
As part of the Limited Partner distributions discussed
above, the Partnership distributed $18,392 of proceeds from the
sale of property in December, 1995. The distribution reduced the
Limited Partners' Adjusted Capital Contributions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Results of Operations
For the years ended December 31, 1995 and 1994, the
Partnership recognized rental income of $575,214 and $584,172,
respectively. During the same periods, the Partnership earned
investment income of $14,378 and $9,701, respectively.
During the years ended December 31, 1995 and 1994, the
Partnership paid Partnership administration expenses to
affiliated parties of $96,271 and $97,847, respectively. These
administration expenses include costs associated with the
management of the properties, processing distributions, reporting
requirements and correspondence to the Limited Partners. During
the same periods, the Partnership incurred Partnership
administration and property management expenses from unrelated
parties of $58,593 and $50,935, respectively. These expenses
represent direct payments to third parties for legal and filing
fees, direct administrative costs, outside audit and accounting
costs, taxes, insurance and other property costs.
The Fair Muffler property in Park Forest, Illinois was
acquired in August, 1986 and leased under a long-term triple net
lease for twenty years. In 1989, the lessee filed for bankruptcy
and the Partnership re-leased the property to a Fair Muffler
franchisee who had been operating the property as a sublessee.
The franchisee has continued to operate the property since 1989,
but has had financial problems and is not in compliance with all
of the terms of the Lease Agreement. The Partnership is
reviewing its available options which include selling or re-
leasing the property. However, other real estate in the
immediate area has been taken back by lenders and is maintaining
a high vacancy rate.
The Partnership obtained an independent appraisal which
valued the property at $125,000. A charge to operations for real
estate impairment of $116,252 was recognized, which is the
difference between book value at December 31, 1995 of $241,252
and the appraised market value of $125,000. The charge was
recorded against the carrying amount of the land. The cost of
the building and equipment will continue to be depreciated over
the remaining estimated useful life.
The reduction in both rental income and net income of
$8,958 and $126,615, respectively, between 1995 and 1994, is due
primarily to rent not collected from the Fair Muffler franchisee
and the real estate impairment, as discussed above.
As of December 31, 1995, the Partnership's annualized cash
distribution rate was 6.27%, based on the Adjusted Capital
Contribution. Distributions of Net Cash Flow to the General
Partners were subordinated to the Limited Partners as required in
the Partnership Agreement. As a result, 99% of distributions and
income were allocated to Limited Partners and 1% to the General
Partners.
Inflation has had a minimal effect on income from
operations. It is expected that increases in sales volumes of
the tenants, due to inflation and real sales growth, will result
in an increase in rental income over the term of the leases.
Inflation also may cause the Partnership's real estate to
appreciate in value. However, inflation and changing prices may
also have an adverse impact on the operating margins of the
properties' tenants which could impair their ability to pay rent
and subsequently reduce the Partnership's Net Cash Flow available
for distributions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Liquidity and Capital Resources
During 1995, the Partnership's cash balances increased
$33,692 as the Partnership distributed slightly less cash to the
Partners than it generated from operating activities. Net cash
provided by operating activities increased from $468,716 in 1994
to $471,313 in 1995. Net cash income before depreciation was
lower in 1995 compared to 1994. This was offset by timing
differences in the collection of payments from the lessees and
the payment of expenses which resulted in an overall increase in
net cash provided by operating activities.
The Partnership's primary use of cash flow is distribution
and redemption payments to Partners. The Partnership declares
its regular quarterly distributions before the end of each
quarter and pays the distribution in the first week after the end
of each quarter. The Partnership attempts to maintain a stable
distribution rate from quarter to quarter. However, in certain
quarters, the Partnership will increase the quarterly
distribution to pay out contingent rent received as a result of
an increase in sales at a property. The distribution of the
contingent rent can cause the total distributions and the
distribution payable to fluctuate from year to year. Redemption
payments are paid to redeeming Partners in the fourth quarter of
each year.
In December, 1995, the Partnership distributed $18,578 of
sale proceeds to the Limited and General Partners as part of
their regular quarterly distribution, which represented a return
of capital of $2.70 per Limited Partnership Unit.
The Partnership may purchase Units from Limited Partners
who have tendered their Units to the Partnership. Such Units may
be acquired at a discount. The Partnership is not obligated to
purchase in any year more than 5% of the total number of Units
originally sold and in no event, obligated to purchase Units if
such purchase would impair the capital or operation of the
Partnership.
