UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1997
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 0-19141
CNL INCOME FUND V, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2922869
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
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 value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund V, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund V, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 17, 1988. 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 December 16, 1988, 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 June 7, 1989, 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 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 national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$22,125,000, and were used to acquire 30 Properties, including interests in
three Properties owned by joint ventures in which the Partnership is a
co-venturer. During the year ended December 31, 1995, the Partnership sold its
Property in Myrtle Beach, South Carolina, to the tenant of the Property and
accepted a promissory note for the full sales price of the Property. During the
year ended December 31, 1996, the Partnership sold its Property in St. Cloud,
Florida, to the tenant of the Property and accepted $100,000 in cash and a
promissory note for the remaining sales price of the Property. In addition,
during the year ended December 31, 1997, the Partnership sold its Properties in
Franklin and Smyrna, Tennessee; Salem, New Hampshire; Port St. Lucie and Tampa,
Florida, and Richmond, Indiana. The Partnership reinvested a portion of these
net sales proceeds in a Property in Houston, Texas and a Property in Sandy,
Utah. In addition, the Partnership reinvested a portion of the net sales
proceeds in a Property in Mesa, Arizona and a Property in Vancouver, Washington,
as tenants-in-common, with affiliates of the General Partners. As a result of
the above transactions, the Partnership owned 26 Properties as of December 31,
1997. The 26 Properties include interests in three Properties owned by joint
ventures in which the Partnership is a co-venturer and two Properties owned as
tenants-in-common with affiliates of the General Partners. In January and
February 1998, the Partnership sold its Properties in Port Orange, Florida and
Tyler, Texas, respectively. The Partnership intends to reinvest the net sales
proceeds in an additional Property , make distributions to limited partners and
use for payment of Partnership distributions . Generally, the Properties are
leased on a triple-net basis with the lessees 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 also have been granted options to purchase Properties, generally at the
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 12 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
the joint ventures in which the Partnership is a co-venturer provide for initial
terms, ranging from seven to 20 years (the average being 18 years) and expire
between 2001 and 2017. All leases are on a triple-net basis, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases of the Properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $37,800 to
$222,800. Generally, the leases provide for percentage rent, based on sales in
excess of a specified amount, to be paid annually. In addition, a majority of
the leases provide that, commencing in the sixth lease year, the percentage rent
will be an amount equal to the greater of (i) the percentage rent calculated
under the lease formula or (ii) a specified percentage (ranging from one-fourth
to five percent) of the purchase price paid by the Partnership for the Property.
Generally, the leases of the Properties provide for two to 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.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
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.
The tenant relating to the Property in Lebanon, New Hampshire, in which
the Partnership has a 66.5% interest, defaulted under the terms of its
agreement, and in February 1995, ceased operations of the restaurant on the
Property. The Partnership is currently seeking a replacement tenant or a
purchaser for this Property.
In February 1994, the tenant of the Properties in Belding and South
Haven, Michigan, defaulted under the terms of its leases and a new operator
began occupying the Properties on a month-to-month basis for reduced rental
amounts. The new operator ceased operations of the Belding and South Haven
Properties in October 1994 and October 1995, respectively. In June 1997, the
Partnership entered into an operating agreement with a new operator for the
Property in South Haven, Michigan. Under the operating agreement, the
Partnership will collect amounts contingent on net operating income generated by
the restaurant. The Partnership is currently seeking a replacement tenant or a
purchaser for the Property in Belding, Michigan.
In June 1997, the Partnership terminated the lease with the tenant of
the Property in Connorsville, Indiana. In July 1997, the Partnership entered
into a new lease for this Property with a new tenant to operate the Property as
an Arby's restaurant. The lease terms of this Property are substantially the
same as the Partnership's other leases as described above in the first three
paragraphs of this section.
In November and December 1997, the Partnership reinvested a portion of
the net sales proceeds from the sales of the Properties in Port St. Lucie,
Florida; Franklin, Tennessee and Salem, New Hampshire, in Properties located in
Houston, Texas and Sandy, Utah, respectively. In addition, in October and
December 1997, the Partnership reinvested a portion of the net sales proceeds
from the sales of the Properties in Smyrna and Franklin, Tennessee, and
Richmond, Indiana, in a Property located in Mesa, Arizona and a Property in
Vancouver, Washington, respectively, with affiliates of the General Partners as
tenants-in-common, as described below in "Joint Venture Arrangements." The lease
terms for these Properties are substantially the same as the Partnership's other
leases, as described above in the first three paragraphs of this section.
