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AEI REAL ESTATE FUND 86-A LIMITED PARTNERSHIP
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AEI REAL ESTATE FUND 86-A LIMITED PARTNERSHIP
1300 Minnesota World Trade Center
30 East 7th Street
St. Paul, Minnesota 55101
CONSENT STATEMENT
For Amendment to Limited Partnership Agreement
to Permit Reinvestment of Sales Proceeds
THIS CONSENT STATEMENT IS BEING MAILED TO INVESTORS ON OR
ABOUT JULY 31, 1996. TO BE COUNTED, A PROPERLY SIGNED CONSENT FORM
MUST BE RECEIVED BY THE MANAGING GENERAL PARTNER AT 1300 MINNESOTA
WORLD TRADE CENTER, 30 EAST 7TH STREET, ST. PAUL, MINNESOTA 55101,
ON OR BEFORE AUGUST 31, 1996.
AEI Fund Management 86-A, Inc., the managing general partner
(the "Managing General Partner"), of AEI Real Estate Fund 86-A
Limited Partnership (the "Partnership") is recommending an
amendment (the "Amendment") to the Partnership's Limited
Partnership Agreement (the "Partnership Agreement") to enable the
Partnership to reinvest the Net Proceeds of Sale of Partnership
properties until the final liquidation of the Partnership. The
Partnership Agreement was previously amended in December 1989 to
provide for a 60 month reinvestment period, which period has
expired. Approval of the Amendment will enable the Partnership to
reinvest a portion of the Net Proceeds of Sale resulting from sale
of three of the Partnership's properties, and any other sale that
occurs prior to the liquidation of this Partnership.
The proposed Amendment will affect your investment in the
Partnership in a number of ways and involves a number of Risks,
including the following:
Investors will not receive the cash generated from
property sales that is reinvested until final liquidation of
the Partnership and will have only limited rights to present
their units for repurchase before then;
Although it is not intended that the Amendment will
extend the life of the Partnership, it may be more difficult
for the Partnership to resell properties, or to dispose of all
Partnership properties, within the original intended life of
the Partnership.
The General Partners may have a conflict of interest in
proposing the Amendment because they will receive more
aggregate reimbursements from the Partnership if proceeds are
reinvested than they would if proceeds were not reinvested.
Proceeds will be reinvested in additional triple net
leased commercial properties that are subject to many of the
same risks of nonperformance, (including risks related to
changing market values, tenant defaults, difficulty of resale,
among others) as the original properties;
Investors will be taxed on the full amount of gain
generated from sale of properties but will receive
distributions designed to cover potential tax effects at an
assumed average blended tax rate that may not match their tax
obligations;
Investors will not be able to review in advance the
properties in which proceeds are reinvested;
The Managing General Partner believes, as set forth in more
detail below, that reinvestment will facilitate additional rental
income and gains on sale without incurring the expenses of capital
raising. For such reasons, the Managing General Partner recommends
a vote "FOR" the proposed Amendment.
SUMMARY
The following summary is qualified in its entirety by the more
detailed discussion of the proposed Amendment set forth herein and
in the text of the proposed Amendment.
The Amendment. The Managing General Partner is proposing an
Amendment to Section 5.4 of the Partnership Agreement that would
eliminate the requirement that the Partnership distribute all Net
Proceeds of Sale of properties and allow reinvestment of such
proceeds until final liquidation of the Partnership.
Reasons for the Amendment. The Partnership holds a number
of properties which may be sold prior to final liquidation of
the Partnership due to favorable market conditions, exercise of
lease purchase options, tenant restructuring or other reasons.
Although the Managing General Partner cannot guarantee returns,
it believes it can continue to generate favorable returns to
Investors by reinvestment of such proceeds in additional
properties. The Partnership sold its ownership in three of its
properties; an Applebee's restaurant in Ft. Myers, Florida, for a
net cash gain of $467,203, its ownership interest of a 20%
interest in a Cheddar's restaurant in Columbus, Ohio, for a net
cash gain of $8,115, and an office building in Kearney, Nebraska
for a net cash loss of $104,123. The Partnership would like to
reinvest the proceeds therefrom.