During 1995, four Limited Partners redeemed a total of
25.3 Partnership Units for $15,046 in accordance with the
Partnership Agreement. The Partnership acquired these Units
using Net Cash Flow from operations. In prior years, a total of
sixty-four Limited Partners redeemed 655.5 Partnership Units for
$533,696. The redemptions increase the remaining Limited
Partners' ownership interest in the Partnership.
The continuing rent payments from the properties, together
with the Partnership's cash reserve, should be adequate to fund
continuing distributions and meet other Partnership obligations
on both a short-term and long-term basis.
ITEM 7. FINANCIAL STATEMENTS.
See accompanying Index to Financial Statements.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report
Balance Sheet as of December 31, 1995 and 1994
Statements for the Years Ended December 31, 1995 and 1994:
Income
Cash Flows
Changes in Partners' Capital
Notes to Financial Statements
INDEPENDENT AUDITOR'S REPORT
To the Partners:
AEI Real Estate Fund 85-B Limited Partnership
St. Paul, Minnesota
We have audited the accompanying balance sheet of AEI REAL
ESTATE FUND 85-B LIMITED PARTNERSHIP (a Minnesota limited
partnership) as of December 31, 1995 and 1994 and the related
statements of income, cash flows and changes in partners' capital
for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of AEI Real Estate Fund 85-B Limited Partnership as of December
31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota Boulay, Heutmaker, Zibell & Co. P.L.L.P.
February 6, 1996 Certified Public Accountants
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31
ASSETS
1995 1994
CURRENT ASSETS:
Cash $ 302,614 $ 268,922
Receivables 49 0
---------- ----------
Total Current Assets 302,663 268,922
---------- ----------
INVESTMENTS IN REAL ESTATE:
Land 1,667,493 1,783,745
Buildings and Equipment 3,000,246 3,000,246
Accumulated Depreciation (1,279,598) (1,138,636)
---------- ----------
Net Investments in Real Estate 3,388,141 3,645,355
---------- ----------
Total Assets $3,690,804 $3,914,277
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 46,587 $ 9,953
Distributions Payable 111,398 120,864
---------- ----------
Total Current Liabilities 157,985 130,817
---------- ----------
PARTNERS' CAPITAL (DEFICIT):
General Partners (29,269) (26,763)
Limited Partners, $1,000 Unit value;
7,500 Units authorized and issued;
6,819 and 6,844 outstanding in 1995
and 1994, respectively 3,562,088 3,810,223
---------- ----------
Total Partners' Capital 3,532,819 3,783,460
---------- ----------
Total Liabilities and Partners' Capital $3,690,804 $3,914,277
========== ==========
The accompanying notes to financial statements are an integral
part of this statement.
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 3l
1995 1994
INCOME:
Rent $ 575,214 $ 584,172
Investment Income 14,378 9,701
---------- ----------
Total Income 589,592 593,873
---------- ----------
EXPENSES:
Partnership Administration - Affiliates 96,271 97,847
Partnership Administration and Property
Management - Unrelated Parties 58,593 50,935
Depreciation 140,962 140,962
Real Estate Impairment 116,252 0
---------- ----------
Total Expenses 412,078 289,744
---------- ----------
NET INCOME $ 177,514 $ 304,129
========== ==========
NET INCOME ALLOCATED:
General Partners $ 1,775 $ 3,041
Limited Partners 175,739 301,088
---------- ----------
$ 177,514 $ 304,129
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT
(6,838 and 6,861 weighted average Units
outstanding in 1995 and 1994, respectively) $ 25.70 $ 43.88
========== ==========
The accompanying notes to financial statements are an integral
part of this statement.
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 177,514 $ 304,129
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating Activities:
Depreciation 140,962 140,962
Real Estate Impairment 116,252 0
(Increase) Decrease in Receivables (49) 23,403
Increase in Payable to
AEI Fund Management, Inc. 36,634 222
---------- ----------
Total Adjustments 293,799 164,587
---------- ----------
Net Cash Provided By
Operating Activities 471,313 468,716
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of Long-Term Note Receivable 0 20,060
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Distributions Payable (9,466) 30,836
Distributions to Partners (412,957) (442,659)
Redemption Payments (15,198) (14,798)
---------- ----------
Net Cash Used For
Financing Activities (437,621) (426,621)
---------- ----------
NET INCREASE IN CASH 33,692 62,155
CASH, beginning of period 268,922 206,767
---------- ----------
CASH, end of period $ 302,614 $ 268,922
========== ==========
The accompanying notes to financial statements are an integral
part of this statement.