Major Tenants
During 1997, two lessees of the Partnership and its consolidated joint
venture, Shoney's, Inc. and 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 two Properties owned by unconsolidated joint ventures and two
Properties owned with affiliates as tenants-in-common). As of December 31, 1997,
Shoney's, Inc. was the lessee under leases relating to four restaurants and
Golden Corral Corporation was the lessee under leases relating to two
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these two lessees each will continue to contribute more
than ten percent of the Partnership's total rental income in 1997 and subsequent
years. In addition, three Restaurant Chains, Perkins, Denny's and Wendy's Old
Fashioned Hamburger Restaurants, each accounted for more than ten percent of the
Partnership's total rental and mortgage interest income in 1997 (including
rental income from the Partnership's consolidated joint venture and the
Partnership's share of the rental income from two Properties owned by
unconsolidated joint ventures and two Properties owned with affiliates as
tenants-in-common). In subsequent years, it is anticipated that these three
Restaurant Chains each will continue to account for more than ten percent of the
total rental and mortgage interest income to which the Partnership is entitled
under the terms of the leases and mortgage note. Any failure of these lessees or
these Restaurant Chains could materially affect the Partnership's income. No
single tenant or group of affiliated tenants lease Properties with an aggregate
carrying value in excess of 20 percent of the total assets of the Partnership.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into a joint venture arrangement,
CNL/Longacre Joint Venture, with an unaffiliated entity, to purchase and hold a
Property through such joint venture. The Partnership has also entered into two
separate joint venture arrangements: Cocoa Joint Venture with CNL Income Fund
IV, Ltd., an affiliate of the General Partners, to purchase and hold one
Property; and Halls Joint Venture with CNL Income Fund VII, Ltd., an affiliate
of the General Partners, to purchase and hold one Property. The affiliates are
limited partnerships organized pursuant to the laws of the State of Florida.
Each joint venture arrangement provides for the Partnership and its joint
venture partners to share in all costs and benefits associated with the joint
venture in proportion to each partner's percentage interest in the joint
venture. The Partnership has a 66.5% interest in CNL/Longacre Joint Venture, a
43.0% interest in Cocoa Joint Venture, and a 49.0% interest in Halls Joint
Venture. The Partnership and its joint venture partners are jointly and
severally liable for all debts, obligations, and other liabilities of the joint
ventures.
Each joint venture has an initial term of 20 to 30 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer or unless terminated 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 the CNL/Longacre Joint
Venture and shares management control equally with affiliates of the General
Partners for Cocoa Joint Venture and Halls 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
partner, 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 CNL/Longacre Joint Venture, Cocoa
Joint Venture and Halls Joint Venture is distributed 66.5%, 43.0% and 49.0%,
respectively, to the Partnership and the balance is distributed to each of the
other joint venture partners. 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.
In addition to the above joint venture agreements, in 1997, the
Partnership entered into separate agreements to hold a Property in Mesa, Arizona
, as tenants-in-common , with CNL Income Fund II, Ltd., an affiliate of the
General Partners; and to hold a Property in Vancouver, Washington, as
tenants-in-common, with CNL Income Fund, Ltd., CNL Income Fund II, Ltd., and CNL
Income Fund VI, Ltd., affiliates of the General Partners. The affiliates are
limited partnerships organized pursuant to the laws of the State of Florida. The
agreements provide for the Partnership and the affiliates to share in the
profits and losses of the Properties in proportion to each co- tenant's
percentage interest. The Partnership owns a 42.23 and 27.78 percent interest in
the Property in Mesa, Arizona and the Property in Vancouver, Washington,
respectively. The tenancy in common agreement restricts each co-tenant's ability
to sell, transfer, or assign its interest in the tenancy in common's Property
without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
provided certain services relating to management of the Partnership and its
Properties pursuant to a management agreement with the Partnership through
September 30, 1995. Under this agreement, CNL Income Fund Advisors, Inc. 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 Income Fund Advisors, Inc. also
assisted the General Partners in negotiating the leases. For these services, the
Partnership had agreed to pay CNL Income Fund Advisors, Inc. an annual fee of
one percent of the sum of gross operating revenues from Properties wholly owned
by the Partnership plus the Partnership's allocable share of gross revenues of
joint ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services. Under the management agreement, the
management fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, cumulative, 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").
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
management agreement, including the payment of fees, as described above, remain
unchanged.
The 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.