Risks of the Amendment. The Amendment will present several
risks, including the following:
1. Deferred Cash Distributions. Rather than distributing all
net cash proceeds on sale of a property, the Amendment will allow
the Partnership (if the Managing General Partner determines, in
its discretion, that it is advantageous to the Partnership) to
reinvest such proceeds in new properties, (subject to a
continuing obligation to distribute to limited partners
("Investors") as much cash proceeds as is necessary to pay the
income tax liability (at an assumed average blended tax rate)
generated by the sale of property). Accordingly, distribution of
cash on sale will likely be delayed until the Managing General
Partner determines to liquidate the Partnership. There can be no
assurance that distributions will be adequate to cover income tax
liabilities generated by the gain on sale of any properties, or
that reinvested proceeds will generate significant returns.
2. Risk of Extension of Partnership Life. The General Partners
intend to reinvest proceeds from sale of properties in properties
that will be sold again within the next few years. Although the
General Partners do not intend to extend the life of the
Partnership through the Amendment or reinvestment of sales
proceeds, it may be more difficult for the Partnership to resell
properties, or to dispose of all Partnership properties, within
the original intended life of the Partnership. Accordingly, the
Amendment may have the effect of extending the life of the
Partnership for several years and delaying the ultimate
distribution of its assets upon liquidation.
3. Real Estate Risks on Reinvestment. Proceeds will be
reinvested in additional triple net leased commercial properties
that are subject to the same risks of performance or
nonperformance as the properties originally acquired by the
Partnership. The value of real estate is subject to a number of
factors beyond the control of the Partnership, including national
economic conditions, changes in interest rates, changes in real
estate taxes, governmental rules and regulations and competition
from other forms of financing. If adverse changes in these
general conditions negatively affect market value, the final
disposition of the property, and the distribution of cash to
investors, may be delayed or the disposition may result in a
loss, or both. The value of properties in which the fund will
invest will be effected by the financial condition of the tenant.
If a tenant is unable to perform its lease obligations, the
Partnership may not be able to sell the property and may be
forced to sell the property at a loss. Further, in the event of
a bankruptcy of a tenant, the Partnership might not be able to
obtain possession of the property for a considerable period of
time.
4. Undesignated Properties. Investors will not be able to
review in advance the properties in which proceeds are
reinvested.
5. General Partner Conflicts of Interest. The Managing General
Partner will be reimbursed for the costs it incurs, including
costs of its personnel, in reinvesting the proceeds and managing
the properties in which the proceeds are reinvested. Such
reimbursements will include the salaries of personnel of the
General Partner during the time they spend on such activities,
plus a small portion (based on hours of employees spent on
partnership activies and the assets of the partnership as
compared to all partnerships the General Partners manage) of
other overhead, such as rental expense, of the General Partners.
REASONS FOR AND EFFECTS OF THE AMENDMENT
General
If Investors approve the Amendment of the Partnership
Agreement, the Partnership would have the opportunity, upon the
sale or other disposition of properties which it currently owns
or which may be acquired, to reinvest the Net Proceeds of Sale in
additional triple net leased properties. Under the original
terms of the Partnership Agreement, reinvestment of the Net
Proceeds of Sale from the sale of properties was limited to a
period of 24 months, which expired July 9, 1988. In October
1989, the Partnership Agreement was amended to allow for a 60
month period for reinvestment of Net Proceeds of Sale, which
expired July 9, 1991. By consenting to the Amendment of the
Partnership Agreement, Investors would permit the Partnership to
acquire new properties with the Net Proceeds of Sale from the
sale of the Applebee's, Cheddar's and office building properties
(net of any distributions to Investors) or any other sale of
Partnership property that occurs prior to the final liquidation
of the Partnership.
The Amendment is not intended to extend the life of the
Partnership. The Prospectus pursuant to which the units of
limited partnership interest were sold indicated that the General
Partners expected that most of the properties would be sold or
refinanced eight to twelve years after acquisition. The
Applebee's property described below was acquired in 1988 and it
remains the intention to sell the properties in which sale
proceeds are reinvested, depending market conditions and the
benefits of continued ownership, by the year 2000.
