UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16850
CNL INCOME FUND III, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street, Suite 500
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is
no market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
ITEM 1. BUSINESS
CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on June 1, 1987. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on August 10, 1987, the
Partnership offered for sale up to $25,000,000 in limited partnership
interests (the "Units") (50,000 Units at $500 per Unit) pursuant to a
registration statement on Form S-11 under the Securities Act of 1933, as
amended. The offering terminated on April 29, 1988, as of which date the
maximum offering proceeds of $25,000,000 had been received from investors who
were admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized primarily to acquire both newly
constructed and existing restaurant properties, as well as properties upon
which restaurants were to be constructed (the "Properties"), which are leased
primarily to operators of selected national and regional fast-food restaurant
chains (the "Restaurant Chains"). Net proceeds to the Partnership from its
offering of Units, after deduction of organizational and offering expenses,
totalled $22,125,102, and were used to acquire 32 Properties, including
interests in two Properties owned by joint ventures in which the Partnership
is a co-venturer. During January 1997, the Partnership sold its Property in
Chicago, Illinois, to an unrelated third party. Generally, the Properties are
leased on a triple-net basis with the lessee responsible for all repairs and
maintenance, property taxes, insurance and utilities.
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
capital appreciation, net cash flow and federal income tax considerations.
Certain lessees have been granted options to purchase Properties, generally at
a Property's then fair market value after a specified portion of the lease
term has elapsed. In general, the General Partners plan to seek the sale of
some of the Properties commencing seven to 15 years after their acquisition.
The Partnership has no obligation to sell all or any portion of a Property at
any particular time, except as may be required under Property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership
and joint ventures in which the Partnership is a co-venturer provide for
initial terms ranging from 10 to 20 years (the average being 18 years), and
expire between 2001 and 2013. All leases are on a triple-net basis, with the
lessee generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties generally provide for
minimum base annual rental payments (payable in monthly installments) ranging
from approximately $23,000 to $151,900. All of the leases provide for
percentage rent, based on sales in excess of a specified amount, to be paid
annually. In addition, some leases provide for increases in the annual base
rent during the lease term.
The leases of the Properties provide for two or four five-year renewal
options subject to the same terms and conditions as the initial lease.
Certain lessees also have been granted options to purchase Properties at the
Property's then fair market value, or pursuant to a formula based on the
original cost of the Property, after a specified portion of the lease term has
elapsed. Additionally, certain leases provide the lessee an option to
purchase up to a 49 percent interest in the Property, after a specified
portion of the lease term has elapsed, at an option purchase price similar to
those described above, multiplied by the percentage interest in the Property
with respect to which option is being exercised.
1
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership must first
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In August 1994, the Partnership and the tenant of the Po Folks Property
in Hagerstown, Maryland, entered into an agreement whereby the tenant would
pay the Partnership past due rental amounts of $250,525 in weekly installments
over a period of approximately 60 months, commencing September 1994. In
February 1995, the tenant ceased operations of the restaurant business located
on such Property and discontinued payment of the base rental income as
provided in its lease agreement. The Partnership did not receive any payments
relating to the past due rental amounts during 1995 or 1996. In September
1996, the tenant of the Denny's Property in Hagerstown, Maryland (which is the
same tenant as the Po Folks Property in Hagerstown, Maryland) entered into an
asset purchase agreement with an unrelated third party to sell the business
operations to the unrelated third party. In conjunction therewith, the
Partnership entered into a lease agreement with the unrelated third party for
the Denny's Property. In accordance with the asset purchase agreement, the
unrelated third party agreed to pay $175,000 to the Partnership, which the
Partnership agreed to accept as full satisfaction of past due rental amounts
and unpaid real estate taxes due from the former tenant of the Denny's and Po
Folks Properties in Hagerstown, Maryland. In connection therewith, the
Partnership wrote-off the remaining receivables for which the Partnership had
previously established an allowance for doubtful accounts relating to the
Denny's and Po Folks Properties in Hagerstown, Maryland. The Partnership
accepted a promissory note for $25,000 from the unrelated third party and is
currently negotiating the terms of the promissory note for the remaining
$150,000. The Partnership reclassified the lease from an operating lease to a
direct financing lease based on the terms of the new lease agreement. The
Partnership is currently seeking either a replacement tenant or purchaser for
the Po Folks Property.
During 1995, the Partnership terminated its lease with the tenant of the
Property in Page, Arizona. In June 1995, a new operator began operating this
Property on a month-to-month basis and in September 1996, the Partnership
entered into a lease agreement with this operator. The new lease provides for
reduced base rents with annual increases over the term of the lease and
provides for a change in the percentage rent calculation.
Major Tenants
During 1996, one lessee of the Partnership and its consolidated joint
venture, Golden Corral Corporation, contributed more than ten percent of the
Partnership's total rental income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of the
rental income from one Property owned by an unconsolidated joint venture). As
of December 31, 1996, Golden Corral Corporation was the lessee under leases
relating to six restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, this lessee will continue to
contribute more than ten percent of the Partnership's total rental income in
1997 and subsequent years. In addition, six Restaurant Chains, Golden Corral
Family Steakhouse Restaurants, Denny's, Perkins, Pizza Hut, KFC and Taco Bell,
each accounted for more than ten percent of the Partnership's total rental
income in 1996 (including rental income from the Partnership's consolidated
joint venture and the Partnership's share of the rental income from one
Property owned by an unconsolidated joint venture). In subsequent years, it
is anticipated that these six Restaurant Chains each will continue to account
for more than ten percent of total rental income to which the Partnership is
entitled under the terms of the leases. Any failure of Golden Corral
Corporation or any of these Restaurant Chains could materially affect the
Partnership's income. As of December 31, 1996, no single tenant or group of
affiliated tenants lease Properties with an aggregate carrying value,
excluding acquisition fees and certain acquisition expenses, in excess of 20
percent of the total assets of the Partnership.
Joint Venture Arrangements
The Partnership has entered into a joint venture arrangement, Tuscawilla
Joint Venture, with three unaffiliated entities to purchase and hold one
Property. In addition, the Partnership has entered into a joint venture
arrangement, Titusville Joint Venture, with an affiliate of the General
Partners to purchase and hold one Property. The joint venture arrangements
provide for the Partnership and its joint venture partners to share in all
costs and benefits associated with the joint venture in accordance with their
respective percentage interests in the joint venture. The Partnership and its
joint venture partners are also jointly and severally liable for all debts,
obligations and other liabilities of the joint venture.
2
Each joint venture has an initial term of approximately 20 years
(generally the same term as the initial term of the lease for the Property in
which the joint venture invested) and, after the expiration of the initial
term, continues in existence from year to year unless terminated at the option
of any joint venture partner or by an event of dissolution. Events of
dissolution include the bankruptcy, insolvency or termination of any joint
venturer, sale of the Property owned by the joint venture and mutual agreement
of the Partnership and its joint venture partner to dissolve the joint
venture.
The Partnership has management control of Tuscawilla Joint Venture and
shares management control equally with an affiliate of the General Partners
for Titusville Joint Venture. The joint venture agreements restrict each
venturer's ability to sell, transfer or assign its joint venture interest
without first offering it for sale to its joint venture partners, either upon
such terms and conditions as to which the venturers may agree or, in the event
the venturers cannot agree, on the same terms and conditions as any offer from
a third party to purchase such joint venture interest.
Net cash flow from operations of Tuscawilla Joint Venture and Titusville
Joint Venture is distributed 69.07% and 73.4%, respectively, to the
Partnership and the balance is distributed to each other joint venture partner
in accordance with its respective percentage interest in the joint venture.
Any liquidation proceeds, after paying joint venture debts and liabilities and
funding reserves for contingent liabilities, will be distributed first to the
joint venture partners with positive capital account balances in proportion to
such balances until such balances equal zero, and thereafter in proportion to
each joint venture partner's percentage interest in the joint venture.
Property Management
CNL Investment Company, an affiliate of the General Partners, acted as
manager of the Partnership's Properties pursuant to a property management
agreement with the Partnership through December 31, 1994. Under this
agreement, CNL Investment Company was responsible for collecting rental
payments, inspecting the Properties and the tenants' books and records,
assisting the Partnership in responding to tenant inquiries and notices and
providing information to the Partnership about the status of the leases and
the Properties. CNL Investment Company also assisted the General Partners in
negotiating the leases. For these services, the Partnership had agreed to pay
CNL Investment Company an annual fee of one-half of one percent of Partnership
assets (valued at cost) under management, not to exceed the lesser of one
percent of gross rental revenues or competitive fees for comparable services.
Under the management agreement, the property management fee is subordinated to
receipt by the Limited Partners of an aggregate, ten percent, noncumulative,
noncompounded annual return on their adjusted capital contributions (the "10%
Preferred Return"), calculated in accordance with the Partnership's limited
partnership agreement (the "Partnership Agreement"). In any year in which the
Limited Partners do not receive a 10% Preferred Return, no property management
fee will be paid.
Effective January 1, 1995, certain officers and employees of CNL
Investment Company became officers and employees of CNL Income Fund Advisors,
Inc., an affiliate of the General Partners, and CNL Investment Company
assigned its rights in, and its obligations under, the property management
agreement with the Partnership to CNL Income Fund Advisors, Inc. In addition,
effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its rights
in, and it obligations under, the property management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
property management agreement, including the payment of fees, as described
above, remain unchanged.
The property management agreement continues until the Partnership no
longer owns an interest in any Properties unless terminated at an earlier date
upon 60 days' prior notice by either party.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains,
including those offering different types of food and service.
3
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. perform
certain services for the Partnership. In addition, the General Partners have
available to them the resources and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates, who
may also perform certain services for the Partnership.