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, 1997, the Partnership owned 26 Properties. Of the 26
Properties, 21 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and two are owned through tenancy
in common arrangements. See Item 1. Business - Joint Venture and Tenancy in
Common Arrangements. The Partnership is not permitted to encumber its Properties
under the terms of its partnership agreement. 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 12,300
to 135,000 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.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
1
<PAGE>
State Number of Properties
----- --------------------
Arizona 1
Florida 3
Georgia 1
Illinois 1
Indiana 3
Michigan 2
New Hampshire 1
New York 2
Ohio 2
Tennessee 1
Texas 5
Utah 2
Washington 2
------
TOTAL PROPERTIES: 26
======
Buildings. Generally, 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 1,700 to 10,100 square feet. 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. As of
December 31, 1997, the Partnership had no plans for renovation of the
Properties. Depreciation expense is computed for buildings and improvements
using the straight line method using depreciable lives of 31.5 and 40 years for
federal income tax purposes. As of December 31, 1997, the aggregate cost basis
of the Properties owned by the Partnership and joint ventures (including
Properties held through tenancy in common arrangements) for federal income tax
purposes was $15,626,886 and $5,493,388, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Boston Market 1
Burger King 2
Captain D's 2
Chevy's Fresh Mex 1
Denny's 4
Golden Corral 2
Hardee's 3
IHOP 1
Pizza Hut 1
Shoney's 1
Taco Bell 2
Tony Roma's 1
Waffle House 1
Wendy's 3
Other 1
------
TOTAL PROPERTIES 26
======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
3
<PAGE>
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.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. 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. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were
93%, 90%, 90%, 96%, and 100%, occupied, respectively. The following is a
schedule of the average annual rent for each of the five years ended December
31:
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31:
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------
Rental Revenues (1) $1,804,300 $2,119,765 $2,231,108 $2,347,669 $2,343,965
Properties (2) 24 27 28 30 30
Average Rent per Unit $75,179 $78,510 $79,682 $78,256 $78,132
</TABLE>
(1) Rental revenues include the Partnership's share of rental revenues from
the three Properties owned through joint venture arrangements and the
two properties owned through tenancy in common arrangements. Rental
revenues have been adjusted, as applicable, for any amounts for which
the Partnership has established an allowance for doubtful accounts.
4
<PAGE>
(2) Excludes Properties that were vacant at December 31 which did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 1997 for each of the ten years beginning with 1998 and
thereafter.
<TABLE>
<CAPTION>
<S> <C>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
----------------------- ------------------ -------------------- ----------------
1998 - - -
1999 - - -
2000 1 78,078 4.33%
2001 1 39,100 2.17%
2002 2 101,860 5.65%
2003 - - -
2004 2 172,506 9.58%
2005 - - -
2006 - - -
2007 - - -
Thereafter 18 1,410,069 78.27%
-------- ------------- -------------
Totals (1) 24 1,801,613 100.00%
======== ============= =============
</TABLE>
(1) Excludes two Properties which were vacant at December 31, 1997.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Shoney's, Inc. leases one Shoney's restaurant and two Captain D's
restaurants pursuant to three leases, each with an initial term of 20 years
(expiring in 2008). The average minimum base annual rent for the leases is
approximately $63,600 (ranging from approximately $49,000 to $84,700).
Golden Corral Corporation leases two restaurants pursuant to two
leases, each with an initial term of 12 to 15 years (expiring 2002 and 2004),
respectively, and average minimum base annual rent of approximately $97,800
($63,400 and 132,200, respectively).
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.
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.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on August 17, 1988, 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 and family-style 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, 1997, the Partnership owned 26 Properties, either directly or indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended
December 31, 1997, 1996 and 1995, 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 $1,813,231, $2,103,745
and $2,142,918 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in cash from operations during 1997 and 1996, each as
compared to the previous 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.
Other sources and uses of capital included the following during the
years ended December 31, 1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership received $106,000, $159,700 and $31,500, respectively, in capital
contributions from the corporate General Partner in connection with the
operations of the Partnership. 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.
In August 1995, the Partnership sold its Property in Myrtle Beach,
South Carolina, to the tenant of the Property for $1,040,000, and in connection
therewith, accepted a promissory note in the principal sum of $1,040,000,
collateralized by a mortgage on the Property. The note bears interest at a rate
of 10.25% per annum and is being collected in 59 equal monthly installments of
$9,319, with a balloon payment of $1,006,004 due in July 2000. Collections
commenced August 1, 1995. In accordance with Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate," the Partnership
recorded the sale of the Property using the installment sales method. Therefore,
the gain on the sale of the Property was deferred and is being recognized as
income proportionately as payments of principal under the mortgage note are
collected. The Partnership recognized a gain of $1,024, $924 and $1,571 for
financial reporting purposes for the years ended December 31, 1997, 1996 and
1995, respectively. The mortgage note receivable balance relating to this
Property at December 31, 1997 and 1996, was $883,417 and $889,891, respectively,
including accrued interest of $8,665 and $8,729, respectively, and net of the
remaining deferred gain of $139,693 and $140,717, respectively. The General
Partners anticipate that payments collected under the mortgage note will be
reinvested in additional Properties or used for payment of Partnership
liabilities.
In addition, in October 1996, the Partnership sold its Property in St.