The Managing General Partner believes that it can generate
favorable returns through the investment of sale proceeds in
newly contructed properties that it purchases at construction
cost and resells within a few years. The Managing General
Partner believes that, in most cases, because the owner is
compensated for the risk of development and contruction through
increase in market value, the market value of properties will
exceed the cost of development. Because no commissions will be
paid in connection with reinvestment, the entire amount of
reinvested proceeds can be applied to the purchase price and
expenses associated with acquisition of newly acquired
properties. Further, the Managing General Partner believes that,
if allowed to reinvest the Net Proceeds of Sale (after a
distribution to Investors to cover income taxes in accordance
with the Partnership Agreement), it can acquire properties that
will generate attractive net rental income for the Partnership
during the period they are held. Recent acquisitions by the
General Partners for other real estate limited partnerships that
have investment objectives substantially identical to the
Partnership have produced what the General Partners believe are
favorable rental rates. No assurances can be given, however,
that a property acquired by the Partnership will produce similar
rentals, that such rentals will not be interrupted by events
outside the Managing General Partners' control, or that the
market value of any properties acquired will exceed their cost
immediately after acquisition or within the several years the
Partnership proposes to hold the properties.
The Managing General Partner of the Partnership is currently
evaluating a number of properties for acquisition. Affilates of
the Managing General Partners manage eleven public and eleven
private real estate partnerships and have developed relationships
with the companies that lease properties from such other
partnerships that cause them to send proposals for similar
properties to the General Partners. The Managing General Partner
will not be obligated to obtain the consent of Investors as to
the type of property acquired if this Amendment is approved.
Nevertheless, any property acquired will comply with the
investment objectives and policies set forth in the Prospectus
pursuant to which the Units were initially offered. Any property
acquired will be an existing commercial property that will be
acquired on a debt-free basis and will likely be leased to a
single tenant pursuant to a triple-net lease in the franchise
restaurant industry. No property will be acquired from the
General Partners or their Affiliates. There can, however, be no
assurance that favorable returns will be achieved.
Sale of Properties
The Amendment is being proposed at this time to facilitate
reinvestment of Net Proceeds of Sale of an Applebee's restaurant
in Ft. Myers, Florida, a Cheddar's restaurant in Columbus, Ohio
and an office building in Kearney, Nebraska. The Partnership
purchased the Applebee's restaurant property on February 1, 1988.
The property was leased to Apple South, Inc. under a 20-year, non-
cancelable triple-net lease agreement. The total cost of the
property to the Partnership was $1,179,405. The lease agreement
provided Apple South, Inc. with an option to purchase the
property after the seventh lease year. The purchase price was
the greater of a) $1,170,000 increased by 5% per annum per lease
year, or b) the average rent paid by the lessee over the
immediately preceding two year period divided by eleven percent,
or c) the fair market value of the property thirty days prior to
the time of closing.
Apple South, Inc. exercised that option by notifying the
Partnership and the sale of the property closed on July 28, 1995.
The Partnership received Net Proceeds of Sale of $1,646,608 which
resulted in a net cash gain on sale of $467,203. The
Partnership's adjusted basis in the property, after depreciation,
was $978,299. Accordingly, the sale of the property generated a
taxable gain of $668,309, or $90.98 per outstanding limited
partnership unit.
The Partnership purchased a 20% interest in the Cheddar's
restaurant property on June 7, 1990. The remaining interest in
the property was purchased by AEI Real Estate Fund XVIII Limited
Partnership, an affiliate of the Partnership. The property was
leased to Heartland Restaurant Corporation under a 20-year, non-
cancelable triple-net lease agreement. The total cost of the
property to the Partnership was $306,711. On July 6, 1995, the
property was sold to Heartland Restaurant Corporation. The
Partnership received Net Proceeds of Sale of $314,826 which
resulted in a net cash gain on sale of $8,115. The Partnership's
adjusted basis in the property, after depreciation, was $269,419.
Accordingly, the sale of the property generated a taxable gain of
$45,407, or $6.24 per outstanding limited partnership unit.