ITEM 2. PROPERTIES
As of December 31, 1996, the Partnership owned, either directly or
through joint venture arrangements, 32 Properties located in 16 states.
Reference is made to the Schedule of Real Estate and Accumulated Depreciation
filed with this report for a listing of the Properties and their respective
costs, including acquisition fees and certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,800
to 94,500 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
1,900 to 8,900 square feet. Generally, all buildings on Properties acquired
by the Partnership are freestanding and surrounded by paved parking areas.
Buildings are suitable for conversion to various uses, although modifications
may be required prior to use for other than restaurant operations.
Generally, a lessee is required, under the terms of its lease agreement,
to make such capital expenditures as may be reasonably necessary to refurbish
buildings, premises, signs and equipment so as to comply with the lessee's
obligations, if applicable, under the franchise agreement to reflect the
current commercial image of its Restaurant Chain. These capital expenditures
are required to be paid by the lessee during the term of the lease.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1996 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases six Golden Corral restaurants with an
initial term of 15 years (expiring in 2002) and an average minimum base annual
rent of approximately $72,000 (ranging from approximately $48,000 to
$110,000).
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties, is a party to,
or subject to, any material pending legal proceedings.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of February 28, 1997, there were 2,056 holders of record of the
Units. There is no public trading market for the Units, and it is not
anticipated that a public market for the Units will develop. Limited Partners
who wish to sell their Units may offer the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited
Partners who wish to have their distributions used to acquire additional Units
(to the extent Units are available for purchase), may do so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units.
The price paid for any Unit transferred pursuant to the Plan has been $475 per
Unit. The price to be paid for any Units transferred other than pursuant to
the Plan is subject to negotiation by the purchaser and the selling Limited
Partner. The Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 1996 and 1995 other
than pursuant to the Plan, net of commissions (which ranged from zero to
18.09%).
1996 (1) 1995 (1)
----------------------- -----------------------
High Low Average High Low Average
------ ----- ------- ------ ----- -------
First Quarter $500 $370 $453 $483 $425 $469
Second Quarter 475 360 439 437 415 426
Third Quarter 475 425 458 461 461 461
Fourth Quarter 475 390 432 475 300 453
(1) A total of 679 and 866 Units were transferred other than pursuant to the
Plan for the years ended December 31, 1996 and 1995, respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 1996 and 1995, the Partnership
declared cash distributions of $2,376,000 to the Limited Partners.
Distributions of $594,000 were declared at the close of each of the
Partnership's calendar quarters during 1996 and 1995 to the Limited Partners.
No amounts distributed to partners for the years ended December 31, 1996 and
1995, are required to be or have been treated by the Partnership as a return
of capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions. No distributions have been made to the
General Partners to date.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
5
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
Revenues (1) $ 2,452,797 $ 2,358,235 $ 2,511,833 $ 2,477,000 $ 2,414,153
Net income (2) 1,814,657 1,482,515 1,858,605 1,856,462 1,699,941
Cash distributions declared 2,376,000 2,376,000 2,376,000 2,376,000 2,376,000
Net income per Unit (2) 35.93 29.37 36.80 36.76 33.66
Cash distributions declared
per Unit (2) 47.52 47.52 47.52 47.52 47.52
At December 31:
Total assets $18,608,907 $19,065,305 $19,945,765 $20,411,131 $20,326,353
Partners' capital 17,595,301 18,156,644 19,050,129 19,567,524 20,087,062
</TABLE>
(1) Revenues include equity in earnings of the unconsolidated joint venture
and minority interest in income of the consolidated joint venture.
(2) Net income for the year ended December 31, 1995, includes a provision
for loss on land and building of $207,844.
The above selected financial data should be read in conjunction with the
financial statements and related notes contained in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Partnership was organized on June 1, 1987, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food Restaurant Chains. The leases are
triple-net leases, with the lessee generally responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of December 31,
1996, the Partnership owned 32 Properties, either directly or indirectly
through joint venture arrangements.
Liquidity and Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1996, 1995 and 1994, was cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest
received, less cash paid for expenses). Cash from operations was $2,091,754,
$2,203,437 and $2,363,371 for the years ended December 31, 1996, 1995 and
1994, respectively. The decrease in cash from operations during 1996 and
1995, each as compared to the prior year, is primarily a result of changes in
income and expenses as discussed in "Results of Operations" below and changes
in the Partnership's working capital during each of the respective years.
Cash from operations was also affected by the following transactions during
the years ended December 31, 1996, 1995 and 1994.
In May 1992, the Partnership and the tenant of the Po Folks Property in
Hagerstown, Maryland, amended their lease agreement as described above in Item
1. Business - Leases. In addition, in August 1994, the tenant resumed payment
of the base rental income as provided in the original lease agreement and
entered into an agreement with the Partnership providing for the payment to
the Partnership of $250,525 of past due rental amounts on a weekly basis over
a period of approximately 60 months. In February 1995, the tenant ceased
operations of the restaurant business located on such Property and
discontinued payment of the base rental income as provided in its lease
agreement. Due to the uncertainty of the collectibility of past due rental
amounts, the Partnership established an allowance for doubtful accounts
relating to the amount due from the former tenant. At December 31, 1995 and
1994, the balance in the allowance for doubtful accounts for this Property was
$259,242 and $234,443, respectively; therefore, no amounts were included in
receivables at December 31, 1995 and 1994, relating to this Property. In
6
addition, at December 31, 1995, the balance in the allowance for doubtful
accounts for the Denny's Property in Hagerstown, Maryland, (which was leased
to the same tenant of the Po Folks Property) for past due rental amounts was
$76,948. In September 1996, the Partnership agreed to accept $175,000 from
the new tenant of the Denny's Property as full satisfaction of current and
past due rental amounts from the former tenant of the Denny's and Po Folks
Properties as described in Item 1. Business - Leases. In connection
therewith, during 1996, the Partnership recognized approximately $118,700 in
base rental income for amounts which the Partnership had previously
established an allowance for doubtful accounts, and wrote-off the remaining
balances in the allowance for doubtful accounts. During 1996, the Partnership
accepted a three year promissory note for $25,000, which bears interest at ten
percent per annum for which collections commenced in October 1996.
Receivables at December 31, 1996, include approximately $23,300. The
Partnership is currently negotiating the terms of the promissory note for the
remaining $150,000 to be received from the new tenant. The Partnership is
currently seeking either a replacement tenant or purchaser for the Po Folks
Property.
Other sources and uses of capital included the following during the
years ended December 31, 1996, 1995 and 1994.
In January 1996, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $86,200 in connection
with the operations of the Partnership. The loan was uncollateralized, bore
interest at a rate of prime plus 0.25% per annum and was due on demand. The
Partnership repaid the loan in full, along with approximately $660 in
interest, to the corporate general partner. In addition, in 1996, the
Partnership entered into various promissory notes with the corporate general
partners for loans totalling $575,200 in connection with the operations of the
Partnership. The loans were uncollateralized, non-interest bearing and due on
demand. As of December 31, 1996, the Partnership had repaid the loans in full
to the corporate general partner.
In April 1996, the Partnership received $51,400 as partial settlement in
a right of way taking relating to a parcel of land of the Property in Plant
City, Florida. The Partnership intends to petition through mediation for
additional proceeds. As of March 14, 1997, the final amount of proceeds to be
received had not been determined; therefore, the sale had not been
consummated.
In January 1997, the Partnership sold its Property in Chicago, Illinois,
to an unrelated third party, for $505,000 and received net sales proceeds of
$481,268, resulting in a gain of approximately $3,800 for financial reporting
purposes. The Partnership intends to reinvest the sales proceeds in an
additional Property during 1997.
In May 1995, the Partnership received notice from the tenant of its
Property in Bradenton, Florida, that it intended to exercise its option to
purchase the Property in accordance with the terms of its lease agreement. On
March 14, 1997, the Partnership sold this Property for $1,332,154, and
received net sales proceeds of $1,310,001, resulting in a gain of
approximately $361,400 for financial reporting purposes. This Property was
originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $229,500 in excess of its original purchase price. The
remaining net sales proceeds are expected to be invested in an additional
Property or used for other Partnership purposes. The General Partners believe
that the transaction, or a portion thereof, relating to the sale of the
Property in Bradenton, Florida, and the reinvestment of the proceeds will be
structured to qualify as a like-kind exchange transaction for federal income
tax purposes. However, the Partnership will distribute amounts sufficient to
enable the Limited Partners to pay federal and state (at a level reasonably
assumed by the General Partners) income taxes, if any, resulting from the
sale.
None of the Properties owned by the Partnership or the joint ventures in
which the Partnership owns an interest is or may be encumbered. Subject to
certain restrictions on borrowings from the General Partners, however, the
Partnership may borrow, in the discretion of the General Partners, for the
purpose of maintaining the operations of the Partnership. The Partnership
will not encumber any of the Properties in connection with any borrowings or
advances. The Partnership also will not borrow under circumstances which
would make the Limited Partners liable to creditors of the Partnership.
Affiliates of the General Partners from time to time incur certain operating
expenses on behalf of the Partnership for which the Partnership reimburses the
affiliates without interest.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments
pending the Partnership's use of such funds to pay Partnership expenses or to
7
make distributions to the partners. At December 31, 1996, the Partnership had
$57,751 invested in such short-term investments as compared to $312,814 at
December 31, 1995. The decrease in cash was attributable to the payment of
distributions in excess of current cash from operations during the year ended
December 31, 1996. The funds remaining at December 31, 1996, will be used for
the payment of distributions and other liabilities.