Cloud, Florida, to the tenant for $1,150,000. In connection therewith, the
Partnership received $100,000 in cash and accepted the remaining sales proceeds
in the form of a promissory note in the principal sum of $1,057,299,
representing the balance of the sales price of $1,050,000 plus tenant closing
costs in the amount of $7,299 the Partnership financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the Property, and is being collected in 12
monthly installments of interest only and thereafter in 168 equal monthly
installments of principal and interest. This sale is also being accounted for
under the installment sales method for financial reporting purposes; therefore,
the gain on the sale of the Property was deferred and is being recognized as
income proportionately as payments of principal under the mortgage note are
collected. The Partnership recognized a gain of $338 and $18,445 for financial
reporting purposes for the years ended December 31, 1997 and 1996, respectively,
and had a deferred gain in the amount of $183,465 and $183,802 at December 31,
1997 and 1996. The mortgage note receivable balance relating to this Property at
December 31, 1997 and 1996, was $874,443 and $882,967, including accrued
interest of $2,747 and $9,471, and net of the remaining deferred gain of
$183,465 and $183,802. Payments collected under the mortgage note totalling
$100,000 were used to pay liabilities of the Partnership, including quarterly
distributions to the Limited Partners. The General Partners anticipate that
payments collected under the mortgage note in the future will be reinvested in
additional Properties or used for payment of Partnership liabilities.
In January 1997, the Partnership sold its Property in Franklin,
Tennessee, to the tenant, for $980,000 and received net sales proceeds of
$960,741. Since the Partnership had previously established an allowance for loss
on land and building of $169,463 as of December 31, 1996 relating to this
Property, no loss was recognized during 1997 as a result of this sale. The
Partnership used $360,000 of the net sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the Limited Partners. In
addition, in June 1997, the Partnership entered into an operating agreement for
the Property located in South Haven, Michigan, with an operator to operate the
Property as an Arby's restaurant. In connection therewith, the Partnership used
approximately $120,400 of the net sales proceeds from the sale of the Property
in Franklin, Tennessee, to fund conversion costs associated with the Arby's
Property. In December 1997, the Partnership reinvested approximately $244,800 of
the net sales proceeds in a Property located in Sandy, Utah, and approximately
$150,000 in a Property located in Vancouver, Washington, as tenants-in-common
with affiliates of the General Partners, as described below. The Partnership
intends to use the remaining net sales proceeds from the sale of the Property in
Franklin, Tennessee to fund additional renovation costs relating to the Property
in South Haven, Michigan, described above, and to pay liabilities of the
Partnership, including quarterly distributions to the Limited Partners.
In May 1997, the Partnership sold its Property in Smyrna, Tennessee, to
a third party for $655,000 and received net sales proceeds of $634,310,
resulting in a gain of $101,995 for financial reporting purposes. This Property
was originally acquired by the Partnership in March 1989 and had a cost of
approximately $569,500, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately $64,800
in excess of its original purchase price. The Partnership used approximately
$82,500 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners. In addition, in
October 1997, the Partnership reinvested approximately $460,900 of the net sales
proceeds in a Property in Mesa, Arizona, as tenants-in-common with an affiliate
of the General Partners. In December 1997, the Partnership reinvested remaining
net sales proceeds in a Property located in Vancouver, Washington, as
tenants-in-common with affiliates of the General Partners, as described below.
The Partnership anticipates that it will distribute amounts sufficient to enable
the Limited Partners to pay federal and state taxes, if any (at a level
reasonably assumed by the General Partners), resulting from the sale.
In June 1997, the Partnership terminated the leases with the tenant of
the Properties in Connorsville and Richmond, Indiana. In connection therewith,
the Partnership accepted a promissory note from the former tenant for $35,297
for amounts relating to past due real estate taxes as a result of the former
tenant's financial difficulties. The promissory note, which is uncollateralized,
bears interest at a rate of ten percent per annum and is being collected in 36
monthly installments. Receivables at December 31, 1997 included $37,099 of such
amounts, including accrued interest of $1,802. In July 1997, the Partnership
entered into a new lease for the Property in Connorsville, Indiana, with a new
tenant to operate the Property as an Arby's restaurant. In connection therewith,
the Partnership incurred $125,000 in renovation costs.
In September 1997, the Partnership sold its Property in Salem, New
Hampshire, to the tenant for $1,295,172 and received net sales proceeds (net of
$1,773 which represents prorated rent returned to the tenant) of $1,270,365,
resulting in a gain of approximately $141,508 for financial reporting purposes.
This Property was originally acquired by the Partnership in May 1989 and had a
cost of approximately $1,085,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $187,000 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in a Property located in
Sandy, Utah, as described below. The General Partners believe that the
transaction, or a portion thereof, relating to the sale of the Property in
Salem, New Hampshire, and the reinvestment of the proceeds will 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 income taxes, if any (at a level reasonably assumed by the
General Partners), resulting from the sale.