The Partnership purchased the office building on December
13, 1986. The total cost was $434,623. The property was leased
to Myron Andersen Construction, Inc. under a 10-year
noncancellable triple-net Lease Agreement. In July, 1992, it
became apparent that Myron Andersen Construction, Inc. would not
be able to comply with the terms of the Lease Agreement and the
Partnership replaced them with another lessee who, in 1993, filed
for reorganization. Since 1993, the Partnership has had the
property for sale or lease.
On April 20, 1996, the property was sold to Sports West,
L.L.C. The Partnership received net proceeds of sale of
approximately $330,500 which resulted in a net cash loss of
approximately $104,123. The Partnership's adjusted basis in the
property, after depreciation was $311,500. Accordingly, the sale
of the property generated a taxable gain of approximately
$19,000, or $2.63 per outstanding limited partnership unit.
The Partnership has distributed approximately $263,000, or
approximately $36 per outstanding Limited Partnership Unit, of
the Net Proceeds of Sale to cover income tax liabilities
generated by the sales. The distribution of the Net Proceeds of
Sale were made in the third and fourth quarter of 1995 and the
first quarter of 1996 as part of the regular quarterly
distribution, with the entire third quarter distribution of
approximately $142,000 representing a distribution of Net
Proceeds of Sale. The distribution of Net Proceeds on Sale
reduced the Adjusted Capital Contributions of Investors by $36
per outstanding limited partnership unit. The remainder of the
proceeds would be reinvested in new properties, if the Investors
approve the Amendment.
In the event Investors do not approve the Amendment,
Investors will receive a distribution of approximately
$2,200,000, or approximately $305 per outstanding limited
partnership unit, from sale of the Applebee's, Cheddar's and
office building properties. The regular quarterly distribution
for the third quarter of 1995 of approximately $142,000, $82,000
of the fourth quarter of 1995 and $39,000 of the first quarter of
1996 was a distribution of Net Proceeds of Sale. The balance of
the Net Proceeds of Sale ($1,937,000) to be distributed will be
paid in the third quarter of 1996. The Net Proceeds of Sale not
distributed will be retained by the Partnership as working
capital reserves. The distribution of Net Proceeds on Sale would
reduce the Adjusted Capital Contributions of Investors by $305
per outstanding limited partnership unit.
The Applebee's, Cheddar's and office building generated
rental revenues of $197,010 during the year ended December 31,
1994. If the proceeds from its sale are distributed, rather than
reinvested, future Partnership revenues, and therefore cash
distributions to investors, will be reduced by a corresponding
amount.
Risks of Reinvestment
The reinvestment of proceeds from the sale of these
properties, like the original investment in properties by the
Partnership, is subject to a number of risks, including the
following:
Investors will not be able to review in advance the
properties in which proceeds are reinvested;
Investors will not receive the cash generated from
property sales until final liquidation of the Partnership
and will have only limited rights to present their units for
repurchase before then;
Investors will be taxed on the full amount of gain
generated from sale of properties but will receive
distributions designed to cover potential tax effects at an
assumed average blended tax rate that may not match their
tax obligations;
Proceeds will be reinvested in additional triple net
leased commercial properties that are subject to the same
risks of nonperformance, (including risks related to
changing market values, tenant defaults, difficulty of
resale, among others) as the original properties;
The General Partners may receive more aggregate
reimbursements from the Partnership if proceeds are
reinvested than they would if proceeds were not reinvested.
Although the General Partners intend to reinvest any Net
Proceeds of Sale in properties that will further the objectives
of preserving capital, creating a favorable return through cash
distributions from rentals, and appreciation realized on resale,
there can be no assurances that such objectives will be achieved
or that the ultimate distribution of Net Proceeds of Sale will be
larger when the new properties are eventually sold.
INTEREST OF THE GENERAL PARTNER
The General Partners will be reimbursed for any costs,
including a proportionate amount of employee salary, benefit and
overhead expense, they incur in completing any acquisition and in
connection with management of the property in accordance with,
and subject to the limitations in the Partnership Agreement.
Generally, costs are allocated to the Partnership based on the
daily timesheets of employees. The General Partners establish an
hourly charge for each employee based on their salaries, benefit
expense and overhead expense (the portion of rental, depreciation
and other office charges necessary to maintain the employee) and
the Partnership is charged for the amount of time speant by the
employee on partnership activities multiplied by the time charge.
