SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarter Ended: September 30, 1996
Commission file number: 0-14264
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
(Exact Name of Small Business Issuer as Specified 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)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.
Yes [X] No
Transitional Small Business Disclosure Format:
Yes No [X]
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
INDEX
PART I. Financial Information
Item 1. Balance Sheet as of September 30, 1996 and December 31, 1995
Statements for the Periods ended September 30, 1996 and 1995:
Income
Cash Flows
Changes in Partners' Capital
Notes to Financial Statements
Item 2. Management's Discussion and Analysis
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
ASSETS
1996 1995
CURRENT ASSETS:
Cash and Cash Equivalents $ 346,655 $ 302,614
Receivables 0 49
----------- -----------
Total Current Assets 346,655 302,663
----------- -----------
INVESTMENTS IN REAL ESTATE:
Land 1,667,493 1,667,493
Buildings and Equipment 3,000,246 3,000,246
Accumulated Depreciation (1,383,348) (1,279,598)
----------- -----------
Net Investments in Real Estate 3,284,391 3,388,141
----------- -----------
Total Assets $ 3,631,046 $ 3,690,804
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 92,449 $ 46,587
Environmental Claim 211,000 0
Distributions Payable 91,189 111,398
Unearned Rent 17,157 0
----------- -----------
Total Current Liabilities 411,795 157,985
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partners (32,525) (29,269)
Limited Partners, $1,000 Unit value;
7,500 Units authorized and issued;
6,819 Units outstanding 3,251,776 3,562,088
----------- -----------
Total Partners' Capital 3,219,251 3,532,819
----------- -----------
Total Liabilities and Partners' Capital $ 3,631,046 $ 3,690,804
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
</PAGE>
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
INCOME:
Rent $ 142,208 $ 138,761 $ 425,786 $ 417,294
Investment Income 4,018 3,643 11,389 10,799
---------- ---------- ---------- ----------
Total Income 146,226 142,404 437,175 428,093
---------- ---------- ---------- ----------
EXPENSES:
Partnership Administration -
Affiliates 25,503 21,972 73,059 72,141
Partnership Administration
and Property Management -
Unrelated Parties 232,385 13,170 272,342 47,415
Depreciation 34,331 35,241 103,750 105,722
---------- ---------- ---------- ----------
Total Expenses 292,219 70,383 449,151 225,278
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (145,993) $ 72,021 $ (11,976) $ 202,815
========== ========== ========== ==========
NET INCOME (LOSS) ALLOCATED:
General Partners $ (2,920) $ 720 $ (240) $ 2,028
Limited Partners (143,073) 71,301 (11,736) 200,787
---------- ---------- ---------- ----------
$ (145,993) $ 72,021 $ (11,976) $ 202,815
========== ========== ========== ==========
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT
(6,819 and 6,844 weighted
average Units outstanding in 1996
and 1995, respectively) $ (20.77) $ 10.42 $ (1.72) $ 29.34
========== ========== ========== ==========
The accompanying Notes to Financial Statements are an integral
part of this statement.
</PAGE>
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (11,976) $ 202,815
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
Depreciation 103,750 105,722
(Increase) Decrease in Receivables 49 (2,600)
Increase in Payable to
AEI Fund Management, Inc. 45,862 32,742
Increase in Environmental Claim 211,000 0
Increase in Unearned Rent 17,157 12,320
----------- -----------
Total Adjustments 377,818 148,184
----------- -----------
Net Cash Provided By
Operating Activities 365,842 350,999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Distributions Payable (20,209) (30,792)
Distributions to Partners (301,592) (292,218)
----------- -----------
Net Cash Used For
Financing Activities (321,801) (323,010)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 44,041 27,989
CASH AND CASH EQUIVALENTS, beginning of period 302,614 268,922
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 346,655 $ 296,911
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
</PAGE>
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
Limited
Partnership
General Limited Units
Partners Partners Total Outstanding
BALANCE, December 31, 1994 $ (26,763) $ 3,810,223 $ 3,783,460 6,844.30
Distributions (2,922) (289,296) (292,218)
Net Income 2,028 200,787 202,815
---------- ----------- ----------- ----------
BALANCE, September 30, 1995 $ (27,657) $ 3,721,714 $ 3,694,057 6,844.30
========== =========== =========== ==========
BALANCE, December 31, 1995 $ (29,269) $ 3,562,088 $ 3,532,819 6,819.00
Distributions (3,016) (298,576) (301,592)
Net Loss (240) (11,736) (11,976)
---------- ----------- ----------- ----------
BALANCE, September 30, 1996 $ (32,525) $ 3,251,776 $ 3,219,251 6,819.00
========== =========== =========== ==========
The accompanying Notes to Financial Statements are an integral
part of this statement.
</PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(1) The condensed statements included herein have been prepared
by the Partnership, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and
reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results of
operations for the interim period, on a basis consistent with
the annual audited statements. The adjustments made to these
condensed statements consist only of normal recurring
adjustments. Certain information, accounting policies, and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Partnership
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that
these condensed financial statements be read in conjunction
with the financial statements and the summary of significant
accounting policies and notes thereto included in the
Partnership's latest annual report on Form 10-KSB.
(2) 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., 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
($1,300,000) 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.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Organization - (Continuted)
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.
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.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Investments in Real Estate -
In 1995, the Partnership elected early adoption of the
Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." This standard requires the
Partnership to compare the carrying amount of its properties
to the estimated future cash flows expected to result from
the property and its eventual disposition. If the sum of
the expected future cash flows is less than the carrying
amount of the property, the Statement requires the
Partnership to recognize an impairment loss by the amount by
which the carrying amount of the property exceeds the fair
value of the property.