During 1996, 1995 and 1994, affiliates of the General Partners incurred
on behalf of the Partnership $108,900, $149,252 and $115,243, respectively,
for certain operating expenses. At December 31, 1996 and 1995, the
Partnership owed $102,859 and $53,915, respectively, to affiliates for such
amounts and accounting and administrative services. Amounts payable to other
parties, including distributions payable, decreased to $681,010 at December
31, 1996, from $685,742 at December 31, 1995. Total liabilities at December
31, 1996, to the extent they exceed cash and cash equivalents at December 31,
1996, will be paid from future cash from operations, and in the event the
General Partners elect to make additional contributions or loans to the
Partnership, from future General Partner contributions or loans.
Based primarily on current and anticipated cash from operations, the
Partnership declared distributions to the Limited Partners of $2,376,000 for
each of the years ended December 31, 1996, 1995 and 1994. This represents
distributions of $47.52 per unit for each of the years ended December 31,
1996, 1995 and 1994. No amounts distributed or to be distributed to the
Limited Partners for the years ended December 31, 1996, 1995 or 1994 are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the Limited Partners return on their adjusted
capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is
intended to reduce the Partnership's exposure in the unlikely event a tenant's
insurance policy lapses or is insufficient to cover a claim relating to the
Property.
The Partnership's investment strategy of acquiring Properties for cash
and generally leasing them under triple-net leases to operators who generally
meet specified financial standards minimizes the Partnership's operating
expenses. The General Partners believe that the leases will continue to
generate cash flow in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent
reserve for maintenance and repairs will be established at this time. To the
extent, however, that the Partnership has insufficient funds for such
purposes, the General Partners will contribute to the Partnership an aggregate
amount of up to one percent of the offering proceeds for maintenance and
repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection
with the operations of the Partnership.
Results of Operations
During the years ended December 31, 1996, 1995 and 1994, the Partnership
owned and leased 30 wholly owned Properties. In addition, during the years
ended December 31, 1996, 1995 and 1994, the Partnership was a co-venturer in
two separate joint ventures that each owned and leased one Property. As of
December 31, 1996, the Partnership owned, either directly or through joint
venture arrangements, 32 Properties which are, in general, subject to long-
term, triple-net leases. The leases of the Properties provide for minimum
base annual rental amounts (payable in monthly installments) ranging from
approximately $23,000 to $151,900. All of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, some leases
provide for increases in the annual base rent during the lease term. For
further description of the Partnership's leases and Properties, see Item 1.
Business - Leases and Item 2. Properties, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Partnership
and its consolidated joint venture, Tuscawilla Joint Venture, earned
$2,273,850, $2,188,000 and $2,308,470, respectively, in rental income from
8
operating leases and earned income from the direct financing lease. The
increase in rental and earned income during 1996, as compared to 1995, is
primarily attributable to the fact that the Partnership entered into a new
lease with a new tenant for the Denny's Property in Hagerstown, Maryland, and
in connection therewith, during 1996, recognized as income approximately
$155,000, including approximately $118,700, for which the Partnership had
previously established an allowance for doubtful accounts relating to the
Denny's and Po Folks Properties in Hagerstown, Maryland, as discussed above in
"Liquidity and Capital Resources". The decrease in rental income during 1995,
as compared to 1994, is partially attributable to a decrease of approximately
$126,000 as a result of the fact that the tenant of the Po Folks Property
ceased operations of the restaurant business located on such Property, as
discussed in "Liquidity and Capital Resources." The decrease was partially
offset by the fact that during 1995, the Partnership increased its allowance
for doubtful accounts for rental amounts by approximately $22,500, as compared
to approximately $64,100 in 1994. Rental and earned income also decreased in
1995, as compared to 1994, as a result of the Partnership's establishing an
allowance for doubtful accounts of approximately $53,900 for rental and other
amounts relating to the Denny's Property in Hagerstown, Maryland, which was
leased to the same tenant as the Po Folks.
The increase in rental and earned income during 1996, as compared to
1995, is partially offset by, and the decrease during 1995, as compared to
1994, is partially attributable to, the fact that the Partnership recorded an
allowance for doubtful accounts of approximately $55,000 and $34,800 during
1996 and 1995, respectively, for its Property in Chicago, Illinois. The
allowance for doubtful accounts for 1996 was for past due rental amounts. The
allowance for 1995 was for accrued rental amounts previously recorded (due to
the fact that future scheduled rent increases are recognized on a straight-
line basis over the term of the lease in accordance with generally accepted
accounting principles) relating to this Property. Rental and earned income
also decreased during 1996, as compared to 1995, by approximately $31,000 due
to the fact that in September 1996, the tenant of this Property ceased
operations of the restaurant business located on such Property and the
Partnership ceased recording rental revenue relating to such Property. The
General Partners believe that collection of past due amounts is doubtful due
to the fact that the tenant filed for bankruptcy and ceased operations of the
Property. The Partnership intends to pursue collection of amounts due in
accordance with the lease and will record such amounts as income if collected.
In January 1997, the Partnership sold this Property to an unrelated third
party, as discussed above in "Liquidity and Capital Resources".
The increase in rental and earned income during 1996, as compared to
1995, was partially offset by a decrease of approximately $11,900, due to the
fact that during 1995 the Partnership terminated its lease with the former
tenant of the Property in Page, Arizona, and entered into a new lease with a
new tenant in 1996, at lower rental amounts, as discussed above in "Liquidity
and Capital Resources." The decrease in rental and earned income during 1995,
as compared to 1994, was partially offset due to the fact that in conjunction
with the lease termination during 1995, the Partnership received and recorded
as rental income approximately $40,000 during 1995, of which a portion related
to amounts that had been previously reserved as uncollectible in 1994.
During the years ended December 31, 1996, 1995 and 1994, the Partnership
also earned $157,993, $143,039 and $163,506, respectively, in contingent
rental income. The increase in contingent rental income during 1996, as
compared to 1995, is primarily attributable to an increase in gross sales of
certain restaurant Properties requiring the payment of contingent rent. In
addition, the decrease in contingent rent during 1995, as compared to 1994, is
a result of a lower percentage rent breakpoint provided for in the lease
amendment for the Property in Hazard, Kentucky, and the collection of
approximately $23,400 during 1994 of contingent rental amounts previously
reserved relating to the Denny's Property in Hagerstown, Maryland. No
contingent rental income was recognized during 1995 for the Denny's Property
in Hagerstown, Maryland.
The Partnership also recognized income of $11,740, $22,015 and $20,952
for the years ended December 31, 1996, 1995 and 1994, respectively,
attributable to net income recorded by Titusville Joint Venture in which the
Partnership is a co-venturer. The decrease in net income earned by Titusville
Joint Venture during 1996, as compared to 1995, and the increase during 1995,
as compared to 1994, is primarily attributable to the receipt by the joint
venture of bankruptcy proceeds relating to the former tenant during 1995.
These amounts had previously been written off; therefore, they were recognized
as income when received, during 1995.
During the years ended December 31, 1996, 1995 and 1994, one lessee of
the Partnership and its consolidated joint venture, Golden Corral Corporation,
contributed more than ten percent of the Partnership's total
9
rental income (including rental income from the Partnership's consolidated
joint venture andthe Partnership's share of the rental income from one
Property owned by an unconsolidated joint venture). As of December 31, 1996,
Golden Corral Corporation was the lessee under leases relating to six
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, this lessee will continue to contribute more than ten
percent of the Partnership's total rental income during 1997 and subsequent
years. In addition, six Restaurant Chains, Golden Corral Family Steakhouse
Restaurants, Denny's, Perkins, Pizza Hut, KFC and Taco Bell, each accounted
for more than ten percent of the Partnership's total rental income in 1996
(including rental income from the Partnership's consolidated joint venture
and the Partnership's share of the rental income from one Property owned by
an unconsolidated joint venture). In subsequent years, it is anticipated that
these six Restaurant Chains each will continue to account for more than ten
percent of total rental income to which the Partnership is entitled under the
terms of the leases. Any failure of Golden Corral Corporation or any of these
Restaurant Chains could materially affect the Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $638,140, $667,876 and $653,228 for the years ended December 31, 1996,
1995 and 1994, respectively. The decrease in operating expenses during 1996,
as compared to 1995, is partially attributable to the fact that during 1996,
the Partnership reversed approximately $25,000 in real estate taxes accrued
during the year ended December 31, 1995, as a result of accepting a promissory
note from the new tenant of the Denny's Property in Hagerstown, Maryland, as
discussed above in "Liquidity and Capital Resources." These real estate taxes
had been previously accrued during 1995 relating to the Denny's and Po Folks
Properties in Hagerstown, Maryland, due to financial difficulties of the
former tenant and were recorded as a reduction to real estate tax expense
during the year ended December 31, 1996.
The decrease in operating expenses during 1996, as compared to 1995, is
also partially attributable to a decrease in depreciation expense relating to
the Po Folks Property in Hagerstown, Maryland. The Partnership established an
allowance for loss on land and building which represented the difference
between the Property's carrying value at December 31, 1995, and the estimated
net realizable value of the Property based on an anticipated sales price
previously agreed upon by the General Partners relating to this Property.
This allowance reduced the depreciable basis of the Property. No adjustment
to the allowance was necessary during 1996.
The decrease in operating expenses during 1996, as compared to 1995, is
partially offset by, and the increase during 1995, as compared to 1994, is
partially a result of, an increase in accounting and administrative expenses
associated with operating the Partnership and its Properties and an increase
in insurance expense as a result of the General Partners' obtaining contingent
liability and property coverage for the Partnership as discussed above in
"Liquidity and Capital Resources." The decrease in operating expenses during
1996, as compared to 1995, was also partially offset by the fact that during
1996, the Partnership incurred approximately $19,700, relating to legal fees
associated with the tenant of the Property in Chicago, Illinois, filing
bankruptcy.