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31
Limited
Partnership
General Limited Units
Partners Partners Total Outstanding
BALANCE, December 31, 1993 $ (25,229) $3,962,017 $3,936,788 6,866.80
Distributions (4,426) (438,084) (442,510)
Redemption Payments (149) (14,798) (14,947) (22.50)
Net Income 3,041 301,088 304,129
---------- ----------- ----------- ----------
BALANCE, December 31, 1994 (26,763) 3,810,223 3,783,460 6,844.30
Distributions (4,129) (408,828) (412,957)
Redemption Payments (152) (15,046) (15,198) (25.30)
Net Income 1,775 175,739 177,514
---------- ----------- ----------- ----------
BALANCE, December 31, 1995 $ (29,269) $ 3,562,088 $ 3,532,819 6,819.00
========== =========== =========== =========
The accompanying notes to financial statements are an integral
part of this statement.
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) Organization -
AEI Real Estate Fund 85-B Limited Partnership (Partnership)
was formed to acquire and lease commercial properties to
operating tenants. The Partnership's operations are managed
by Net Lease Management 85-B, Inc. (NLM), the Managing
General Partner of the Partnership. Robert P. Johnson, the
President and sole shareholder of NLM, serves as the
Individual General Partner of the Partnership. An affiliate
of NLM, AEI Fund Management, Inc. (AEI), performs the
administrative and operating functions for the Partnership.
The terms of the Partnership offering call for a
subscription price of $1,000 per Limited Partnership Unit,
payable on acceptance of the offer. The Partnership
commenced operations on September 17, 1985 when minimum
subscriptions of 1,300 Limited Partnership Units
($l,300,000) were accepted. The Partnership's offering
terminated on February 4, 1986 when the maximum subscription
limit of 7,500 Limited Partnership Units ($7,500,000) was
reached.
Under the terms of the Limited Partnership Agreement, the
Limited Partners and General Partners contributed funds of
$7,500,000 and $1,000, respectively. During the operation
of the Partnership, any Net Cash Flow, as defined, which the
General Partners determine to distribute will be distributed
90% to the Limited Partners and 10% to the General Partners;
provided, however, that such distributions to the General
Partners will be subordinated to the Limited Partners first
receiving an annual, noncumulative distribution of Net Cash
Flow equal to 10% of their Adjusted Capital Contribution, as
defined, and, provided further, that in no event will the
General Partners receive less than 1% of such Net Cash Flow
per annum. Distributions to Limited Partners will be made
pro rata by Units.
Any Net Proceeds of Sale, as defined, from the sale or
financing of the Partnership's properties which the General
Partners determine to distribute will, after provisions for
debts and reserves, be paid in the following manner: (i)
first, 99% to the Limited Partners and 1% to the General
Partners until the Limited Partners receive an amount equal
to: (a) their Adjusted Capital Contribution plus (b) an
amount equal to 6% of their Adjusted Capital Contribution
per annum, cumulative but not compounded, to the extent not
previously distributed from Net Cash Flow; (ii) next, 99% to
the Limited Partners and 1% to the General Partners until
the Limited Partners receive an amount equal to 14% of their
Adjusted Capital Contribution per annum, cumulative but not
compounded, to the extent not previously distributed; (iii)
next, to the General Partners until cumulative distributions
to the General Partners under Items (ii) and (iii) equal 15%
of cumulative distributions to all Partners under Items (ii)
and (iii). Any remaining balance will be distributed 85% to
the Limited Partners and 15% to the General Partners.
Distributions to the Limited Partners will be made pro rata
by Units.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) Organization - (Continued)
For tax purposes, profits from operations, other than
profits attributable to the sale, exchange, financing,
refinancing or other disposition of the Partnership's
property, will be allocated first in the same ratio in
which, and to the extent, Net Cash Flow is distributed to
the Partners for such year. Any additional profits will be
allocated 90% to the Limited Partners and 10% to the General
Partners. In the event no Net Cash Flow is distributed to
the Limited Partners, 90% of each item of Partnership
income, gain or credit for each respective year shall be
allocated to the Limited Partners, and 10% of each such item
shall be allocated to the General Partners. Net losses from
operations will be allocated 98% to the Limited Partners and
2% to the General Partners.
