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, 1997
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, 1997 were
$535,204.
As of February 28, 1998, there were 6,702.66 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 $6,702,660.
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 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 5 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.
Several of the leases provide the lessees with two 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)
The Fair Muffler property, located in Park Forest,
Illinois, is a one-story brick building of approximately 2,450
square feet on a 19,388 square foot parcel of land. It was
acquired in August, 1986 subject to a long-term triple net Lease
for 20 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. That
franchisee continued to operate the property until December,
1996. In January, 1997, it was leased on a month-to-month basis
to a car care operator for $2,600 per month.
In 1996, in anticipation of selling the property, the
Partnership conducted 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 in place when the property was operated as a
gasoline station, prior to the Partnership's ownership.
An estimate for site remediation work, which includes
contaminated soil removal, tank removal, soil sampling,
backfilling and reporting, of $211,000 was received from an
environmental engineering firm. The Partnership has engaged
legal counsel to investigate what sources, if any, are available
for indemnification of these reclamation costs. In the third
quarter of 1996, the Partnership accrued a current liability of
$211,000 to remediate the site. It has not been determined when
the reclamation work will begin or how long it will take to
complete. It is reasonably possible that the actual costs could
materially differ from the estimate.
The Partnership obtained an independent appraisal of the
property which showed a value of $125,000. In the fourth quarter
of 1995, 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.
Since 1995, the Partnership has not paid real estate taxes
on the Park Forest property while it was unsuccessfully appealing
the real estate tax valuation of the property. During this
period of time the Partnership accrued $128,958 of real estate
taxes, of which $86,399 was accrued as of December 31, 1996. In
1997, the taxing authority sold the property for unpaid taxes to
an unrelated third party. Since the tax liability exceeded the
appraised market value of the property, the Partnership did not
redeem the tax sale. Consequently, the Partnership reversed the
tax accrual resulting in a $86,399 credit to 1997 expenses.
Since the Partnership intends to allow the tax sale to be
completed, a charge to operations for an additional real estate
impairment of $117,823 was recognized in the third quarter of
1997, to write down the carrying value of the property to zero.
The third party who purchased the unpaid taxes has not filed a
petition for issuance of the tax deed and the Partnership remains
as the owner of record.
On February 17, 1997, the Partnership sold the Auto Max
property to an unrelated third party. The Partnership received
net sale proceeds of $411,993, which resulted in a net gain of
$109,147. At the time of sale, the cost and related accumulated
depreciation of the property was $388,800 and $85,954,
respectively.
On January 21, 1998, the Cheddar's restaurant was
destroyed by fire. The lessee is in the process of rebuilding
the restaurant and is planning on reopening in July, 1998. The
lessee had adequate insurance coverage to cover the cost of
rebuilding and the rental payments in the interim.
ITEM 1. DESCRIPTION OF BUSINESS. (Continued)
Major Tenants
During 1997, 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 72%
of the Partnership's total rental revenue in 1997. 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 1998 and future years. Any failure of these major tenants or
business concepts 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.
Year 2000
AEI Fund Management, Inc. (AEI) performs all management
services for the Partnership. AEI is currently analyzing its
computer hardware and software systems to determine what, if any,
resources need to be dedicated regarding Year 2000 issues. The
Partnership does not anticipate any significant operational
impact or incurring material costs as a result of AEI becoming
Year 2000 compliant.
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 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.
ITEM 2. DESCRIPTION OF PROPERTIES. (Continued)
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.
The following table is a summary of the properties that
the Partnership acquired and owned as of December 31, 1997.
Total Property Annual Annual
Purchase Acquisition Lease Rent Per
Property Date Costs Lessee Payment Sq. Ft.