The Partnership incurred real estate taxes of approximately $20,900,
$25,000 and $92,100, during the years ended December 31, 1996, 1995 and 1994,
respectively, relating to the Property in Chicago, Illinois, due to continued
financial difficulties of the tenant which led to the tenant filing bankruptcy
during 1996. The amounts recorded during 1994 included past due amounts
relating to prior years' real estate taxes and interest relating to this
Property. In January 1997, the Partnership sold this Property. The
Partnership intends to pursue collection from the former tenant of any such
amounts paid by the Partnership and will recognize such amounts as income if
collected.
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement
requires that an entity review long-lived assets and certain identifiable
intangibles, to be held and used, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Adoption of this standard had no material effect on the
Partnership's financial position or results of operations.
The Partnership's leases as of December 31, 1996, are triple-net leases
and, in general, contain provisions that the General Partners believe mitigate
the adverse effect of inflation. Such provisions include clauses requiring
the payment of percentage rent based on certain restaurant sales above a
specified level and/or automatic increases in base rent at specified times
during the term of the lease. Management expects that increases in restaurant
sales volumes due to inflation and real sales growth should result in an
increase in rental income over time. Continued
10
inflation also may cause capital appreciation of the Partnership's Properties.
Inflation and changing prices, however, also may have an adverse impact on the
sales of the restaurants and on potential capital appreciation of the
Properties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
11
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Accountants 13
Financial Statements:
Balance Sheets 14
Statements of Income 15
Statements of Partners' Capital 16
Statements of Cash Flows 17
Notes to Financial Statements 19
12
Report of Independent Accountants
To the Partners
CNL Income Fund III, Ltd.
We have audited the financial statements and the financial statement
schedules of CNL Income Fund III, Ltd. (a Florida limited partnership) listed
in Item 14(a) of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedules 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 CNL Income Fund III, Ltd. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered
in relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information required to be included
therein.
/s/Coopers & Lybrand L.L.P.
Orlando, Florida
February 8, 1997
13
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
ASSETS 1996 1995
----------- -----------
Land and buildings on operating
leases, less accumulated
depreciation and allowance
for loss on land and
building $16,483,532 $17,309,533
Net investment in direct
financing leases 938,918 545,014
Investment in joint venture 643,912 663,842
Cash and cash equivalents 57,751 312,814
Receivables, less allowance for
doubtful accounts of $70,142
and $353,277 321,831 106,638
Prepaid expenses 6,898 5,601
Lease costs, less accumulated
amortization of $2,162 and
$1,562 9,838 10,438
Accrued rental income, less
allowance for doubtful accounts
of $34,830 in 1995 114,738 82,071
Other assets 31,489 29,354
----------- -----------
$18,608,907 $19,065,305
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 14,183 $ 14,489
Accrued and escrowed real
estate taxes payable 72,827 77,253
Distributions payable 594,000 594,000
Due to related parties 102,859 53,915
Rents paid in advance and deposits 88,325 24,792
----------- -----------
Total liabilities 872,194 764,449
Commitments and Contingencies (Note 11)
Minority interest 141,412 144,212
Partners' capital 17,595,301 18,156,644
----------- -----------
$18,608,907 $19,065,305
=========== ===========
See accompanying notes to financial statements.
14
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
---------- ---------- ----------
Revenues:
Rental income from operating
leases $2,184,460 $2,115,798 $2,235,602
Earned income from direct
financing leases 89,390 72,202 72,868
Contingent rental income 157,993 143,039 163,506
Interest and other income 26,496 22,386 36,192
---------- ---------- ----------
2,458,339 2,353,425 2,508,168
---------- ---------- ----------
Expenses:
General operating and admini-
strative 147,840 131,071 99,775
Professional services 50,064 28,758 22,666
Bad debt expense 924 11,418 4,101
Real estate taxes 1,973 50,815 80,095
State and other taxes 11,973 11,322 12,100
Depreciation and amortization 425,366 434,492 434,491
---------- ---------- ----------
638,140 667,876 653,228
---------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Venture and
Provision for Loss on Land
and Building 1,820,199 1,685,549 1,854,940
Minority Interest in Income of
Consolidated Joint Venture (17,282) (17,205) (17,287)
Equity in Earnings of Unconsoli-
dated Joint Venture 11,740 22,015 20,952
Provision for Loss on Land and
Building - (207,844) -
---------- ---------- ----------
Net Income $1,814,657 $1,482,515 $1,858,605
========== ========== ==========
Allocation of Net Income:
General partners $ 18,147 $ 13,906 $ 18,586
Limited partners 1,796,510 1,468,609 1,840,019
---------- ---------- ----------
$1,814,657 $1,482,515 $1,858,605
========== ========== ==========
Net Income Per Limited Partner
Unit $ 35.93 $ 29.37 $ 36.80
========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding 50,000 50,000 50,000
========== ========== ==========
See accompanying notes to financial statements.
15
<TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
General Partners Limited Partners
------------------ -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993 $161,500 $109,166 $25,000,000 $(13,645,640) $10,807,396 $(2,864,898) $19,567,524
Distributions to
limited partners
($47.52 per
limited partner
unit) - - - (2,376,000) - - (2,376,000)
Net income - 18,586 - - 1,840,019 - 1,858,605
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1994 161,500 127,752 25,000,000 (16,021,640) 12,647,415 (2,864,898) 19,050,129
Distributions to
limited partners
($47.52 per
limited partner
unit) - - - (2,376,000) - - (2,376,000)
Net income - 13,906 - - 1,468,609 - 1,482,515
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995 161,500 141,658 25,000,000 (18,397,640) 14,116,024 (2,864,898) 18,156,644
Distributions to
limited partners
($47.52 per
limited partner
unit) - - - (2,376,000) - - (2,376,000)
Net income - 18,147 - - 1,796,510 - 1,814,657
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996 $161,500 $159,805 $25,000,000 $(20,773,640) $15,912,534 $(2,864,898) $17,595,301
======== ======== =========== ============ =========== =========== ===========
See accompanying notes to financial statements.
16
</TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows From Operating
Activities:
Cash received from
tenants $ 2,226,794 $ 2,340,729 $ 2,479,442
Distributions from
unconsolidated joint
venture 31,670 47,499 42,149
Cash paid for expenses (175,148) (198,797) (170,171)
Interest received 8,438 14,006 11,951
----------- ----------- -----------
Net cash provided
by operating
activities 2,091,754 2,203,437 2,363,371
----------- ----------- -----------
Cash Flows From Investing
Activities:
Deposit received on sale
of land parcel 51,400 - -
Collections on loans - - 26,173
Payment of lease costs - - (4,000)
Increase in other assets (2,135) - -
----------- ----------- -----------
Net cash provided
by investing
activities 49,265 - 22,173
----------- ----------- -----------
Cash Flows From Financing
Activities:
Proceeds from loans from
corporate general partner 661,400 - -
Repayment of loans from
corporate general partner (661,400) - -
Distributions to holder
of minority interest (20,082) (19,997) (20,033)
Distributions to
limited partners (2,376,000) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in
financing
activities (2,396,082) (2,395,997) (2,396,033)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents (255,063) (192,560) (10,489)
Cash and Cash Equivalents at
Beginning of Year 312,814 505,374 515,863
----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 57,751 $ 312,814 $ 505,374
=========== =========== ===========
See accompanying notes to financial statements.
17
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
Reconciliation of Net Income
to Net Cash Provided by
Operating Activities:
Net income $ 1,814,657 $ 1,482,515 $ 1,858,605
----------- ----------- -----------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 424,766 433,892 433,892
Amortization 600 600 599
Minority interest in
income of consolidated
joint venture 17,282 17,205 17,287
Equity in earnings of
unconsolidated joint
venture, net of
distributions 19,930 25,484 21,197
Provision for loss on
land and building - 207,844 -
Decrease (increase) in
receivables (215,193) 9,339 (184)
Decrease in net investment
in direct financing
leases 7,331 5,358 4,692
Increase in prepaid
expenses (1,297) (1,778) (3,823)
Decrease (increase) in
accrued rental income (32,667) 7,161 (27,669)
Increase (decrease) in
accounts payable and
accrued expenses (4,732) (21,689) 46,582
Increase in due to
related parties 48,944 51,578 2,337
Increase (decrease) in
rents paid in advance
and deposits 12,133 (14,072) 9,856
----------- ----------- -----------
Total adjustments 277,097 720,922 504,766
----------- ----------- -----------
Net Cash Provided by Operating
Activities $ 2,091,754 $ 2,203,437 $ 2,363,371
=========== =========== ===========
Supplemental Schedule of
Non-Cash Financing Activities:
Distributions declared and
unpaid at December 31 $ 594,000 $ 594,000 $ 594,000
=========== =========== ===========
See accompanying notes to financial statements.
18
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund III, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
on a triple-net basis, whereby the tenant is generally responsible for
all operating expenses relating to the property, including property
taxes, insurance, maintenance and repairs. The leases are accounted for
using either the direct financing or the operating methods. Such
methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents
the cost of the asset) (Note 4). Unearned income is
deferred and amortized to income over the lease terms so as
to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on
19
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
1. Significant Accounting Policies - Continued:
a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property
is placed in service.
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date.
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, plus any accrued rental income, will be removed from
the accounts and gains or losses from sales will be reflected in income.