To the extent that the Amendment to the Partnership Agreement is
not approved, and the proceeds from the sale of the properties
are not reinvested, the amount of capital under management by the
General Partners through the Partnership, and the scope of the
Partnership's operations, will be reduced and the General
Partners would have to deploy its employees in other activities.
Such reduced operations can be expected to reduce the aggregate
amount of reimbursements that the General Partners receive from
the Partnership.
The Managing General Partner holds 23 Units as a limited
partner in the Partnership. No other General Partner or
Affiliate of the General Partners holds any interest as a limited
partner in the Partnership.
VOTING UNITS
Voting by Investors on an Amendment of the Partnership
Agreement is based upon Partnership units ("Voting Units"). As
of July 1, 1996, there were 7,221.31667 Voting Units outstanding.
Each Voting Unit is entitled to one vote. Fractions of Voting
Units will be included in the total.
To the best of the Managing General Partner's knowledge,
there is no beneficial owner holding five percent or more of the
Voting Units including the General Partners.
In order for the proposed Amendment to be adopted, a
majority of the Voting Units must be voted in favor of the
Amendment. Because an abstention will not be counted as a vote
for the Amendment, it would have the effect of a vote against the
Amendment.
PROCEDURES FOR VOTING
Accompanying this Consent Statement is a Consent Form for
each Investor with respect to his/her unit ownership in the
Partnership. By checking the appropriate box, each Investor can
indicate whether he/she votes FOR or AGAINST or abstains as to
the proposed Amendment. If any Investor returns a Consent Form
duly signed without checking any box, he/she will be deemed to
have voted FOR the Amendment.
An Investor who votes against, or abstains, does not have
appraisal or similar rights under Minnesota law.
The Managing General Partner has fixed the close of business
on July 1, 1996 as the record date for the determination of the
Investors entitled to vote on the proposed Amendment; the close
of business on August 31, 1996 as the date by which Consent Forms
must be received by the Managing General Partner in order to be
counted; and July 1, 1996 as the date on which the consents are
to be counted. An Investor may revoke his/her/its consent at any
time prior to August 31, 1996, provided written revocation is
received by the Managing General Partner prior to that date.
The cost of solicitation of consents of the Investors will
be borne by the Partnership. The solicitations will be made by
the mails. This Consent Statement was first mailed to Investors
on July 31, 1996. Staff of the Managing General Partner will be
available by telephone to answer any questions concerning this
Consent.
INCORPORATION BY REFERENCE
The information included under the captions "Financial
Statements and Notes to Financial Statements," "Selected
Financial Data" and Management's Discussion and Analysis of
Financial Condition and Results of operations" of the
Partnership's Annual Report on Form 10-KSB for the year ended
December 31, 1995 and Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996 and Current Report on Form 8-K dated
April 24, 1996 is hereby incorporated by reference. Copies of
such sections are being delivered to you with this consent
statement.
BY ORDER OF THE BOARD OF DIRECTORS
OF AEI FUND MANAGEMENT 86-A, INC.
Robert P. Johnson, President
Exhibit A
PROPOSED AMENDMENT OF
LIMITED PARTNERSHIP AGREEMENT OF
AEI REAL ESTATE FUND 86-A
Changes in the existing provisions of the Limited
Partnership Agreement that would be made by the proposed
Amendment are shown below. Existing provisions proposed to be
omitted are enclosed in brackets. New matter is printed in bold.
SECTION 5.4 DISTRIBUTION OF NET PROCEEDS OF SALE
5.4 Distribution of Net Proceeds of Sale. Upon financing,
refinancing, sale or other disposition of any of the Properties,
Net Proceeds of Sale may be reinvested in additional properties
until [a date 60 months after the date on which the offer and
sale of units pursuant to the Prospectus is terminated], the
General Partner determines that it is in the best interests of
the Partnership to begin liquidation of the Partnership;
provided, however, that sufficient cash is distributed to the
Limited Partners to pay state and federal income taxes (assuming
Limited Partners are taxable at the lesser of (i) a 40% rate on
ordinary income and a 16% rate on capital gain income or (ii) the
maximum marginal tax rates then in effect) created as a result of
such transaction.