Fair Muffler Pro Tech's Car
Park Forest, IL 8/14/86 $ 284,902 Care, Inc. $ 31,200 $ 13.25
Arby's Restaurant Select
Jackson, TN 10/14/86 $ 752,971 Beef VIII, Inc. $ 95,842 $ 30.88
All Tune & Lube Diana L. Franks &
Merrillville, IN 10/21/86 $ 304,432 Ernie R. Alverado $ 35,096 $ 15.18
Huntington
Denny's Restaurant Restaurants
Fort Worth, TX 10/31/86 $ 981,764 Group, Inc. $ 42,000 $ 10.66
Cheddar's Restaurant Phaedra
Fort Wayne, IN 12/31/86 $1,480,553 Partners Ltd. $192,920 $ 25.22
Arby's Restaurant Circle Restaurant
Colorado Springs, CO 3/31/87 $ 447,177 Company $ 40,000 $ 26.85
Children's World
Daycare Center Children's World
Sterling Heights, MI Learning
(16.3486%) 11/25/87 $ 143,391 Centers, Inc. $ 20,919 $ 20.72
The property listed above with a partial ownership
percentage is owned with AEI Real Estate Fund XVI Limited
Partnership, an affiliate of the Partnership. 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 20 years except for the Denny's
restaurant (5 years), the All Tune & Lube (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 10 years.
ITEM 2. DESCRIPTION OF PROPERTIES. (Continued)
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.
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.
During the last five years, all properties were 100
percent occupied by the lessees.
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, 1997, there were 723 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. In no event shall the Partnership be obligated
to purchase Units if, in the sole discretion of the Managing
General Partner, such purchase would impair the capital or
operation of the Partnership.
During 1997, five Limited Partners redeemed a total of 33
Partnership Units for $15,895 accordance with the Partnership
Agreement. In prior years, a total of seventy-two Limited
Partners redeemed 755.84 Partnership Units for $590,626. The
redemptions increase the remaining Limited Partners' ownership
interest in the Partnership.
Cash distributions of $7,461 and $4,444 were made to the
General Partners and $722,723 and $398,102 were made to the
Limited Partners in 1997 and 1996, 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.
ITEM 5.MARKET FOR THE REGISTRANT'S PARTNERSHlP UNITS AND RELATED
SECURITY HOLDER MATTERS. (Continued)
As part of the Limited Partner distributions discussed
above, the Partnership distributed $400,000 of proceeds from the
sale of property in 1997. 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, 1997 and 1996, the
Partnership recognized rental income of $515,207 and $587,057,
respectively. During the same periods, the Partnership earned
investment income of $19,997 and $14,966, respectively. In 1997,
rental income decreased mainly as a result of the sale of the
Auto Max property discussed below. The decrease in rental income
was partially offset by additional investment income earned on
the net proceeds from the property sale.
During the years ended December 31, 1997 and 1996, the
Partnership paid Partnership administration expenses to
affiliated parties of $96,838 and $93,159, 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 $(63,439) and $304,514, 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 decrease
in these expenses in 1997 relates to the Park Forest property
real estate tax and reclamation costs discussed below.
The Fair Muffler property, located in Park Forest,
Illinois, is a one-story brick building of approximately 2,450
square feet on a 19,388 square foot parcel of land. It was
acquired in August, 1986 subject to a long-term triple net Lease
for 20 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. That
franchisee continued to operate the property until December,
1996. In January, 1997, it was leased on a month-to-month basis
to a car care operator for $2,600 per month.
In 1996, in anticipation of selling the property, the
Partnership conducted 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 in place when the property was operated as a
gasoline station, prior to the Partnership's ownership.
An estimate for site remediation work, which includes
contaminated soil removal, tank removal, soil sampling,
backfilling and reporting, of $211,000 was received from an
environmental engineering firm. The Partnership has engaged
legal counsel to investigate what sources, if any, are available
for indemnification of these reclamation costs. In the third
quarter of 1996, the Partnership accrued a current liability of
$211,000 to remediate the site. It has not been determined when
the reclamation work will begin or how long it will take to
complete. It is reasonably possible that the actual costs could
materially differ from the estimate.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
The Partnership obtained an independent appraisal of the
property which showed a value of $125,000. In the fourth quarter
of 1995, 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.