The general partners of the Partnership review properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations. The
general partners determine whether an impairment in value has occurred
by comparing the estimated future undiscounted cash flows, including the
residual value of the property, with the carrying cost of the individual
property. Although the general partners have made their best estimate
of these factors based on current conditions, it is reasonably possible
that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be
generated from its properties and the need for asset impairment write-
downs. If an impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its fair market
value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
and to decrease rental or other income or increase bad debt expense for
the current period, although the Partnership continues to pursue
collection of such amounts. If amounts are subsequently determined to
be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture, a Florida general partnership,
using the consolidation method. Minority interest represents the
minority joint venture partners'
20
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
1. Significant Accounting Policies - Continued:
proportionate share of the equity in the Partnership's consolidated
joint venture. All significant intercompany accounts and transactions
have been eliminated.
The Partnership's investment in Titusville Joint Venture is accounted
for using the equity method since the Partnership shares control with an
affiliate which has the same general partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits
at commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus
accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits
at commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash
investments to financial institutions with high credit standing;
therefore, the Partnership believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Lease Costs - Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of
21
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
1. Significant Accounting Policies - Continued:
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. The more
significant areas requiring the use of management estimates relate to
the allowance for doubtful accounts and future cash flows associated
with long-lived assets. Actual results could differ from those
estimates.
New Accounting Standard - Effective January 1, 1996, the Partnership
adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The statement requires that an entity review long-lived
assets and certain identifiable intangibles, to be held and used, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Adoption of this
standard had no material effect on the Partnership's financial position
or results of operations.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The leases generally are classified as
operating leases, however, two of the leases have been classified as
direct financing leases. For the leases classified as direct financing
leases, the building portions of the property leases are accounted for
as direct financing leases while the land portion of both of these
leases are operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition, the
tenant generally pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew
the leases for two or four successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow
the tenant to purchase the property at fair market value after a
specified portion of the lease has elapsed.
22
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
1996 1995
----------- -----------
Land $ 7,835,279 $ 7,835,279
Buildings 12,467,020 13,016,774
----------- -----------
20,302,299 20,852,053
Less accumulated
depreciation (3,610,923) (3,334,676)
----------- -----------
16,691,376 17,517,377
Less allowance for loss
on land and building (207,844) (207,844)
----------- -----------
$16,483,532 $17,309,533
=========== ===========
At December 31, 1995, the Partnership established an allowance for loss
on land and building in the amount of $207,844 for financial reporting
purposes for the Po Folks property in Hagerstown, Maryland. The
allowance represents the difference between the (i) property's carrying
value at December 31, 1995, and (ii) the general partners' estimate of
the net realizable value of the property based on an anticipated sales
price previously agreed upon by the general partners relating to this
property.
Some leases provide for escalating guaranteed minimum rents throughout
the lease terms. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For
the years ended December 31, 1996, 1995 and 1994, the Partnership
recognized $32,667, $27,669 and $27,669 of such rental income. Income
recognized during 1995 was reduced by $34,830 as a result of the
Partnership's establishing an allowance for doubtful accounts for
accrued rental income amounts previously recorded relating to the lease
of the property in Chicago, Illinois.
23
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
3. Land and Buildings on Operating Leases - Continued:
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1996:
1997 $ 1,980,747
1998 2,001,716
1999 2,014,645
2000 2,014,645
2001 2,019,170
Thereafter 10,682,641
-----------
$20,713,564
===========
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during
the initial lease term. In addition, this table does not include any
amounts for future contingent rentals which may be received on the
leases based on a percentage of the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct financing
leases at December 31:
1996 1995
----------- -----------
Minimum lease payments
receivable $ 2,340,192 $ 1,370,228
Estimated residual value 239,432 139,124
Less unearned income (1,640,706) (964,338)
----------- -----------
Net investment in direct
financing leases $ 938,918 $ 545,014
=========== ===========
24
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
4. Net Investment in Direct Financing Leases - Continued:
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 1996:
1997 $ 148,672
1998 148,672
1999 148,672
2000 148,672
2001 148,672
Thereafter 1,596,832
----------
$2,340,192
==========
The above table does not include future minimum lease payments for
renewal periods or for contingent rental payments that may become due in
future periods (see Note 3).
5. Investment in Joint Venture:
The Partnership has a 73.4% interest in the profits and losses of
Titusville Joint Venture which is accounted for using the equity method.
The remaining interest in the Titusville Joint Venture is held by an
affiliate of the Partnership which has the same general partners.
Titusville Joint Venture owns and leases one property to an operator of
national family-style restaurants. The following presents the joint
venture's condensed financial information at December 31:
1996 1995
-------- --------
Land and building on operating
lease, less accumulated
depreciation $822,072 $847,105
Cash 9,677 6,995
Receivables 11,233 12,000
Accrued rental income 17,700 14,700
Other assets 29,631 35,540
Liabilities 9,665 8,539
Partners' capital 880,648 907,801
Revenues 51,778 65,105
Net income 15,995 29,996
25
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
5. Investment in Joint Venture:
The Partnership recognized income of $11,740, $22,015 and $20,952 for
the years ended December 31, 1996, 1995 and 1994, respectively, from
this joint venture.
6. Receivables:
During 1996, the Partnership terminated its lease with the former tenant
of its Denny's property in Hagerstown, Maryland. In connection
therewith, the Partnership wrote-off approximately $238,300 of amounts
previously included in receivables relating to both the Denny's and Po
Folks properties, and the related allowance for doubtful accounts. In
October 1996, the Partnership entered into a lease agreement with a new
tenant to operate the Denny's restaurant located on the Partnership's
property and accepted a promissory note from the current tenant whereby
$25,000, which had been included in receivables for past due rents from
the former tenant, was converted to a loan receivable held by the
Partnership to facilitate the asset purchase agreement between the
former and current tenants. The promissory note bears interest of ten
percent per annum and is being collected in 36 equal monthly
installments of $807 and commenced in October 1996. The promissory note
balance at December 31, 1996, was $23,240, including accrued interest of
$50.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent
to the limited partners and one percent to the general partners.
Distributions of net cash flow are made 99 percent to the limited
partners and one percent to the general partners; provided, however,
that the one percent of net cash flow to be distributed to the general
partners is subordinated to receipt by the limited partners of an
aggregate, ten percent, noncumulative, noncompounded annual return on
their adjusted capital contributions (the "10% Preferred Return").
26
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
7. Allocations and Distributions - Continued:
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an
amount sufficient to provide them with their cumulative 10% Preferred
Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior
distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property is, in general,
allocated in the same manner as net sales proceeds are distributable.
Any loss from the sale of a property is, in general, allocated first, on
a pro rata basis, to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
During each of the years ended December 31, 1996, 1995 and 1994, the
Partnership declared distributions to the limited partners of
$2,376,000. No distributions have been made to the general partners to
date.
27
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
1996 1995 1994
---------- ---------- ----------
Net income for financial
reporting purposes $1,814,657 $1,482,515 $1,858,605
Depreciation for tax
reporting purposes
less than(in excess
of) depreciation for
financial reporting
purposes (9,754) (628) (628)
Allowance for loss on
land and building - 207,844 -
Direct financing leases
recorded as operating
leases for tax reporting
purposes 7,330 5,358 4,692
Gain on sale of land for
tax reporting purposes 20,724 - -
Equity in earnings of
joint venture for tax
reporting purposes less
than equity in earnings
of joint venture for
financial reporting
purposes (1,329) (1,769) (1,769)
Allowance for doubtful
accounts (283,135) 42,770 82,915
Accrued rental income (32,667) 7,161 (27,669)
Rents paid in advance 12,133 (14,572) 9,856
Minority interest in
timing differences
of consolidated joint
venture (161) (106) (132)
---------- ---------- ----------
Net income for federal
income tax purposes $1,527,797 $1,728,573 $1,925,870
========== ========== ==========
28
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Group, Inc., the parent company of CNL
Investment Company and CNL Fund Advisors, Inc. The other individual
general partner, Robert A. Bourne, is the president of CNL Investment
Company and CNL Fund Advisors, Inc. CNL Income Fund Advisors, Inc. was
a wholly owned subsidiary of CNL Group, Inc. until its merger, effective
January 1, 1996, with CNL Fund Advisors, Inc. During the years ended
December 31, 1996, 1995 and 1994, CNL Investment Company, CNL Income
Fund Advisors, Inc. and CNL Fund Advisors, Inc. (hereinafter referred to
collectively as the "Affiliates") each performed certain services for
the Partnership, as described below.
During the years ended December 31, 1996, 1995 and 1994, certain
Affiliates acted as manager of the Partnership's properties pursuant to
a property management agreement with the Partnership. In connection
therewith, the Partnership agreed to pay the Affiliates an annual,
noncumulative, subordinated management fee of one-half of one percent of
the Partnership assets under management (valued at cost) annually. The
property management fee is limited to one percent of the sum of gross
operating revenues from properties wholly owned by the Partnership and
the Partnership's allocable share of gross operating revenues from joint
ventures or competitive fees for comparable services. In addition,
these fees will be incurred and will be payable only after the limited
partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular
year, no property management fees will be due or payable for such year.
As a result of such threshold, no property management fees were incurred
during the years ended December 31, 1996, 1995 and 1994.
During the years ended December 31, 1996, 1995 and 1994, the Affiliates
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $85,906, $78,597 and $47,633
for the years ended December 31, 1996, 1995 and 1994, respectively, for
such services.
29
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
9. Related Party Transactions - Continued:
The due to related parties consisted of the following at December 31:
1996 1995
-------- --------
Due to Affiliates:
Expenditures incurred on
behalf of the Partnership $ 56,942 $ 27,557
Accounting and administrative
services 45,917 26,358
-------- --------
$102,859 $ 53,915
======== ========
10. Concentration of Credit Risk:
For the years ended December 31, 1996, 1995 and 1994, rental income from
Golden Corral Corporation was $490,196, $470,952 and $472,443,
respectively, each representing more than ten percent of the
Partnership's total rental and earned income (including the
Partnership's share of rental and earned income from the joint venture).