For tax purposes, profits arising from the sale, financing,
or other disposition of the Partnership's property will be
allocated in accordance with the Partnership Agreement as
follows: (i) first, to those Partners with deficit balances
in their capital accounts in an amount equal to the sum of
such deficit balances: (ii) second, 99% to the Limited
Partners and 1% to the General Partners until the aggregate
balance in the Limited Partners' capital accounts equals the
sum of the Limited Partners' Adjusted Capital Contributions
plus an amount equal to 14% of their Adjusted Capital
Contributions per annum, cumulative but not compounded, to
the extent not previously allocated; (iii) third, to the
General Partners until cumulative allocations to the General
Partners equal 15% of cumulative allocations. Any remaining
balance will be allocated 85% to the Limited Partners and
15% to the General Partners. Losses will be allocated 98%
to the Limited Partners and 2% to the General Partners.
The General Partners are not required to currently fund a
deficit capital balance. Upon liquidation of the
Partnership or withdrawal by a General Partner, the General
Partners will contribute to the Partnership an amount equal
to the lesser of the deficit balances in their capital
accounts or 1% of total Limited Partners' and General
Partners' capital contributions.
(2) Summary of Significant Accounting Policies -
Financial Statement Presentation
The accounts of the Partnership are maintained on the
accrual basis of accounting for both federal income tax
purposes and financial reporting purposes.
Accounting Estimates
Management uses estimates and assumptions in preparing
these financial statements in accordance with generally
accepted accounting principles. Those estimates and
assumptions may affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
Actual results could differ from those estimates.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(2) Summary of Significant Accounting Policies - (Continued)
Given that the Partnership has had limited success in its
efforts to lease or dispose of certain properties, it is
reasonably possible that the Partnership's estimate that
it will recover the carrying amount of these properties
from future operations or sales will change in the near
term.
Cash Concentrations of Credit Risk
At times throughout the year, the Partnership's cash
deposited in financial institutions may exceed FDIC
insurance limits.
Income Taxes
The income or loss of the Partnership for federal income
tax reporting purposes is includable in the income tax
returns of the partners. Accordingly, no recognition has
been given to income taxes in the accompanying financial
statements.
The tax return, the qualification of the Partnership as
such for tax purposes, and the amount of distributable
partnership income or loss are subject to examination by
federal and state taxing authorities. If such an
examination results in changes with respect to the
partnership qualification or in changes to distributable
partnership income or loss, the taxable income of the
partners would be adjusted accordingly.
Real Estate
The Partnership's real estate leases are classified as
operating leases. The Partnership recognizes rental
revenue on the accrual basis according to the terms of
the individual leases. For leases which contain cost of
living increases, the increases are recognized in the
year in which they are effective.
Real estate is recorded at the lower of cost or estimated
net realizable value. The Financial Accounting Standards
Board has issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" which is effective for the
Partnership's fiscal year ended December 31, 1996. The
Partnership regularly reviews the carrying value of its
properties and will reduce properties to their net
realizable value as needed. Adoption of Statement 121 is
not expected to have a material effect on the
Partnership's operations.
The Partnership has capitalized as Investments in Real
Estate certain costs incurred in the review and
acquisition of the properties. The costs were allocated
to the land, buildings and equipment.
The buildings and equipment of the Partnership are
depreciated using the straight-line method for financial
reporting purposes based on estimated useful lives of 30
years and 10 years respectively.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 1995 AND 1994
(3) Related Party Transactions -
In 1987, the Partnership acquired a 16.3486% interest in the
Children's World property. The remaining interest of
83.6514% is owned by an affiliate of the Partnership, AEI
Real Estate Fund XVI Limited Partnership. Each Partnership
owns a separate, undivided interest in the properties. No
specific agreement or commitment exists between the
Partnerships as to the management of their respective
interests in the properties, and the Partnership that holds
more than a 50% interest does not control decisions over the
other Partnership's interest. The financial statements
reflect only this Partnership's percentage share of the
properties' land, building and equipment, liabilities,
revenues and expenses.