Since 1995, the Partnership has not paid real estate taxes
on the Park Forest property while it was unsuccessfully appealing
the real estate tax valuation of the property. During this
period of time the Partnership accrued $128,958 of real estate
taxes, of which $86,399 was accrued as of December 31, 1996. In
1997, the taxing authority sold the property for unpaid taxes to
an unrelated third party. Since the tax liability exceeded the
appraised market value of the property, the Partnership did not
redeem the tax sale. Consequently, the Partnership reversed the
tax accrual resulting in a $86,399 credit to 1997 expenses.
Since the Partnership intends to allow the tax sale to be
completed, a charge to operations for an additional real estate
impairment of $117,823 was recognized in the third quarter of
1997, to write down the carrying value of the property to zero.
The third party who purchased the unpaid taxes has not filed a
petition for issuance of the tax deed and the Partnership remains
as the owner of record.
On January 21, 1998, the Cheddar's restaurant was
destroyed by fire. The lessee is in the process of rebuilding
the restaurant and is planning on reopening in July, 1998. The
lessee had adequate insurance coverage to cover the cost of
rebuilding and the rental payments in the interim.
As of December 31, 1997, the Partnership's annualized cash
distribution rate was 5.0%, 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.
AEI Fund Management, Inc. (AEI) performs all management
services for the Partnership. AEI is currently analyzing its
computer hardware and software systems to determine what, if any,
resources need to be dedicated regarding Year 2000 issues. The
Partnership does not anticipate any significant operational
impact or incurring material costs as a result of AEI becoming
Year 2000 compliant.
Liquidity and Capital Resources
During 1997, the Partnership's cash balances increased
$33,413 as the Partnership distributed less cash to the Partners
than it generated from operating and investing activities. Net
cash provided by operating activities decreased from $461,765 in
1996 to $390,581 in 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
On February 17, 1997, the Partnership sold the Auto Max
property to an unrelated third party. The Partnership received
net sale proceeds of $411,993 which resulted in a net gain of
$109,147. At the time of sale, the cost and related accumulated
depreciation of the property was $388,800 and $85,954,
respectively. In April, 1997, the Partnership distributed
$404,040 of the net sale proceeds to the Limited and General
Partners, which represented a return of capital of $59.31 per
Limited Partnership Unit.
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. Redemption payments
are paid to redeeming Partners in the fourth quarter of each
year. During 1996, the Partnership made distributions at a 6.27%
rate which resulted in distributions to the Partners of $402,123.
In April, 1997, the Partnership distributed net sale proceeds of
$404,040 to the Partners as a special distribution, which reduced
the Limited Partners' Adjusted Capital Contribution. Effective
April 1, 1997, the Partnership made distributions at a 5.0% rate
on the reduced capital balance, which resulted in regular
distributions to the Partners of $325,983 for 1997.
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 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.
During 1997, five Limited Partners redeemed a total of 33
Partnership Units for $15,895 in accordance with the Partnership
Agreement. The Partnership acquired these Units using Net Cash
Flow from operations. In prior years, a total of seventy-two
Limited Partners redeemed 755.84 Partnership Units for $590,626.