In addition, in September 1997, the Partnership sold its Property in
Port St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of approximately $125,309 for
financial reporting purposes. This Property was originally acquired by the
Partnership in November 1989 and had a cost of approximately $1,176,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Property for approximately $40,700 in excess of its
original purchase price. In November 1997, the Partnership reinvested the
majority of the net sales proceeds in an IHOP Property located in Houston,
Texas. The General Partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Port St. Lucie, Florida, and the
reinvestment of the proceeds will 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
income taxes, if any (at a level reasonably assumed by the General Partners),
resulting from the sale.
During the year ended December 31, 1996, the Partnership established an
allowance for the Property in Richmond, Indiana, in the amount of $70,062 which
represented the difference between the Property's carrying value at December 31,
1996, and the property manager's estimate of net realizable value of the
Property based on an anticipated sales price of this Property. In November 1997,
the Partnership sold this Property to a third party for $400,000 and received
net sales proceeds of $385,179. As a result of this transaction, the Partnership
recognized a loss of $141,567 for financial reporting purposes. In December
1997, the Partnership reinvested the net sales proceeds in a Property located in
Vancouver, Washington, as tenants-in-common with affiliates of the General
Partners, as described below.
In addition, in December 1997, the Partnership sold its Property in
Tampa, Florida, to a third party for $850,000 and received net sales proceeds
(net of $724 which represents prorated rent returned to the tenant) of $804,451
resulting in a gain of $180,704 for financial reporting purposes. This Property
was originally acquired by the Partnership in February 1989 and had a cost of
approximately $673,200, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$132,000 in excess of its original purchase price. The Partnership intends to
use $50,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners. The Partnership
intends to distribute some or all of the remaining net sales proceeds to the
Limited Partners. The Partnership will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by the General Partners), resulting from the sale. The
remaining net sales proceeds, if any, will be used for payment of Partnership
liabilities.
As described above, in December 1997, the Partnership used the majority
of the net sales proceeds from the sale of the Properties in Franklin, Tennessee
and Salem, New Hampshire, in a Property located in Sandy, Utah. In addition, in
December 1997, the Partnership used the majority of the net sales proceeds from
the sale of the Properties in Franklin and Smyrna, Tennessee and Richmond,
Indiana, in a Property located in Vancouver, Washington, as tenants-in-common
with affiliates of the General Partners.
In January 1998, the Partnership sold its Property in Port Orange,
Florida, to the tenant, for $1,330,000 and received net sales proceeds (net of
$2,909 which represents prorated rent returned to the tenant) of $1,283,096,
resulting in a gain of approximately $350,300 for financial reporting purposes.
The Partnership intends to distribute some or all of the net sales proceeds to
the Limited Partners. The remaining net sales proceeds, if any, will be used for
other Partnership purposes. In addition, in February 1998, the Partnership sold
its Property in Tyler, Texas, to the tenant, for $850,000 and received net sales
proceeds of $844,229, resulting in a gain of approximately $155,900 for
financial reporting purposes. The Partnership intends to reinvest the sales
proceeds in an additional Property during 1998, or use the net sales proceeds
for other Partnership purposes.
None of the Properties owned by the Partnership, or the joint ventures
or the tenancy in common arrangements, in which the Partnership owns an
interest, is or may be encumbered. Under its Partnership Agreement, the
Partnership is prohibited from borrowing for any purpose; provided, however,
that the General Partners or their affiliates are entitled to reimbursement, at
cost, for actual expenses incurred by the General Partners or their affiliates
on behalf 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 and net
sales proceeds from the sale of Properties, pending reinvestment in additional
Properties, distribution to the Limited Partners or use for the payment of
Partnership liabili ties, are invested in money market accounts or other
short-term, highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day maturity
date, pending the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At December 31, 1997, the Partnership had
$1,361,290 invested in such short-term investments as compared to $362,922 at
December 31, 1996. The increase in cash and cash equivalents during 1997, is
primarily attributable to the receipt of net sales proceeds relating to the
sales of several Properties, as described above. As of December 31, 1997, the
average interest rate earned on the rental income deposited in demand deposit
accounts at commercial banks was approximately 2.5 percent annually. The funds
remaining at December 31, 1997, will be reinvested in additional Properties,
distributed to the Limited Partners or used for other Partnership purposes, as
described above, and will be used for the payment of distributions and other
liabilities.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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 all leases of the Partnership's Properties are 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 Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, a portion of the sales proceeds received from the sales of the
Properties and additional capital contributions from the General Partners, the
Partnership declared distributions to the Limited Partners of $2,300,000 for
each of the years ended December 31, 1997, 1996 and 1995. This represents
distributions of $46 per Unit for each of the years ended December 31, 1997,