In addition, the following schedule presents total rental and earned
income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and earned income
(including the Partnership's share of rental and earned income from the
joint venture) for at least one of the years ended December 31:
1996 1995 1994
-------- -------- --------
Golden Corral
Family Steakhouse
Restaurants $490,196 $470,952 $472,443
Denny's 355,123 254,043 330,659
Pizza Hut 292,795 289,161 290,438
Perkins 276,114 276,114 276,114
KFC 254,646 279,075 227,493
Taco Bell 254,395 260,119 262,282
30
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
10. Concentration of Credit Risk - Continued:
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains could significantly impact the results of operations
of the Partnership. However, the general partners believe that the risk
of such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
11. Commitments and Contingencies:
In May 1995, the Partnership received notice from the tenant of its
property in Bradenton, Florida, that it intends to exercise its option
to purchase the property in accordance with the terms of its lease
agreement. As of February 8, 1997, the Partnership and the tenant had
not yet entered into a purchase and sale agreement relating to this
property.
In April 1996, the Partnership received $51,400 as partial settlement in
a right of way taking relating to a parcel of land of the property in
Plant City, Florida. The Partnership intends to petition through
mediation for additional proceeds. As of February 8, 1997, the final
amount of proceeds to be received had not been determined; therefore,
the sale had not been consummated. The proceeds of $51,400 were
recorded as a deposit as of December 31, 1996.
12. Subsequent Event:
In January 1997, the Partnership sold its property in Chicago, Illinois,
to an unrelated third party, for $505,000 and received net sales
proceeds of $481,268, resulting in a gain of approximately $3,800 for
financial reporting purposes.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. 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 Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., CNL Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 50, is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, director and Chief Executive Officer since its formation
in 1980. CNL Group, Inc. is the parent company of CNL Securities Corp., CNL
Investment Company, CNL Fund Advisors, Inc., and prior to its merger with CNL
Fund Advisors, Inc., effective January 1, 1996, CNL Income Fund Advisors, Inc.
Mr. Seneff is Chief Executive Officer, and has been a director and registered
principal of CNL Securities Corp., which served as the managing dealer in the
Partnership's offering of Units, since its formation in 1979. Mr. Seneff also
has held the position of President and a director of CNL Management Company, a
registered investment advisor, since its formation in 1976, has served as
Chief Executive Officer and Chairman of the Board of CNL Investment Company,
and Chief Executive Officer and Chairman of the Board of Commercial Net Lease
Realty, Inc. since 1992, has served as the Chairman of the Board and the Chief
Executive Officer of CNL Realty Advisors, Inc. since its inception in 1991,
served as Chairman of the Board and Chief Executive Officer of CNL Income Fund
Advisors, Inc. since its inception in 1994 through December 31, 1995, has
served as Chairman of the Board and Chief Executive Officer of CNL Fund
Advisors, Inc. since its inception in 1994, and has held the position of Chief
Executive Officer and a director of CNL Institutional Advisors, Inc., a
registered investment advisor, since its inception in 1990. In addition, Mr.
Seneff has served as Chairman of the Board and Chief Executive Officer of CNL
American Properties Fund, Inc. since 1994, and has served as Chairman of the
Board and Chief Executive Officer of CNL American Realty Fund, Inc. since 1996
and of CNL Real Estate Advisors, Inc. since January 1997. Mr. Seneff
previously served on the Florida State Commission on Ethics and is a former
member and past Chairman of the State of Florida Investment Advisory Council,
which recommends to the Florida Board of Administration investments for
various Florida employee retirement funds. The Florida Board of
Administration, Florida's principal investment advisory and money management
agency, oversees the investment of more than $40 billion of retirement funds.
Since 1971, Mr. Seneff has been active in the acquisition, development and
management of real estate projects and, directly or through an affiliated
entity, has served as a general partner or joint venturer in over 100 real
estate ventures involved in the financing, acquisition, construction and
rental of office buildings, apartment complexes, restaurants, hotels and other
real estate. Included in these real estate ventures are approximately 65
privately offered real estate limited partnerships in which Mr. Seneff,
directly or through an affiliated entity, serves or has served as a general
partner. Also included are CNL Income Fund, Ltd., CNL Income Fund II, Ltd.,
CNL Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd.,
CNL Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX,
Ltd., CNL Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII,
Ltd., CNL Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund
XV, Ltd., CNL Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income
Fund XVIII, Ltd. (the ``CNL Income Fund Partnerships''), public real estate
limited partnerships with investment objectives similar to those of the
Partnership, in which Mr. Seneff serves as a general partner. Mr. Seneff
received his degree in Business Administration from Florida State University
in 1968.
Robert A. Bourne, age 49, is President and Treasurer of CNL Group, Inc.,
President, a director and a registered principal of CNL Securities Corp.,
President and a director of CNL Investment Company, CNL Fund
32
Advisors, Inc., and prior to its merger with CNL Fund Advisors, Inc.,
effective January 1, 1996, CNL Income Fund Advisors, Inc., and President,
Chief Investment Officer and a director of CNL Institutional Advisors, Inc., a
registered investment advisor. Mr. Bourne also has served as a director since
1992, as President from July 1992 to February 1996, and since February 1996,
as Vice Chairman of the Board of Directors, Secretary and Treasurer of
Commercial Net Lease Realty, Inc. In addition, Mr. Bourne has served as a
director since its inception in 1991, as President from 1991 to February 1996,
as Secretary from February 1996 to July 1996, and since February 1996, as
Treasurer and Vice Chairman of CNL Realty Advisors, Inc. In addition, Mr.
Bourne has served as President and a director of CNL American Properties Fund,
Inc. since 1994, and has served as President and a director of CNL American
Realty Fund, Inc. since 1996 and of CNL Real Estate Advisors, Inc. since
January 1997. Upon graduation from Florida State University in 1970, where he
received a B.A. in Accounting, with honors, Mr. Bourne worked as a certified
public accountant and, from September 1971 through December 1978, was employed
by Coopers & Lybrand, Certified Public Accountants, where he held the
position of tax manager beginning in 1975. From January 1979 until June
1982, Mr. Bourne was a partner in the accounting firm of Cross & Bourne and
from July 1982 through January 1987, he was a partner in the accounting firm
of Bourne & Rose, P.A., Certified Public Accountants. Mr. Bourne, who joined
CNL Securities Corp. in 1979, has participated as a general partner or joint
venturer in over 100 real estate ventures involved in the financing,
acquisition, construction and rental of office buildings, apartment complexes,
restaurants, hotels and other real estate. Included in these real estate
ventures are approximately 64 privately offered real estate limited
partnerships in which Mr. Bourne, directly or through an affiliated entity,
serves or has served as a general partner. Also included are the CNL Income
Fund Partnerships, public real estate limited partnerships with investment
objectives similar to those of the Partnership, in which Mr. Bourne serves as
a general partner.
CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida. Its sole directors and shareholders
are James M. Seneff, Jr. and Robert A. Bourne, the individual General
Partners. CNL Realty Corporation was organized to serve as the corporate
general partner of real estate limited partnerships, such as the Partnership,
organized by one or both of the individual General Partners. CNL Realty
Corporation currently serves as the corporate general partner of the CNL
Income Fund Partnerships.
CNL Fund Advisors, Inc., provides certain management services in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc.
is a corporation organized in 1994 under the laws of the State of Florida, and
its principal office is located at 400 East South Street, Suite 500, Orlando,
Florida 32801. CNL Fund Advisors, Inc. is a wholly owned subsidiary of CNL
Group, Inc., a diversified real estate company, and was organized to perform
property acquisition, property management and other services.
CNL Group, Inc., which is the parent company of CNL Fund Advisors, Inc.,
is a diversified real estate corporation organized in 1980 under the laws of
the State of Florida. Other subsidiaries and affiliates of CNL Group, Inc.
include a property development and management company, two investment advisory
companies, and seven corporations organized as strategic business units.
James M. Seneff, Jr., an individual General Partner of the Partnership, is the
Chairman of the Board, Chief Executive Officer, and a director of CNL Group,
Inc. Mr. Seneff and his wife own all of the outstanding shares of CNL Group,
Inc.
The following persons serve as operating officers of CNL Group, Inc. or
its affiliates or subsidiaries in the discretion of the Boards of Directors of
those companies, but, except as specifically indicated, do not serve as
members of the Boards of Directors of those entities. The Boards of Directors
have the responsibility for creating and implementing the policies of
CNL Group, Inc. and its affiliated companies.
John T. Walker, age 38, joined CNL Group, Inc. in September 1994, as
Senior Vice President, responsible for Research and Development. He currently
serves as the Chief Operating Officer and Executive Vice President of CNL Fund
Advisors, Inc. and CNL American Properties Fund, Inc. and serves as Executive
Vice President of CNL American Realty Fund, Inc. and CNL Real Estate Advisors,
Inc. From May 1992 to May 1994, he was Executive Vice President for Finance
and Administration and Chief Financial Officer of Z Music, Inc., a cable
television network which was subsequently acquired by Gaylord Entertainment,
where he was responsible for overall financial and administrative management
and planning. From January 1990 through April 1992, Mr. Walker was Chief
Financial Officer of the First Baptist Church in Orlando, Florida. From
April 1984 through December 1989, he was a partner in the accounting firm of
Chastang, Ferrell & Walker, P.A., where he was the partner in charge
33
of audit and consulting services, and from 1981 to 1984, Mr. Walker was a
Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker is a Cum Laude
graduate of Wake Forest University with a B.S. in Accountancy and is a
certified public accountant.