In 1995, the Partnership recognized an impairment loss of
$116,252 on the Fair Muffler property located in Park
Forest, Illinois. The loss was the difference between book
value at December 31, 1995 of $241,252 and an independent
appraisal which valued the property at $125,000. The charge
was recorded against the carry amount of the land. The cost
of the building and equipment continue to be depreciated
over the estimated useful life.
The Fair Muffler 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. In addition, in August, 1996, the Partnership
received the results of an environmental soil contamination
investigation of the property. The investigation revealed
contamination of approximately 2,750 cubic yards exceeding
Tier 1 soil migration to Class II groundwater, which will
need to be remediated. The contamination has been
identified as petroleum constituents and is believed to have
been caused by underground storage tanks when the property
was operated as a gasoline station, which occurred prior to
the Partnership's ownership.
An estimate, prepared by an environmental engineering firm,
of approximately $211,000 has been received for site
reclamation work. The estimate includes contaminated soil
removal, tank removal, soil sampling, backfilling and
reporting. The Partnership has engaged legal counsel to
investigate what sources, if any, are available for
indemnification of these reclamation costs. At September
30, 1996, the Partnership has accrued a current liability of
$211,000 to reclaim the site.
In June, 1996, the Partnership entered into an Agreement to
sell the Automax in Minneapolis, Minnesota, to the lessee.
The lessee was unable to obtain acceptable financing and the
Agreement was terminated.
(4) Payable to AEI Fund Management -
AEI Fund Management, Inc. performs the administrative and
operating functions for the Partnership. The payable to AEI
Fund Management represents the balance due for those
services. This balance is non-interest bearing and
unsecured and is to be paid in the normal course of
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
For the nine months ended September 30, 1996 and 1995, the
Partnership recognized rental income of $425,786 and $417,294,
respectively. During the same periods, the Partnership earned
investment income of $11,389 and $10,799, respectively.
During the nine months ended September 30, 1996 and 1995,
the Partnership paid Partnership administration expenses to
affiliated parties of $73,059 and $72,141, 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 $272,342 and $47,415, 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. An accrual of
$211,000 was made in the third quarter of 1996 for estimated
environmental reclamation costs. Details of this expense are
discussed below.
In 1995, the Partnership recognized an impairment loss of
$116,252 on the Fair Muffler property located in Park Forest,
Illinois. The loss was the difference between book value at
December 31, 1995 of $241,252 and an independent appraisal which
valued the property at $125,000. The charge was recorded against
the carry amount of the land. The cost of the building and
equipment continue to be depreciated over the estimated useful
life.
The Fair Muffler 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. In addition, in August, 1996,
the Partnership received the results of an environmental soil
contamination investigation of the property. The investigation
revealed contamination of approximately 2,750 cubic yards
exceeding Tier 1 soil migration to Class II groundwater, which
will need to be remediated. The contamination has been
identified as petroleum constituents and is believed to have been
caused by underground storage tanks when the property was
operated as a gasoline station, which occurred prior to the
Partnership's ownership.
An estimate, prepared by an environmental engineering
firm, of approximately $211,000 has been received for site
reclamation work. The estimate includes contaminated soil
removal, tank removal, soil sampling, backfilling and reporting.
The Partnership has engaged legal counsel to investigate what
sources, if any, are available for indemnification of these
reclamation costs. At September 30, 1996, the Partnership has
accrued a current liability of $211,000 to reclaim the site.
As of September 30, 1996, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
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.
Liquidity and Capital Resources
During the nine months ended September 30, 1996, the
Partnership's cash balances increased $44,041 as the Partnership
distributed less cash to the Partners than it generated from
operating activities. Net cash provided by operating activities
increased from $350,999 in 1995 to $365,842 in 1996 mainly as a
result of net timing differences in the collection of payments
from the lessees and the payment of expenses by the Partnership.
In June, 1996, the Partnership entered into an Agreement
to sell the Automax in Minneapolis, Minnesota, to the lessee.
The lessee was unable to obtain acceptable financing and the
Agreement was terminated.
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. In no event shall the Partnership be obligated
to purchase Units if, in the sole discretion of the Managing
General Partner, such purchase would impair the capital or
operation of the Partnership.
On October 1, 1996, four Limited Partners redeemed a total
of 75 Partnership Units for $41,884 in accordance with the
Partnership Agreement. The Partnership acquired these Units
using Net Cash Flow from operations. In prior years, a total of
sixty-eight Limited Partners redeemed 680.8 Partnership Units for
$548,742. 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,
including those obligations associated with reclamation of
contaminated soil at the Fair Muffler property located in Park
Forest, Illinois, on both a short-term and long-term basis.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Partnership is a party or of which the Partnership's
property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits -
Description
27 Financial Data Schedule for period
ended September 30, 1996.
b. Reports filed on Form 8-K - None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: November 13, 1996 AEI Real Estate Fund 85-B
Limited Partnership
By: Net Lease Management 85-B, Inc.
Its: Managing General Partner
By: /s/ Robert P. Johnson
Robert P. Johnson
President
(Principal Executive Officer)
By: /s/ Mark E. Larson
Mark E. Larson
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000771677
<NAME> AEI REAL ESTATE FUND 85-B LTD PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 346,655
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 346,655
<PP&E> 4,667,739
<DEPRECIATION> (1,383,348)
<TOTAL-ASSETS> 3,631,046
<CURRENT-LIABILITIES> 411,795
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,219,251
<TOTAL-LIABILITY-AND-EQUITY> 3,631,046
<SALES> 0
<TOTAL-REVENUES> 437,175
<CGS> 0
<TOTAL-COSTS> 449,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,976)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,976)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.72)
</TABLE>