1996 and 1995. The General Partners expect to distribute some or all of the net
sales proceeds from the sales of the Properties in Tampa and Port Orange,
Florida, to the Limited Partners. 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. The reduced number of
Properties for which the Partnership receives rental payments, as well as
ongoing operations, is expected to reduce the Partnership's revenues. The
decrease in Partnership revenues, combined with the fact that a significant
portion of the Partnership's expenses are fixed in nature, is expected to result
in a decrease in cash distributions to the Limited Partners during 1998. No
amounts distributed or to be distributed to the Limited Partners for the years
ended December 1997, 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. The Partnership
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
on behalf of the Partnership $77,353, $113,560 and $114,204, respectively, for
certain operating expenses. As of December 31, 1997 and 1996, the Partnership
owed $109,367 and $121,464, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997,
the Partnership had incurred $34,500 in a real estate disposition fee due to an
affiliate as a result of its services in connection with the sale during 1996,
of the Property in St. Cloud, Florida. Amounts payable to other parties,
including distributions payable, increased to $817,621 at December 31, 1997,
from $705,130 at December 31, 1996, primarily as a result of incurring $125,000
in renovation costs relating to the Partnership's Property located in
Connorsville, Indiana, which were unpaid at December 31, 1997. Liabilities at
December 31, 1997, to the extent they exceed cash and cash equivalents
(excluding the net sales proceeds held at December 31, 1997 from the sale of
Properties, as described above), at December 31, 1997, will be paid from future
cash from operations, from amounts collected under the mortgage notes described
above or, in the event the General Partners elect to make additional capital
contributions, from future General Partner contributions.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1995, the Partnership owned and leased 27 wholly owned
Properties (including one Property in Myrtle Beach, South Carolina, which was
sold in August 1995), during 1996, the Partnership owned and leased 26 wholly
owned Properties (including one Property in St. Cloud, Florida, which was sold
in October 1996) and during 1997, the Partnership owned 27 wholly owned
Properties (including six Properties, one in each of Franklin and Smyrna,
Tennessee; Salem, New Hampshire; Port St. Lucie and Tampa, Florida and Richmond,
Indiana, which were sold during the year ended December 31, 1997). In addition,
during 1997, 1996 and 1995, the Partnership was a co-venturer in three separate
joint ventures that each owned and leased one Property and during 1997, the
Partnership owned and leased two Properties, with affiliates of the General
Partners, as tenants-in-common. As of December 31, 1997, the Partnership owned,
either directly or through joint venture arrangements, 26 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 $37,800 to $222,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount to be paid annually. In addition, a majority of the leases provide that,
commencing in the sixth lease year, the percentage rent will be an amount equal
to the greater of (i) the percentage rent calculated under the lease formula or
(ii) a specified percentage (ranging from one-fourth to five percent) of the
purchase price paid by the Partnership for the Property. 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, 1997, 1996 and 1995, the
Partnership and its consolidated joint venture, CNL/Longacre Joint Venture,
earned $1,500,967, $1,931,573 and $2,068,342, respectively, in rental income
from operating leases and earned income from direct financing leases. The
decrease in rental and earned income during the year ended December 31, 1997, as
compared to 1996, was partially attributable to a decrease of approximately
$322,300 as a result of the sale of its Properties in St. Cloud, Florida (in
October 1996), Franklin, Tennessee (in January 1997), Smyrna, Tennessee (in May
1997), Salem, New Hampshire (in September 1997), Port St. Lucie, Florida (in
September 1997) and Tampa, Florida (in December 1997), as described above in
"Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $24,700 due to the reinvestment of a
portion of these net sales proceeds in a Property in Houston, Texas and Sandy,
Utah, in November 1997 and December 1997, respectively, as described above in
"Capital Resources". The General Partners believe that the decrease in rental
and earned income will be offset by an increase during 1998 as the Partnership
continues to reinvest a portion of the remaining net sales proceeds from the
sale of Properties as described above in "Capital Resources," during 1998.
Rental and earned income also decreased in 1997 and 1996, each as
compared to the previous year, as a result of the Partnership increasing its
allowance for doubtful accounts by approximately $57,700 and $29,500,
respectively, for rental and other amounts relating to the Hardee's Properties
located in Connorsville and Richmond, Indiana, which were leased by the same
tenant, due to financial difficulties the tenant was experiencing. Rental and
earned income decreased by approximately $79,200 during 1997 due to the fact
that the Partnership terminated the lease with the former tenant of these
Properties in June 1997, as described above in "Capital Resources." The General
Partners have agreed that they will cease collection efforts on past due rental
amounts once the former tenant of these Properties pays all amounts due under
the promissory note for past due real estate taxes described above in "Capital
Resources." The decrease in rental and earned income was slightly offset by an
increase of $8,500 in rental income from the new tenant of the Property in
Connorsville, Indiana, who began operating the Property after it was renovated
into an Arby's Property. In November 1997, the Partnership sold its Property in
Richmond, Indiana, as described above in "Capital Resources."