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 remediation of
contaminated soil at the Fair Muffler property in Park Forest,
Illinois, 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
Report of Independent Auditors
Balance Sheet as of December 31, 1997 and 1996
Statements for the Years Ended December 31, 1997 and 1996:
Income
Cash Flows
Changes in Partners' Capital
Notes to Financial Statements
REPORT OF INDEPENDENT AUDITORS
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, 1997 and 1996 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 31,1997 and 1996, 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 4, 1998 Certified Public Accountants
<PAGE>
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31
ASSETS
1997 1996
CURRENT ASSETS:
Cash and Cash Equivalents $ 333,257 $ 299,844
Receivables 26,817 6,780
----------- -----------
Total Current Assets 360,074 306,624
----------- -----------
INVESTMENTS IN REAL ESTATE:
Land 1,446,391 1,667,493
Buildings and Equipment 2,714,725 3,000,246
Accumulated Depreciation (1,404,178) (1,414,181)
----------- -----------
Net Investments in Real Estate 2,756,938 3,253,558
----------- -----------
Total Assets $ 3,117,012 $ 3,560,182
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 8,546 $ 99,733
Land Remediation Estimate 211,000 211,000
Distributions Payable 68,211 91,293
----------- -----------
Total Current Liabilities 287,757 402,026
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partners (36,304) (33,015)
Limited Partners, $1,000 Unit value;
7,500 Units authorized and issued;
6,711 and 6,744 outstanding in 1997
and 1996, respectively 2,865,559 3,191,171
----------- -----------
Total Partners' Capital 2,829,255 3,158,156
----------- -----------
Total Liabilities and Partners' Capital $ 3,117,012 $ 3,560,182
=========== ===========
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 YEARS ENDED DECEMBER 31
1997 1996
INCOME:
Rent $ 515,207 $ 587,057
Investment Income 19,997 14,966
----------- -----------
Total Income 535,204 602,023
----------- -----------
EXPENSES:
Partnership Administration - Affiliates 96,838 93,159
Partnership Administration and Property
Management - Unrelated Parties (Note 4) (63,439) 304,514
Depreciation 75,951 134,583
Real Estate Impairment (Note 4) 117,823 0
----------- -----------
Total Expenses 227,173 532,256
----------- -----------
OPERATING INCOME 308,031 69,767
GAIN ON SALE OF REAL ESTATE 109,147 0
----------- -----------
NET INCOME $ 417,178 $ 69,767
=========== ===========
NET INCOME ALLOCATED:
General Partners $ 4,172 $ 698
Limited Partners 413,006 69,069
----------- -----------
$ 417,178 $ 69,767
=========== ===========
NET INCOME PER LIMITED PARTNERSHIP UNIT
(6,736 and 6,800 weighted average Units outstanding
in 1997 and 1996, respectively) $ 61.31 $ 10.16
=========== ===========
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 YEARS ENDED DECEMBER 31
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 417,178 $ 69,767
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating Activities:
Depreciation 75,951 134,583
Real Estate Impairment 117,823 0
Gain on Sale of Real Estate (109,147) 0
Increase in Receivables (20,037) (6,731)
Increase (Decrease) in Payable to
AEI Fund Management, Inc. (91,187) 53,146
Increase in Land Remediation Estimate 0 211,000
----------- -----------
Total Adjustments (26,597) 391,998
----------- -----------
Net Cash Provided By
Operating Activities 390,581 461,765
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Real Estate 411,993 0
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Distributions Payable (23,082) (20,105)
Distributions to Partners (730,023) (402,123)
Redemption Payments (16,056) (42,307)
----------- -----------
Net Cash Used For
Financing Activities (769,161) (464,535)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 33,413 (2,770)
CASH AND CASH EQUIVALENTS, beginning of period 299,844 302,614
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 333,257 $ 299,844
=========== ===========
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 YEARS ENDED DECEMBER 31
Limited
Partnership
General Limited Units
Partners Partners Total Outstanding
BALANCE, December 31, 1995 $ (29,269) $ 3,562,088 $ 3,532,819 6,819.00
Distributions (4,021) (398,102) (402,123)
Redemption Payments (423) (41,884) (42,307) (75.04)
Net Income 698 69,069 69,767
--------- ----------- ----------- -----------
BALANCE, December 31, 1996 (33,015) 3,191,171 3,158,156 6,743.96
Distributions (7,300) (722,723) (730,023)
Redemption Payments (161) (15,895) (16,056) (33.00)
Net Income 4,172 413,006 417,178
--------- ----------- ----------- -----------
BALANCE, December 31, 1997 $ (36,304) $ 2,865,559 $ 2,829,255 6,710.96
========= =========== =========== ===========
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, 1997 AND 1996
(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, 1997 AND 1996
(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 -
Newly Issued Accounting Standards
In June, 1997, Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" was
approved for issuance for fiscal years beginning after
December 15, 1997. The Partnership adopted this
Statement in the fourth quarter of 1997. The effect of
this Statement has been determined that net income/loss
for financial statements and comprehensive income/loss is
primarily the same in all material respects.