Lynn E. Rose, age 48, a certified public accountant, has served as Chief
Financial Officer of CNL Group, Inc. since December 1993, has served as
Secretary of CNL Group, Inc. since 1987, and served as Controller of CNL
Group, Inc. from 1987 until December 1993. In addition, Ms. Rose has served
as Chief Financial Officer and Secretary of CNL Securities Corp. since July
1994. She has served as Chief Operating Officer, Vice President and Secretary
of CNL Corporate Services, Inc. since November 1994. Ms. Rose also has served
as Chief Financial Officer and Secretary of CNL Institutional Advisors, Inc.
since its inception in 1990, a director of CNL Realty Advisors, Inc. since its
inception in 1991, Secretary of CNL Realty Advisors, Inc. since its inception
in 1991 (excluding February 1996 to July 1996), Treasurer of CNL Realty
Advisors, Inc. from 1991 to February 1996, Secretary and Treasurer of
Commercial Net Lease Realty, Inc. from 1992 to February 1996, Secretary of CNL
Income Fund Advisors, Inc. since its inception in 1994 to December 1995, and a
director, Secretary and Treasurer of CNL Fund Advisors, Inc. since 1994 and
has served as a director, Secretary and Treasurer of CNL Real Estate Advisors,
Inc. since January 1997. Ms. Rose also has served as Secretary and Treasurer
of CNL American Properties Fund, Inc. since 1994, and has served as Secretary
and Treasurer of CNL American Realty Fund, Inc. since 1996. Ms. Rose also
currently serves as Secretary for approximately 50 additional corporations.
Ms. Rose oversees the management information services, administration, legal
compliance, accounting, tenant compliance, and reporting for over 250
corporations, partnerships, and joint ventures. Prior to joining CNL, Ms. Rose
was a partner with Robert A. Bourne in the accounting firm of Bourne & Rose,
P.A., Certified Public Accountants. Ms. Rose holds a B.A. in Sociology from
the University of Central Florida and is a registered financial and operations
principal of CNL Securities Corp. She was licensed as a certified public
accountant in 1979.
Jeanne A. Wall, age 38, has served as Chief Operating Officer of
CNL Investment Company and of CNL Securities Corp. since November 1994 and
previously served as Executive Vice President of CNL Investment Company since
January 1991. In 1984, Ms. Wall joined CNL Securities Corp. as its Partnership
Administrator. In 1985, Ms. Wall became Vice President of CNL Securities
Corp. and, in 1987, she became a Senior Vice President of CNL Securities Corp.
In this capacity, Ms. Wall serves as national marketing and sales director and
oversees the national marketing plan for the CNL investment programs. In
addition, Ms. Wall oversees the partnership administration and investor
services for programs offered through participating brokers. Ms. Wall also
has served as Senior Vice President of CNL Institutional Advisors, Inc., a
registered investment advisor, from 1990 to 1993, as Vice President of CNL
Realty Advisors, Inc. since its inception in 1991, as Vice President of
Commercial Net Lease Realty, Inc. since 1992, as Executive Vice President of
CNL Income Fund Advisors, Inc. from its inception in 1994 to December 1995, as
Executive Vice President of CNL Fund Advisors, Inc. since 1994, and as
Executive Vice President of CNL American Properties Fund, Inc. since 1994. In
addition, Ms. Wall has served as Executive Vice President of CNL Real Estate
Advisors, Inc. since January 1997 and as Executive Vice President of CNL
American Realty Fund, Inc. since 1996. Ms. Wall holds a B.A. in Business
Administration from Linfield College and is a registered principal of CNL
Securities Corp. Ms. Wall currently serves as a trustee on the board of the
Investment Program Association and on the Direct Participation Program
committee for the National Association of Securities Dealers (NASD).
Steven D. Shackelford, age 33, has served as Chief Financial Officer of
CNL Fund Advisors, Inc. since September 1996. Mr. Shackelford joined CNL
Group, Inc. in September 1996. He also currently serves as the Chief
Financial Officer of CNL American Properties Fund, Inc. From March 1995 to
July 1996, he was a senior manager in the national office of Price Waterhouse
where he was responsible for advising foreign clients seeking to raise capital
and a public listing in the United States. From August 1992 to March 1995, he
served as a manager in the Price Waterhouse, Paris, France office serving
several multinational clients. Mr. Shackelford was an audit staff and senior
from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr
Shackelford received a B.A. in Accounting, with honors, and a Masters of
Business Administration from Florida State University and is a certified
public accountant.
34
ITEM 11. EXECUTIVE COMPENSATION
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or
any of their affiliates. There are no compensatory plans or arrangements
regarding termination of employment or change of control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 28, 1997, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of February 28, 1997, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
-------------- --------------- ----------------
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
----
100%
====
Neither the General Partners, nor any of their affiliates, owns any interest
in the Registrant, except as noted above. There are no arrangements which at
a subsequent date may result in a change in control of the Registrant.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The table below summarizes the types, recipients, methods of computation
and amounts of compensation, fees and distributions paid or payable by the
Partnership to the General Partners and their affiliates for the year ended
December 31, 1996, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 1996
------------- ----------- -----------------------
Reimbursement to Operating expenses are Operating expenses
affiliates for reimbursed at the lower incurred on behalf of
operating expenses of cost or 90 percent of the Partnership:
the prevailing rate at $108,900
which comparable
services could have been Accounting and
obtained in the same administrative services:
geographic area. If the $85,906
General Partners or
their affiliates loan
funds to the
Partnership, the General
Partners or their
affiliates will be
reimbursed for the
interest and fees
charged to them by
unaffiliated lenders for
such loans. Affiliates
of the General Partners
from time to time incur
certain operating
expenses on behalf of
the Partnership for
which the Partnership
reimburses the
affiliates without
interest.
Annual, subordinated One-half of one percent $ - 0 -
property management fee per year of Partnership
to affiliates assets under management
(valued at cost),
subordinated to certain
minimum returns to the
Limited Partners. The
property management fee
will not exceed the
lesser of one percent of
gross operating revenues
or competitive fees for
comparable services.
Due to the fact that
these fees are
noncumulative, if the
Limited Partners do not
receive their 10%
Preferred Return in any
particular year, no
management fees will be
due or payable for such
year.
36
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 1996
------------- ----------- -----------------------
Deferred, subordinated A deferred, subordinated $ - 0 -
real estate disposition real estate disposition
fee payable to fee, payable upon sale
affiliates of one or more
Properties, in an amount
equal to the lesser of
(i) one-half of a
competitive real estate
commission, or (ii)
three percent of the
sales price of such
Property or Properties.
Payment of such fee
shall be made only if
affiliates of the
General Partners provide
a substantial amount of
services in connection
with the sale of a
Property or Properties
and shall be
subordinated to certain
minimum returns to the
Limited Partners.
However, if the net
sales proceeds are
reinvested in a
replacement property, no
such real estate
disposition fee will be
incurred until such
replacement property is
sold and the net sales
proceeds are
distributed.
General Partners' A deferred, subordinated $ - 0 -
deferred, subordinated share equal to one
share of Partnership percent of Partnership
net cash flow distributions of net
cash flow, subordinated
to certain minimum
returns to the Limited
Partners.
General Partners' A deferred, subordinated $ - 0 -
deferred, subordinated share equal to five
share of Partnership percent of Partnership
net sales proceeds from distributions of such
a sale or sales net sales proceeds,
subordinated to certain
minimum returns to the
Limited Partners.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the years ended December 31, 1996, 1995
and 1994
Statements of Partners' Capital for the years ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1996, 1995 and 1994
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1996
Notes to Schedule III - Real Estate and Accumulated Depreciation
at December 31, 1996
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.1 to Amendment No. 1 to Registration
Statement No. 33-15374 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 4.1 to Amendment No. 1 to Registration
Statement No. 33-15374 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
38
10.1 Property Management Agreement (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on April 5,
1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as Exhibit
10.2 to Form 10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated herein by
reference.)
10.3 Assignment of Property Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
10.3 to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein by
reference.)
10.4 Promissory Note, dated January 16, 1996, among the Registrant and
CNL Realty Corporation relating to a $86,200 loan. (Included as
Exhibit 10.4 to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein by
reference.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 1996 through December 31, 1996.
39
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, on the 26th day
of March, 1997.
CNL INCOME FUND III, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
--------------------------------
JAMES M. SENEFF, JR.