The decrease in rental and earned income during 1996, as compared to
1995, was partially attributable to a decrease of approximately $95,000 as a
result of the sale of its Properties in Myrtle Beach, South Carolina and St.
Cloud, Florida, in August 1995 and October 1996, respectively, as described
above in " Capital Resources." As a result of accepting promissory notes in
conjunction with each of these sales of Properties, as described above in
"Capital Resources," interest income increased during 1997 and 1996 as described
below.
Rental and earned income also decreased by approximately $8,100 during
1996, as compared to 1995, due to the fact that in October 1995, the tenant
ceased operations of the Property in South Haven, Michigan. In June 1997, the
Partnership incurred renovation costs to convert the Property into an Arby's
restaurant and entered into an operating agreement for this Property with an
operator , as described above in "Capital Resources," and earned approximately
$5,100 in rental income during 1997 from the operator of the Property.
Rental and earned income in 1997, 1996 and 1995, continued to remain at
reduced amounts due to the fact that the Partnership is not receiving any rental
income from the Properties in Belding and South Haven, Michigan and Lebanon, New
Hampshire, as a result of the tenants defaulting under the terms of their leases
and ceasing operations of the restaurants on the Properties during 1995. During
1997, the Partnership located a new tenant for the Property in South Haven,
Michigan, as described above. The General Partners are currently seeking
replacement tenants or purchasers for the Properties in Belding, Michigan and
Lebanon, New Hampshire. Rental and earned income for 1998 is expected to remain
at reduced amounts until such time as the Partnership executes new leases for
its Properties in Belding, Michigan, and Lebanon, New Hampshire.
For the years ended December 31, 1997, 1996 and 1995, the Partnership
earned $233,633, $130,167 and $104,455, respectively, in contingent rental
income. The increase in contingent rental income during 1997, as compared to
1996, is primarily attributable to amounts collected under the operating
agreement with the new operator of the Property located in South Haven,
Michigan. The operating agreement provides for payment to the Partnership of
reduced base rents and a percentage of the net operating income generated by the
restaurant. The Partnership expects to continue to receive such amounts until a
lease is entered into with the current operator, at which time contingent rental
income is expected to decrease, but at which time base rent is expected to
increase. The increase in contingent rental income during 1996, as compared to
1995, is partially attributable to increased gross sales of certain restaurant
Properties requiring the payment of contingent rent.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $288,637, $137,385 and $55,785, respectively, in interest
income. The increase in interest income during 1997 and 1996, each as compared
to the previous year, was primarily attributable to the interest earned on the
mortgage notes receivable accepted in connection with the sale of the Properties
in St. Cloud, Florida and Myrtle Beach, South Carolina in October 1996 and
August 1995, respectively. In addition, interest income increased during 1997
due to interest earned on the net sales proceeds received relating to the sales
of the Properties in Smyrna, Tennessee; Salem, New Hampshire; Port St. Lucie,
Florida; Richmond, Indiana and Tampa, Florida. Interest income is expected to
decrease during 1998 as net sales proceeds held at December 31, 1997, are
reinvested in additional Properties, distributed to the Limited Partners or used
for other Partnership purposes.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $56,015, $46,452 and $47,018, respectively, attributable to
net income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer. The increase in net income earned by joint ventures during 1997, as
compared to 1996, is primarily attributable to the fact that in October 1997,
the Partnership acquired an interest in a Property in Mesa, Arizona, with
affiliates as tenants-in-common, as described above in "Capital Resources." Net
income earned by joint venture is expected to increase during 1998 as a result
of the Partnership acquiring an interest in a Property in Vancouver, Washington,
in December 1997, with affiliates of the General Partners, as described above in
"Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, two lessees of
the Partnership and its consolidated joint venture, Shoney's, Inc. and Golden
Corral Corporation, each 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 two
Properties owned by unconsolidated joint ventures and two Properties owned with
affiliates as tenants-in-common). As of December 31, 1997, Shoney's, Inc. was
the lessee under leases relating to four restaurants and Golden Corral
Corporation was the lessee under leases relating to two restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
these two lessees will continue to contribute more than ten percent of the
Partnership's total rental income during 1998 and subsequent years. In addition,
three Restaurant Chains, Perkins, Denny's and Wendy's Old Fashioned Hamburger
Restaurants, each accounted for more than ten percent of the Partnership's total
rental and mortgage interest income during 1997, 1996 and 1995 (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of the rental income from two Properties owned by unconsolidated joint
ventures and two Properties owned with affiliates as tenants-in-common). In
subsequent years, it is anticipated that these three Restaurant Chains each will
continue to account for more than ten percent of the total rental and mortgage
interest income to which the Partnership is entitled under the terms of the
leases and mortgage note. Any failure of these lessees or Restaurant Chains
could materially affect the Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $574,472, $631,565 and $640,922 for the years ended December 31, 1997, 1996
and 1995, respectively. The decrease in operating expenses during 1997 and 1996,
each as compared to the previous year, was partially attributable to a decrease
in depreciation expense as a result of the sales of Properties in 1997, 1996 and
1995, as described above in " Capital Resources."