NLM and AEI received the following compensation and
reimbursements for costs and expenses from the Partnership:
Total Incurred by the Partnership
for the Years Ended December 3l
1995 1994
a. AEI and NLM are
reimbursed for all costs
incurred in connection with managing the
Partnership's operations, maintaining the
Partnership's books and communicating
the results of operations to the Limited
Partners. $ 96,271 $ 97,847
========= =========
b. AEI and NLM are reimbursed for all direct
expenses they have paid on the Partnership's
behalf to third parties. These expenses included
printing costs, interest, legal and filing fees,
direct administrative costs, outside audit and
accounting costs, taxes, insurance and other
property costs. $ 58,593 $ 50,935
========= =========
The payable to AEI Fund Management, Inc. represents the
balance due for the services described in 3a and b. This
balance is non-interest bearing and unsecured and is to be
paid in the normal course of business.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(4) Investments in Real Estate -
The Partnership leases its properties to various tenants
through noncancelable triple net leases, which are
classified as operating leases. Under a triple net lease,
the lessee is responsible for all real estate taxes,
insurance, maintenance, repairs and operating expenses of
the property. The only exception is the Partnership is
responsible for the real estate taxes of the Park Forest
property. The Lease terms are for 20 years except for the
Auto Max and Fort Worth properties (15 years), the
Merrillville property (10 years) and the Park Forest
property, which is leased on a month-to-month basis.
Certain Leases contain renewal options which may extend the
Lease term an additional 5 to 20 years. Most of the Leases
contain provisions which entitle the Partnership to receive
additional rent in future years based on stated rent
increases or if gross receipts for the property exceed
certain specified amounts, among other conditions. Certain
lessees have been granted options to purchase the property.
Depending on the lease, the purchase price is either
determined by a formula, or is the greater of the fair
market value of the property or the amount determined by a
formula. In all cases, if the option were to be exercised
by the lessee, the purchase price would be greater than the
original cost of the property.
The Partnership's properties are all commercial, single-
tenant properties. The Fair Muffler in Park Forest,
Illinois was constructed in 1983. The Cheddar's restaurant
in Fort Wayne, Indiana was constructed in 1985. The
Children's World in Sterling Heights, Michigan was built in
1987. All the remaining buildings were constructed in 1986.
The Partnership acquired all the buildings during 1986
except for the Arby's in Colorado Springs and the Children's
World, which were acquired during 1987. There have been no
costs capitalized as improvements subsequent to the
acquisitions.
The cost of the properties and related accumulated
depreciation at December 31, l995 are as follows:
Buildings and Accumulated
Property Land Equipment Total Depreciation
Auto Max, Minneapolis, MN $ 174,960 $ 213,840 $ 388,800 $ 77,874
Fair Muffler, Park Forest, IL 46,142 122,508 168,650 43,650
Arby's, Jackson, TN 178,733 574,238 752,971 250,291
All Tune & Lube, Merrillville,IN 84,174 220,258 304,432 77,056
Denny's, Fort Worth, TX 525,850 455,914 981,764 183,718
Cheddar's, Fort Wayne, IN 511,427 969,126 1,480,553 457,070
Arby's, Colorado Springs, CO 119,054 328,123 447,177 154,954
Children's World,
Sterling Heights, MI 27,153 116,239 143,392 34,985
----------- ----------- ----------- -----------
$1,667,493 $3,000,246 $4,667,739 $1,279,598
=========== =========== =========== =========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(4) Investments in Real Estate - (Continued)
The Fair Muffler property in Park Forest, Illinois is a one-
story brick building with approximately 2,450 square feet on
an approximately 19,388 square foot parcel of land. It was
acquired in August, 1986 and leased under a long-term triple
net Lease for twenty years. In 1989, the lessee filed for
bankruptcy and the Partnership re-leased the property to a
Fair Muffler franchisee who had been operating the property
as a sublessee. The franchisee has continued to operate the
property since 1989, but has had financial problems and is
not in compliance with all of the terms of the Lease
Agreement. The Partnership is reviewing its available
options which include selling or re-leasing the property.
However, other real estate in the immediate area has been
taken back by lenders and is maintaining a high vacancy
rate.
The Partnership obtained an independent appraisal which
valued the property at $125,000. A charge to operations for
real estate impairment of $116,252 was recognized, which is
the difference between book value at December 31, 1995 of
$241,252 and the appraised market value of $125,000. The
charge was recorded against the carrying amount of the land.
The cost of the building and equipment will continue to be
depreciated over the remaining estimated useful life.