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.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bourne President, Treasurer and March 26, 1997
- ------------------------ Director (Principal
Robert A. Bourne Financial and
Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer March 26, 1997
- ------------------------ and Director (Principal
James M. Seneff, Jr. Executive Officer)
<TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Additions Deductions
----------------------- ----------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---- ----------- ---------- ---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 Allowance for
doubtful
accounts (a) $227,592 $ 4,101 $136,069(b) $ 41,599(c) $ 15,656 $310,507
======== ======= ======== ======== ======== ========
1995 Allowance for
doubtful
accounts (a) $310,507 $10,681 $138,933(b) $ 53,946(c) $ 18,068 $388,107
======== ======= ======== ======== ======== ========
1996 Allowance for
doubtful
accounts (a) $388,107 $ 924 $ 62,167(b) $273,165(c) $107,891 $ 70,142
======== ======= ======== ======== ======== ========
(a) Deducted from receivables and accrued rental income on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
F-1
</TABLE>
<TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
---------------------- -------------------
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Properties the Partnership has
Invested in Under Operating
Leases:
Burger King Restaurants:
Kansas City, Missouri - $ 236,055 $ 573,739 $ - $ -
Roswell, Georgia - 437,528 - 379,809 -
Denny's Restaurants:
Hagerstown, Maryland - 332,665 - - -
Hazard, Kentucky - 196,801 - 489,749 -
Daytona Beach, Florida - 153,159 369,125 446,200 -
Golden Corral Family
Steakhouse Restaurants:
Altus, Oklahoma - 149,756 449,269 - -
Hastings, Nebraska - 110,800 332,400 23,636 -
Wichita, Kansas (f) - 147,349 442,045 - -
Stockbridge, Georgia - 384,644 685,511 - -
Washington, Illinois - 221,680 517,833 - -
Schererville, Indiana (f) - 211,690 531,801 - -
KFC Restaurants:
Calallen, Texas - 219,432 - 332,043 -
Katy, Texas - 266,768 - 279,486 -
Burnsville, Minnesota - 196,159 - 437,895 -
Page, Arizona - 328,729 - 270,755 -
Mountain Jack's Restaurant:
Canton Township, Michigan (g) - 296,945 - - -
Perkins Restaurants:
Flagstaff, Arizona - 372,546 - 669,471 -
Bradenton, Florida - 438,302 720,093 - -
Pizza Hut Restaurants:
Jacksboro, Texas - 54,274 147,337 - -
Seminole, Texas - 183,284 134,531 - -
Winter Springs, Florida - 268,128 270,372 - -
Austin, Texas - 301,778 372,137 - -
Kissimmee, Florida - 141,282 371,166 - -
Po Folks Restaurant:
Hagerstown, Maryland (h) - 579,990 - 638,320 -
Popeyes Famous Fried
Chicken Restaurant:
Plant City, Florida - 275,129 - 360,342 -
<CAPTION>
Life
Gross Amount at Which Carried on Which
at Close of Period (c) Depreciation
------------------------------------- in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ------------
<C> <C> <C> <C> <C> <C> <C>
$ 236,055 $ 573,739 $ 809,794 $ 173,716 1984 12/87 (b)
437,528 379,809 817,337 106,030 1988 06/88 (b)
332,665 (e) 332,665 - 1988 12/87 (d)
196,801 489,749 686,550 123,117 1988 02/88 (b)
153,159 815,325 968,484 229,876 1988 06/88 (b)
149,756 449,269 599,025 138,525 1987 10/87 (b)
110,800 356,036 466,836 109,187 1987 10/87 (b)
147,349 442,045 589,394 135,069 1987 11/87 (b)
384,644 685,511 1,070,155 207,558 1987 11/87 (b)
221,680 517,833 739,513 158,227 1987 12/87 (b)
211,690 531,801 743,491 162,495 1987 12/87 (b)
219,432 332,043 551,475 94,079 1988 12/87 (b)
266,768 279,486 546,254 81,128 1988 02/88 (b)
196,159 437,895 634,054 121,637 1988 02/88 (b)
328,729 270,755 599,484 77,842 1988 02/88 (b)
296,945 (e) 296,945 - 1988 02/88 (d)
372,546 669,471 1,042,017 184,104 1988 06/88 (b)
438,302 720,093 1,158,395 205,026 1985 06/88 (b)
54,274 147,337 201,611 44,611 1983 12/87 (b)
183,284 134,531 317,815 40,733 1977 12/87 (b)
268,128 270,372 538,500 81,487 1987 01/88 (b)
301,778 372,137 673,915 110,091 1987 02/88 (b)
141,282 371,166 512,448 109,803 1987 02/88 (b)
579,990 638,320 1,218,310 177,571 1988 12/87 (b)
275,129 360,342 635,471 104,599 1988 11/87 (b)
F-2
</TABLE>
<TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
----------------------- -------------------
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Taco Bell Restaurants:
Fernandina Beach, Florida - 190,348 - 395,955 -
Bishop, California - 363,965 - 272,151 -
Longwood, Florida - 346,831 - 394,086 -
Wendy's Old Fashioned
Hamburger Restaurants:
Punta Gorda, Florida - 279,061 471,431 - -
Chicago, Illinois - 90,487 542,731 - -
Mason City, Iowa - 59,714 121,384 24,217 -
---------- ---------- ---------- --------
$7,835,279 $7,052,905 $5,414,115 $ -
========== ========== ========== ========
Property of Joint Venture
in Which the Partnership
has a 73.4% Interest and has
Invested in Under an Operating
Lease:
Po Folks Restaurant:
Titusville, Florida - $ 271,350 $ - $ 750,985 $ -
========== ========== ========== ========
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Denny's Restaurant:
Hagerstown, Maryland - $ - $ - $ 549,754 $ -
Mountain Jack's Restaurant:
Canton Township, Michigan - - - 668,909 -
---------- ---------- ---------- --------
$ - $ - $1,218,663 $ -
========== ========== ========== ========
<CAPTION>
Life
Gross Amount at Which Carried on Which
at Close of Period (c) Depreciation
------------------------------------- in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ------------
<C> <C> <C> <C> <C> <C> <C>
190,348 395,955 586,303 114,937 1988 12/87 (b)
363,965 272,151 636,116 74,464 1988 05/88 (b)
346,831 394,086 740,917 106,739 1988 06/88 (b)
279,061 471,431 750,492 140,120 1987 02/88 (b)
90,487 542,731 633,218 155,281 1984 02/88 (b)
59,714 145,601 205,315 42,871 1988 03/88 (b)
---------- ----------- ----------- ----------
$7,835,279 $12,467,020 $20,302,299 $3,610,923
========== =========== =========== ==========
$ 271,350 $ 750,985 $ 1,022,335 $ 200,263 1988 12/88 (b)
========== =========== =========== ==========
(e) (e) (e) (d) 1988 12/87 (d)
(e) (e) (e) (d) 1988 02/88 (d)
F-3
</TABLE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(a) Transactions in real estate and accumulated depreciation during 1996,
1995 and 1994, are summarized as follows:
Accumulated
Cost (h) Depreciation
----------- ------------
Properties the Partnership
has Invested in Under
Operating Leases:
Balance, December 31, 1993 $20,852,053 $ 2,466,892
Depreciation expense - 433,892
----------- -----------
Balance, December 31, 1994 20,852,053 2,900,784
Depreciation expense - 433,892
----------- -----------
Balance, December 31, 1995 20,852,053 3,334,676
Reclassified to direct
financing lease (549,754) -
Depreciation - 276,247
----------- -----------
Balance, December 31, 1996 $20,302,299 $ 3,610,923
=========== ===========
Property of Joint Venture
in Which the Partnership
has a 73.4% Interest:
Balance, December 31, 1993 $ 1,022,335 $ 125,164
Depreciation expense - 25,033
----------- -----------
Balance, December 31, 1994 1,022,335 150,197
Depreciation expense - 25,033
----------- -----------
Balance, December 31, 1995 1,022,335 175,230
Depreciation expense - 25,033
----------- -----------
Balance, December 31, 1996 $ 1,022,335 $ 200,263
=========== ===========
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 1996, the aggregate cost of the Properties owned by
the Partnership and its consolidated joint venture, and the
unconsolidated joint venture for federal income tax purposes was
$21,490,285 and $1,022,335, respectively. All of the leases are
treated as operating leases for federal income tax purposes.
(d) For financial reporting purposes, the portion of the lease relating to
the building has been recorded as a direct financing lease. The cost
of the building has been included in net investment in direct
financing lease; therefore, depreciation is not applicable.
F-4
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1996
(e) For financial reporting purposes, certain components of the lease
relating to land and building have been recorded as a direct financing
lease. Accordingly, costs relating to these components of this lease
are not shown.
(f) The tenant of this property, Golden Corral Corporation, has subleased
this property to a local, independent restaurant. Golden Corral
Corporation continues to be responsible for complying with all the terms
of the lease agreement and is continuing to pay rent on this property to
the Partnership.
(g) The restaurant in Canton Township, Michigan, was converted from a
Ponderosa Steakhouse restaurant to a Mountain Jack's restaurant in
September 1993.
(h) For financial reporting purposes, the undepreciated cost of the Po Folks
Property in Hagerstown, Maryland, was written down to net realizable
value due to an anticipated impairment in value. The Partnership
recognized the impairment by recording an allowance for loss on land and
building in the amount of $207,844 at December 31, 1995. The impairment
at December 31, 1995, was based on an anticipated sales price previously
agreed upon by the general partners relating to this Property. The cost
of the Property presented on this schedule is the gross amount at which
the Property was carried at December 31, 1996, excluding the allowance
for loss on land and building.
F-5
EXHIBITS
EXHIBIT INDEX
Exhibit Number Page
3.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 5, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 5, 1993, and incorporated
herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1
to Form 10-K filed with the Securities and Exchange
Commission on April 5, 1993, and incorporated herein by
reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
10.4 Promissory Note, dated January 16, 1996, among the
Registrant and CNL Realty Corporation relating to a
$86,200 loan. (Included as Exhibit 10.4 to Form 10-K
filed with the Securities and Exchange Commission on April
1, 1996, and incorporated herein by reference.)
i
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund III, Ltd. at December 31, 1996, and its statement of
income for the year then ended and is qualified in its entirety by reference to
the Form 10-K of CNL Income Fund III, Ltd. for the year ended December 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 57,751
<SECURITIES> 0
<RECEIVABLES> 391,973
<ALLOWANCES> 70,142
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 20,094,455
<DEPRECIATION> 3,610,923
<TOTAL-ASSETS> 18,608,907
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,595,301
<TOTAL-LIABILITY-AND-EQUITY> 18,608,907
<SALES> 0
<TOTAL-REVENUES> 2,458,339
<CGS> 0
<TOTAL-COSTS> 637,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 924
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,814,657
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,814,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,814,657
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund III, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