IMPORTANT IMPORTANT
AEI REAL ESTATE FUND 86-A LIMITED PARTNERSHIP
CONSENT OF LIMITED PARTNERS
This consent is solicited by the Board
of Directors of AEI Fund Management 86-A, Inc.,
The Managing General Partner
The undersigned, a Limited Partner of AEI Real Estate Fund
86-A Limited Partnership (the "Partnership"), hereby consents
(unless otherwise directed below) to the proposal identified
below to adopt an Amendment to Section 5.4 of the Limited
Partnership Agreement of the Partnership (the "Partnership
Agreement"), as more fully described in the Consent Statement
(the "Proposal"). By voting for the Proposal, the undersigned
hereby appoints AEI Fund Management 86-A, Inc. as its attorney-in-
fact with power to sign and acknowledge on its behalf any
instrument that may be necessary to evidence the Amendment to the
Partnership Agreement and any corresponding Amendment to the
Certificate of Limited Partnership.
Please date and sign this Consent below and return it in the
enclosed, postage paid envelope. To be counted, this Consent
must be received not later than the close of business on August
31, 1996.
Adoption of Amendment to Section 5.4 of the Partnership Agreement
FOR [ ] AGAINST [ ] ABSTAIN [ ]
The Partnership Units held by the signing Limited Partner
will be voted as directed. They will be voted "FOR" the Proposal
if no box is checked.
Please sign exactly as your name appears below. When
Partnership units are held by joint tenants, both owners should
sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such. If a corporation,
please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership
name by authorized person.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS CONSENT.
Dated: , 1996
Signature (if held jointly)
August 1, 1996
Dear AEI Fund 86-A Investor:
The enclosed Consent Statement proposes an amendment to the
Partnership Agreement that will, if approved by a majority of the
Partners, allow this Fund to reinvest proceeds from property
sales into replacement net leased properties. When a Fund such
as this is originally organized, it is intended that the
properties acquired will be held for an extended period of time--
usually 10 to 12 years. That provides time for the distribution
of income from rents and time for the property to potentially
appreciate in value. From time to time, however, it is
advantageous for the Fund to sell a property earlier than
anticipated if a substantial gain can be realized.
Your Fund's Partnership Agreement requires the distribution
of ALL of the proceeds from any sale of properties. For the
reasons outlined in the enclosed Consent Statement, we believe
that it would be advantageous for your Fund to be able to sell
certain of its properties, distribute a portion of any profits
realized, and reinvest the balance of such proceeds into
replacement properties, until the final liquidation of the Fund
occurs. To facilitate this, we are proposing an amendment to the
Partnership Agreement. Although we believe reinvestment will
allow us to maximize the Partnership's profit potential and avoid
and erosion of it asset base, reinvestment of sales proceeds will
affect you in a number of ways and involve a number of risks
including the following:
Investors will not receive the cash generated from
property sales that is reinvested until final liquidation of
the Partnership and will have only limited rights to present
their units for repurchase before then;
Although it is not intended that the Amendment will
extend the life of the Partnership, it may be more difficult
for the Partnership to resell properties, or to dispose of all
Partnership properties, within the original intended life of
the Partnership.
The General Partners may have a conflict of interest in
proposing the Amendment because they will receive more
aggregate reimbursements from the Partnership if proceeds are
reinvested than they would if proceeds were not reinvested.
Proceeds will be reinvested in additional triple net
leased commercial properties that are subject to many of the
same risks of nonperformance, (including risks related to
changing market values, tenant defaults, difficulty of resale,
among others) as the original properties;
Investors will be taxed on the full amount of gain
generated from sale of properties but will receive
distributions designed to cover potential tax effects at an
assumed average blended tax rate that may not match their tax
obligations;
Investors will not be able to review in advance the
properties in which proceeds are reinvested;
Your General Partner believes this is in the best interest for
you and your Fund and recommends you vote "FOR" this proposed
Amendment. Please vote "FOR" on the Consent Statement vote
form and return it in the prepaid envelope today. If you have
any questions regarding your Fund, or this Consent Statement,
please call AEI Investment Services at 1-800-328-3519.
Thank you for your immediate attention to this matter.