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.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) Summary of Significant Accounting Policies - (Continued)
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.
The Partnership regularly assesses whether market events
and conditions indicate that it is reasonably possible to
recover the carrying amounts of its investments in real
estate from future operations and sales. A change in
those market events and conditions could have a material
effect on the carrying amount of its real estate
Cash Concentrations of Credit Risk
At times throughout the year, the Partnership's cash
deposited in financial institutions may exceed FDIC
insurance limits.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash
equivalents may include cash in checking, cash invested
in money market accounts, certificates of deposit,
federal agency notes and commercial paper with a term of
three months or less.
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.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) Summary of Significant Accounting Policies - (Continued)
Real estate is recorded at the lower of cost or estimated
net realizable value. The Financial Accounting Standards
Board issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" which was effective for the
Partnership's fiscal year ended December 31, 1996. 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.
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.
(3) Related Party Transactions -
The Partnership owns a 16.3486% interest in the Children's
World property. The remaining interest is owned by AEI Real
Estate Fund XVI Limited Partnership, an affiliate of the
Partnership. 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 financial statements reflect only this Partnership's
percentage share of the property's land, building and
equipment, liabilities, revenues and expenses.
AEI and NLM received the following compensation and
reimbursements for costs and expenses from the Partnership:
Total Incurred by the Partnership
for the Years Ended December 31
1997 1996
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. $ 96,838 $ 93,159
========= =========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(3) Related Party Transactions - (Continued)
Total Incurred by the Partnership
for the Years Ended December 31
1997 1996
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. The 1997 amount includes an
$86,399 credit to expenses for real estate taxes
accrued in a prior year, as further discussed in
Note 4. The 1996 amount includes $211,000
of estimated remediation costs further discussed
in Note 4. $ (63,439) $ 304,514
========== ==========
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.
(4) Investments in Real Estate -
The Partnership leases its properties to various tenants
through 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 20 years
except for the Denny's restaurant (5 years), the All Tune &
Lube (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 10 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.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(4) Investments in Real Estate - (Continued)
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
was constructed in 1985. The Children's World was
constructed 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, Colorado 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, 1997 are as follows:
Buildings and Accumulated
Property Land Equipment Total Depreciation
Fair Muffler, Park Forest, IL $ 0 $ 50,828 $ 50,828 $ 50,828
Arby's, Jackson, TN 178,733 574,238 752,971 290,082
All Tune & Lube,
Merrillville, IN 84,174 220,258 304,432 91,935
Denny's, Fort Worth, TX 525,850 455,914 981,764 215,327
Cheddar's, Fort Wayne, IN 511,427 969,126 1,480,553 529,661
Arby's, Colorado Springs, CO 119,054 328,123 447,177 182,757
Children's World,
Sterling Heights, MI 27,153 116,238 143,391 43,588
---------- ---------- ---------- ----------
$1,446,391 $2,714,725 $4,161,116 $1,404,178
========== ========== ========== ==========
The Fair Muffler property, located in Park Forest, Illinois,
is a one-story brick building of approximately 2,450 square
feet on a 19,388 square foot parcel of land. It was
acquired in August, 1986 subject to a long-term triple net
Lease for 20 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. That franchisee continued to operate the
property until December, 1996. In January, 1997, it was
leased on a month-to-month basis to a car care operator for
$2,600 per month.
In 1996, in anticipation of selling the property, the
Partnership conducted 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 in place when the
property was operated as a gasoline station, prior to the
Partnership's ownership.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(4) Investments in Real Estate - (Continued)
An estimate for site remediation work, which includes
contaminated soil removal, tank removal, soil sampling,
backfilling and reporting, of $211,000 was received from an
environmental engineering firm. The Partnership has engaged
legal counsel to investigate what sources, if any, are
available for indemnification of these reclamation costs.