Operating expenses also decreased during 1996, as compared to 1995, due
to the fact that the Partnership and its consolidated joint venture,
CNL/Longacre Joint Venture, recorded approximately $35,100, $40,700 and $47,200
during the years ended December 31, 1997, 1996 and 1995, respectively, for real
estate taxes relating to the Properties in Lebanon, New Hampshire and Belding
and South Haven, Michigan, as a result of lease terminations. The Partnership
entered into an operating agreement with an operator for the Property in South
Haven, Michigan, as described above in "Capital Resources," and is currently
seeking either a replacement tenant or a purchaser for the Properties in
Lebanon, New Hampshire and Belding, Michigan, as described above in "Capital
Resources." The Partnership expects to continue to incur real estate taxes,
insurance and maintenance expense for its Properties in Lebanon, New Hampshire
and Belding, Michigan, until such time as a new lease is executed for each
Property or until each Property is sold.
The decrease in operating expenses during 1996, as compared to 1995, is
partially offset by 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 beginning in May 1995.
In connection with the sale of its Properties in St. Cloud, Florida and
Myrtle Beach, South Carolina, during 1996 and 1995, respectively, as described
above in "Capital Resources," the Partnership recognized a gain for financial
reporting purposes of $1,362, $19,369 and $1,571 for the years ended December
31, 1997, 1996 and 1995, respectively. In accordance with Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate," the
Partnership recorded the sales using the installment sales method. As such, the
gain on the sales was deferred and is being recognized as income proportionately
as payments under the mortgage notes are collected. Therefore, the balance of
the deferred gain of $323,157 at December 31, 1997, will be recognized as income
in future periods as payments are collected. For federal income tax purposes,
gains of approximately $194,100 and $136,900 from the sale of the Properties in
St. Cloud, Florida, and Myrtle Beach, South Carolina, respectively, were also
deferred and are being recognized as payments under the mortgage notes are
collected.
As a result of the sales of the Properties in Smyrna, Tennessee; Salem,
New Hampshire; and Port St. Lucie and Tampa, Florida, as described above in
"Capital Resources," the Partnership recognized gains totalling $549,516 during
1997, for financial reporting purposes. The gains for 1997, were partially
offset by a loss of $141,567 for financial reporting purposes, resulting from
the November 1997 sale of the Property in Richmond, Indiana, as described above
in "Capital Resources." In October 1995, the Partnership also sold a portion of
the land relating to its Property in Dalesville, Indiana, as the result of a
right of way taking and recognized a gain for financial reporting purposes of
$4,353 during the year ended December 31, 1995.
During 1997, the Partnership established an allowance for loss on land
and building of $151,671 for financial reporting purposes relating to the
Property in Belding, Michigan. The allowance represents the difference between
the Property's carrying value at December 31, 1997 and the estimated net
realizable value for this Property. In addition, an allowance was established
for loss on land and building of $99,023 for financial reporting purposes
relating to the Property in Lebanon, New Hampshire, owned by the Partnership's
consolidated joint venture. The allowance represents the difference between the
Property's carrying value at December 31, 1997 and the estimated new realizable
value, based on an anticipated sales price for the Property.
At December 31, 1996, the Partnership established an allowance for loss
on land and building in the amount of $169,463 for financial reporting purposes.
The allowance represented the difference between (i) the Property's carrying
value at December 31, 1996, plus the additional rental income (accrued rental
income) that the Partnership had recognized since inception of the lease
relating to the straight-lining of future scheduled rent increases minus (ii)
the net realizable value of $960,741 received as net sales proceeds in
conjunction with the sale of the Property in January 1997, as described above in
" Capital Resources."
In addition, during 1996, the Partnership established an allowance for
loss on land and building for its Property in Richmond, Indiana. The allowance
of $70,062 represented the difference between the Property's carrying value at
December 31, 1996, and the estimated fair value of the Property based on an
anticipated sales price of this Property. This Property was sold in November
1997, as described above in "Capital Resources."
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor its current or future results of
operations or financial position.
5
<PAGE>
The Partnership's leases as of December 31, 1997, are, in general,
triple-net leases and 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
6
<PAGE>
volumes due to inflation and real sales growth should result in an increase in
rental income (for certain Properties) over time. Continued 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.
7
<PAGE>
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 29th day of
July, 1999.
CNL INCOME FUND V, 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.
<PAGE>
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 July 29, 1999
- -------------------- Director (Principal Financial
Robert A. Bourne and Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer July 29, 1999
- ------------------------ and Director (Principal
James M. Seneff, Jr. Executive Officer)
<PAGE>