The minimum future rentals on the non-cancelable Leases for
years subsequent to December 31, 1995 are as follows:
1996 $ 525,198
1997 526,531
1998 527,917
1999 529,358
2000 504,538
Thereafter 2,865,265
----------
$5,478,807
==========
In 1995 and 1994, the Partnership recognized contingent
rents of $30,936 and $36,171 respectively.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(5) Major Tenants -
The following schedule presents rent revenue from individual
tenants, or affiliated groups of tenants, who each
contributed more than ten percent of the Partnership's total
rent revenue for the years ended December 31:
Tenants who individually generate
10% or more of total rent revenue:
1995 1994
Tenants Industry
Phaedra Partners, LTD Restaurant $ 192,920 $ 192,920
Select Beef VIII, Inc. Restaurant 125,352 129,839
L & H Restaurant Corp. Restaurant 90,000 88,007
----------- -----------
Aggregate rent revenue of major tenants $ 408,272 $ 410,766
=========== ===========
Aggregate rent revenue of major tenants as
a percentage of total rent revenue 71% 70%
=========== ===========
(6) Partners' Capital -
Cash distributions of $4,281 and $4,575 were made to the
General Partners and $408,828 and $438,084 were made to the
Limited Partners in 1995 and 1994, respectively. The
Limited Partners' distributions represent $59.79 and $63.85
per Limited Partnership Unit outstanding using 6,838 and
6,861 weighted average Units in 1995 and 1994, respectively.
The distributions represent $40.32 and $41.72 per Unit of
Net Income and $19.47 and $22.13 per Unit of return of
contributed capital in 1995 and 1994, respectively.
As part of the Limited Partner distributions discussed
above, the Partnership distributed $18,392 of proceeds from
the sale of property in 1995. The distribution reduced the
Limited Partners' Adjusted Capital Contributions.
Distributions of Net Cash Flow to the General Partners
during 1995 and 1994 were subordinated to the Limited
Partners as required in the Partnership Agreement. As a
result, 99% of distributions and income were allocated to
the Limited Partners and 1% to the General Partners.
The Partnership may acquire Units from Limited Partners who
have tendered their Units to the Partnership. Such Units may
be acquired at a discount. The Partnership is not obligated
to purchase in any year more than 5% of the total number of
Units originally sold and in no event obligated to purchase
Units if such purchase would impair the capital or operation
of the Partnership.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(6) Partners' Capital - (Continued)
During 1995, four Limited Partners redeemed a total of 25.3
Partnership Units for $15,046 in accordance with the
Partnership Agreement. The Partnership acquired these Units
using Net Cash Flow from operations. In 1994, a total of
four Limited Partners redeemed 22.5 Partnership Units for
$14,798. The redemptions increase the remaining Limited
Partners' ownership interest in the Partnership.
After the effect of redemptions and the return of capital
from the sale of property, the Adjusted Capital
Contribution, as defined in the Partnership Agreement, is
$931.41 per original $1,000 invested.
(7) Income Taxes -
The following is a reconciliation of net income for
financial reporting purposes to income reported for federal
income tax purposes for the years ended December 31:
1995 1994
Net Income For Financial
Reporting Purposes $ 117,514 $ 304,129
Depreciation for Tax Purposes Under
Depreciation For Financial
Reporting Purposes 32,638 32,637
Income Accrued for Tax Purposes
Over Income For Financial
Reporting Purposes 10,400 0
Property Expenses for Tax Purposes
Under Expenses For Financial
Reporting Purposes 116,252 0
----------- -----------
Taxable Income to Partners $ 336,804 $ 336,766
=========== ===========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(7) Income Taxes - (Continued)
The following is a reconciliation of Partners' capital for
financial reporting purposes to Partners' capital reported
for federal income tax purposes for the years ended December
31:
1995 1994
Partners' Capital For
Financial Reporting Purposes $ 3,532,819 $ 3,783,460
Depreciation For Tax Purposes Over
Depreciation For Financial
Reporting Purposes (272,185) (304,823)
Capitalized Start-Up Costs
Under Section 195 310,830 310,830
Amortization of Start-Up and
Organization Costs (317,702) (317,702)
Income Accrued for Tax Purposes
Over Income For Financial
Reporting Purposes 10,400 0
Property Expenses for Tax Purposes
Under Expenses For Financial
Reporting Purposes 116,252 0
Gain on Sale of Real Estate For Tax
Purposes Over Gain For Financial
Reporting Purposes 99,037 99,037
Organization and Syndication Costs
Treated as Reduction of Capital
For Financial Reporting Purposes 1,009,038 1,009,038
----------- -----------
Partners' Capital For
Tax Reporting Purposes $4,488,489 $4,579,840
=========== ===========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(8) Fair Value of Financial Instruments -
The estimated fair values of the financial instruments, none
of which are held for trading purposes, are as follows at
December 31, 1995:
1995
Carrying Fair
Amount Value
Cash $ 302,614 $ 302,614
The carrying value of cash approximates fair value.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
The registrant is a limited partnership and has no
officers, directors, or direct employees. The General Partners
of the registrant are Robert P. Johnson and NLM. The General
Partners manage and control the Partnership's affairs and have
general responsibility and the ultimate authority in all matters
affecting the Partnership's business. The director and officers
of NLM are as follows:
Robert P. Johnson, age 51, is Chief Executive Officer,
President and Director and has held these positions since the
formation of NLM in May, 1985, and has been elected to continue
in these positions until March, 1997. From 1970 to the present,
he has been employed exclusively in the investment industry,
specializing in tax-advantaged limited partnership investments.