In the third quarter of 1996, the Partnership accrued a
current liability of $211,000 to remediate the site. It has
not been determined when the reclamation work will begin or
how long it will take to complete. It is reasonably
possible that the actual costs could materially differ from
the estimate.
The Partnership obtained an independent appraisal of the
property which showed a value of $125,000. In the fourth
quarter of 1995, 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.
Since 1995, the Partnership has not paid real estate taxes
on the Park Forest property while it was unsuccessfully
appealing the real estate tax valuation of the property.
During this period of time the Partnership accrued $128,958
of real estate taxes, of which $86,399 was accrued as of
December 31, 1996. In 1997, the taxing authority sold the
property for unpaid taxes to an unrelated third party.
Since the tax liability exceeded the appraised market value
of the property, the Partnership did not redeem the tax
sale. Consequently, the Partnership reversed the tax
accrual resulting in a $86,399 credit to 1997 expenses.
Since the Partnership intends to allow the tax sale to be
completed, a charge to operations for an additional real
estate impairment of $117,823 was recognized in the third
quarter of 1997, to write down the carrying value of the
property to zero. The third party who purchased the unpaid
taxes has not filed a petition for issuance of the tax deed
and the Partnership remains as the owner of record.
On February 17, 1997, the Partnership sold the Auto Max
property to an unrelated third party. The Partnership
received net sale proceeds of $411,993, which resulted in a
net gain of $109,147. At the time of sale, the cost and
related accumulated depreciation of the property was
$388,800 and $85,954, respectively. In April, 1997, the
Partnership distributed $404,040 of the net sale proceeds to
the Limited and General Partners, which represented a return
of capital of $59.31 per Limited Partnership Unit.
On January 21, 1998, the Cheddar's restaurant was destroyed
by fire. The lessee is in the process of rebuilding the
restaurant and is planning on reopening in July, 1998. The
lessee had adequate insurance coverage to cover the cost of
rebuilding and the rental payments in the interim.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(4) Investments in Real Estate - (Continued)
The minimum future rentals on the Leases for years
subsequent to December 31, 1997 are as follows:
1998 $ 427,713
1999 429,154
2000 404,334
2001 391,681
2002 349,681
Thereafter 1,441,577
----------
$3,444,140
==========
In 1997 and 1996, the Partnership recognized contingent
rents of $51,067 and $32,008, respectively.
(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:
1997 1996
Tenants Industry
Phaedra Partners, LTD Restaurant $ 192,920 $ 192,920
Select Beef VIII, Inc. Restaurant 112,921 118,456
Huntington Restaurants
Group, Inc. Restaurant 64,004 N/A
L & H Restaurant Corp. Restaurant N/A 90,000
J.D. Enterprises of
Minnesota, Inc. Automotive N/A 62,475
---------- ----------
Aggregate rent revenue of major tenants $ 369,845 $ 463,851
========== ==========
Aggregate rent revenue of major tenants as
a percentage of total rent revenue 72% 79%
========== ==========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(6) Partners' Capital -
Cash distributions of $7,461 and $4,444 were made to the
General Partners and $722,723 and $398,102 were made to the
Limited Partners for the years ended December 31, 1997 and
1996, respectively. The Limited Partners' distributions
represent $107.29 and $58.54 per Limited Partnership Unit
outstanding using 6,736 and 6,800 weighted average Units in
1997 and 1996, respectively. The distributions represent
$58.94 and $3.95 per Unit of Net Income and $48.35 and
$54.59 per Unit of return of contributed capital in 1997 and
1996, respectively.
As part of the Limited Partner distributions discussed
above, the Partnership distributed $400,000 of proceeds from
the sale of property in 1997. The distribution reduced the
Limited Partners' Adjusted Capital Contributions.
Distributions of Net Cash Flow to the General Partners
during 1997 and 1996 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 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.
During 1997, five Limited Partners redeemed a total of 33
Partnership Units for $15,895 in accordance with the
Partnership Agreement. The Partnership acquired these Units
using Net Cash Flow from operations. In 1996, four Limited
Partners redeemed a total of 75.04 Partnership Units for
$41,884. 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
$886.80 per original $1,000 invested.
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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:
1997 1996
Net Income for Financial
Reporting Purposes $ 417,178 $ 69,767
Depreciation for Tax Purposes
(Over) Under Depreciation for
Financial Reporting Purposes (24,315) 26,257
Income Accrued for Tax Purposes
Over (Under) Income for Financial
Reporting Purposes (11,800) 1,400
Property Expenses for Tax Purposes
Under Expenses for Financial
Reporting Purposes 0 211,000
Real Estate Impairment Loss
Not Recognized for
Tax Purposes 117,823 0
Gain on Sale of Real Estate for Tax
Purposes Over Gain for Financial
Reporting Purposes 24,079 0
----------- -----------
Taxable Income to Partners $ 522,965 $ 308,424
=========== ===========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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:
1997 1996
Partners' Capital for
Financial Reporting Purposes $2,829,255 $3,158,156
Adjusted Tax Basis of Investments
in Real Estate Over (Under) Net
Investments in Real Estate for
Financial Reporting Purposes 86,949 (30,639)
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 0 11,800
Property Expenses for Tax Purposes
Under Expenses for Financial
Reporting Purposes 211,000 211,000
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 $ 4,129,370 $ 4,352,483
=========== ===========
AEI REAL ESTATE FUND 85-B LIMITED PARTNERSHlP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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 for
the years ended December 31:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash $ 321 $ 321 $ 456 $ 456
Money Market Funds 332,936 332,936 299,388 299,388
--------- --------- --------- ---------
Total Cash and
Cash Equivalents $ 333,257 $ 333,257 $ 299,844 $ 299,844
========= ========= ========= =========
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 53, 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, 1999. 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 Securities, Inc.
(formerly 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 sixteen other limited partnerships.
Mark E. Larson, age 45, is Executive Vice President,
Treasurer and Chief Financial Officer and has been elected to
continue in these positions until March, 1999. 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, 1999. 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.
The following table sets forth information pertaining to
the ownership of the Units by each person known by the
Partnership to beneficially own 5% or more of the Units, by each
General Partner, and by each officer or director of the Managing
General Partner as of February 28, 1998:
Name and Address Number of Percent
of Beneficial Owner Units Held of Class
Net Lease Management 85-B, Inc. 0 0%
1300 Minnesota World Trade Center
30 East 7th Street, St. Paul, Minnesota 55101
Robert P. Johnson 8.3 *
1300 Minnesota World Trade Center
30 East 7th Street, St. Paul, Minnesota 55101
Mark E. Larson 0 0%
1300 Minnesota World Trade Center
30 East 7th Street, St. Paul, Minnesota 55101
* Less than 1%
The persons set forth in the preceding table hold sole voting
power and power of disposition with respect to all of the Units
set forth opposite their names. The General Partners know of no
holders of more than 5% of the outstanding 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 19 and 20, 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
10.1 Purchase Agreement dated November
20, 1996 between the Partnership, AEI
Real Estate Fund 85-B Limited
Partnership, and Madan Estates relating
to the property at 4501 Central Avenue
N.E., Columbia Heights, Minnesota
(incorporated by reference to Exhibit
10.1 of Form 10-QSB filed with the
Commission on May 9, 1997).
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A.
(Continued)
A. Exhibits -
Description
27 Financial Data Schedule
for year ended December 31, 1997.
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 23, 1998 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 23, 1998
Robert P. Johnson and Sole Director of Managing General
Partner
/s/ Mark E. Larson Executive Vice President, Treasurer March 23, 1998
Mark E. Larson and Chief Financial Officer
(Principal Accounting Officer)
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<CIK> 0000771677
<NAME> AEI REAL ESTATE FUND 85B LTD PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 333,257
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<RECEIVABLES> 26,817
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<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,829,255
<TOTAL-LIABILITY-AND-EQUITY> 3,117,012
<SALES> 0
<TOTAL-REVENUES> 535,204
<CGS> 0
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<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 417,178
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