In that capacity, he has been involved in the development,
analysis, marketing and management of public and private
investment programs investing in net lease properties as well as
public and private investment programs investing in energy
development. Since 1971, Mr. Johnson has been the president, a
director and a registered principal of AEI 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 in fifteen other
limited partnerships.
Mark E. Larson, age 43, is Executive Vice President,
Treasurer and Chief Financial Officer and has been elected to
continue in these positions until March, 1997. Mr. Larson has
been Treasurer and Executive Vice President since December, 1987
and Chief Financial Officer since January, 1990. In January,
1993, Mr. Larson was elected to serve as Secretary of NLM and
will continue to serve until March, 1997. Mr. Larson 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 is responsible for supervising the accounting
functions of NLM and the registrant.
ITEM 10. EXECUTIVE COMPENSATION.
The General Partner and affiliates are reimbursed at cost
for all services performed on behalf of the registrant and for
all third party expenses paid on behalf of the registrant. The
cost for services performed on behalf of the registrant is actual
time spent performing such services plus an overhead burden.
These services include organizing the registrant and arranging
for the offer and sale of Units, reviewing properties for
acquisition and rendering administrative and management services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
NLM, the Managing General Partner of the registrant, and
Robert P. Johnson, its Individual General Partner, contributed
$1,000 in total for their interest in the registrant. See Item 1
for a discussion of their share of the registrant's profits and
losses. Neither the General Partners nor their affiliates have
purchased Limited Partnership Units.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The registrant, NLM and its affiliates have common
management and utilize the same facilities. As a result, certain
administrative expenses are allocated among these related
entities. All of such activities and any other transactions
involving the affiliates of the General Partner of the registrant
are governed by, and are conducted in conformity with, the
limitations set forth in the Limited Partnership Agreement of the
registrant. Reference is made to Note 3 on Page 17, and is
incorporated herein by reference, for details of related party
transactions.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A.
A. Exhibits -
Description
27 Financial Data Schedule for year ended
December 31, 1995.
B. Reports on Form 8-K and 8-K/A - None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AEI REAL ESTATE FUND 85-B
Limited Partnership
By: Net Lease Management 85-B, Inc.
Its Managing General Partner
March 21, 1996 By: /s/ Robert P. Johnson
Robert P. Johnson, President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
/s/ Robert P. Johnson President(Principal Executive Officer) March 21, 1996
Robert P. Johnson and Sole Director of Managing General
Partner
/s/ Mark E. Larson Executive Vice President,Treasurer March 21, 1996
Mark E. Larson and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000771677
<NAME> AEI REAL ESTATE FUND 85-B LTD PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 302,614
<SECURITIES> 0
<RECEIVABLES> 49
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 302,663
<PP&E> 4,667,739
<DEPRECIATION> (1,279,598)
<TOTAL-ASSETS> 3,690,804
<CURRENT-LIABILITIES> 157,985
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,532,819
<TOTAL-LIABILITY-AND-EQUITY> 3,690,804
<SALES> 0
<TOTAL-REVENUES> 589,592
<CGS> 0
<TOTAL-COSTS> 412,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 177,514
<INCOME-TAX> 0
<INCOME-CONTINUING> 177,514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,514
<EPS-PRIMARY> 25.70
<EPS-DILUTED> 25.70
</TABLE>
