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, 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 0-19140
CNL INCOME FUND VII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2963871
(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 ($1 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 $1 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
PART I
Item 1. Business
CNL Income Fund VII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 18, 1989. 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 January 30, 1990, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 1, 1990, as of which date the maximum offering
proceeds of $30,000,000 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
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes. During
1994, the Partnership sold its Property in St. Paul, Minnesota, and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida, consisting of only land, and a Jack in the Box Property in Yuma,
Arizona, which is owned as tenants-in-common with an affiliate of the General
Partners. The lessee of the Property consisting of only land owns the building
currently on the land. During 1995, the Partnership sold its Properties in
Florence, South Carolina, and Jacksonville, Florida, and accepted promissory
notes in the principal sum of $1,160,000 and $240,000, respectively. In
addition, the building located on the Partnership's Property in Daytona Beach,
Florida, was demolished in accordance with a condemnation agreement during 1995.
During the year ended December 31, 1996, the Partnership sold its Properties in
Hartland, Michigan, and Colorado Springs, Colorado, and reinvested the net sales
received from the sale of the Colorado Springs, Colorado Property in a Boston
Market Property in Marietta, Georgia. During the year ended December 31, 1997,
the Partnership used the net sales proceeds from the sale of the Property in
Hartland, Michigan, to invest in CNL Mansfield Joint Venture with an affiliate
of the General Partners in exchange for a 79 percent interest in the joint
venture. In addition, during 1997, the Partnership sold its Properties in
Columbus, Indiana and Dunnellon, Florida, and sold the Property in Yuma,
Arizona, which was owned as tenants-in-common with an affiliate of the General
Partners, and reinvested the net sales proceeds in a Property in Smithfield,
North Carolina, and a Property in Miami, Florida, each as tenants-in-common,
with affiliates of the General Partners. As a result of the above transactions,
the Partnership currently owns 40 Properties, including interests in ten
Properties owned by joint ventures in which the Partnership is a co-venturer and
two Properties owned with affiliates as tenants-in-common. 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 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 five to 20 years (the
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average being 17 years), and expire between 2003 and 2016. All leases are on a
triple-net basis, with the lessee 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 $22,100 to $166,700. The majority of the leases
provide for percentage rent, based on sales in excess of a specified amount. In
addition, some of the leases provide that, commencing in specified lease years
(generally ranging from the sixth to the eleventh lease year), the annual base
rent required under the terms of the lease will increase.
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 after a specified portion of
the lease term has elapsed. Under the terms of certain leases, the option
purchase price may equal the Partnership's original cost to purchase the
Property (including acquisition costs), plus a specified percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's fair market value at the time the
purchase option is exercised.
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 that 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 February 1997, the Partnership reinvested the net sales proceeds
from the sale of the Property in Hartland, Michigan, in CNL Mansfield Joint
Venture, as described below under "Joint Venture Arrangements." The lease terms
of the lease of CNL Mansfield Joint Venture are substantially the same as those
described in the first three paragraphs of this section.
In December 1997, the Partnership reinvested the net sales proceeds
from the sale of the Property in Dunnellon, Florida and Columbus, Indiana, and
net sales proceeds from the sale of the Property in Yuma, Arizona, held as
tenants-in-common with an affiliate of the General Partners, in a Property in
Miami, Florida, as tenants-in-common with affiliates of the General Partners,
and in a Property in Smithfield, North Carolina, as tenants-in-common with an
affiliate of the General Partners, 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, three lessees of the Partnership and its consolidated
joint venture, Golden Corral Corporation, Restaurant Management Services, Inc.
and Flagstar Enterprises, Inc., 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 rental
income from nine Properties owned by unconsolidated joint ventures and three
Properties owned with affiliates as tenants-in-common, including one Property
owned as tenants-in-common which was sold in October 1997). As of December 31,
1997, Golden Corral Corporation was the lessee under leases relating to four
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to seven restaurants and one site currently consisting of land only and
Flagstar Enterprises, Inc. was the lessee under leases relating to four
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these three lessees each will continue to contribute
more than ten percent of the Partnership's total rental income in 1998 and
subsequent years. In addition, three Restaurant Chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Hardee's and Burger King, each
accounted for more than ten percent of the Partnership's total rental income in
1997 (including rental income from the Partnership's consolidated joint venture
and the Partnership's share of rental income from nine Properties owned by
unconsolidated joint ventures and three Properties owned with affiliates as
tenants-in-common, including one Property owned as tenants-in-common which was
sold in October 1997). In subsequent years, it is anticipated that these three
Restaurant Chains each will continue to account for more than ten percent of the
Partnership's total rental income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income. No single tenants 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.
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Joint Venture Arrangements
The Partnership has entered into a joint venture arrangement, San
Antonio #849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property. In addition, as of December 31, 1996, the Partnership had entered into
four separate joint venture arrangements, Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture and CNL Mansfield Joint
Venture, with affiliates of the General Partners to purchase and hold nine
Properties through such joint ventures. 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.
San Antonio #849 Joint Venture, Halls Joint Venture, Des Moines Real
Estate Joint Venture and CNL Mansfield Joint Venture each have an initial term
of 20 years and, after the expiration of the initial term, continue in existence
from year to year unless terminated at the option of any joint venturer 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 each joint venture partner
to dissolve the joint venture. CNL Restaurant Investments II's joint venture
agreement does not provide a fixed term, but continues in existence until
terminated by any of the joint venturers.
The Partnership has management control of the San Antonio #849 Joint
Venture and shares management control equally with affiliates of the General
Partners for Halls Joint Venture, CNL Restaurant Investments II, Des Moines Real
Estate Joint Venture and CNL Mansfield 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 San Antonio #849 Joint Venture, Halls
Joint Venture, CNL Restaurant Investments II, Des Moines Real Estate Joint
Venture and CNL Mansfield Joint Venture is distributed 83 percent, 51 percent,
18 percent, 4.79% and 79 percent, respectively, to the Partnership and the
balance is distributed to each of the other joint venture partners in accordance
with their respective percentage interests 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.
In addition to the above joint venture agreements, in July 1994, the
Partnership entered into an agreement to hold a Jack in the Box Property as
tenants-in-common with an affiliate of the General Partners. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage. The
Partnership owned a 48.33% interest in this Property. In October 1997, the
Partnership and the affiliate, as tenants-in-common, sold the Jack in the Box
Property in Yuma, Arizona. In December 1997, the Partnership entered into an
agreement to hold a Property in Miami, Florida, as tenants-in-common with
affiliates of the General Partners and in conjunction therewith, reinvested its
portion of the net sales proceeds received from the sale of the Property in
Yuma, Arizona, along with additional funds from the sale of the Property in
Columbus, Indiana. The agreement provides for the Partnership and the affiliate
to share in the profits and losses of the Property in proportion to each
co-venturer's percentage interest. The Partnership owns a 35.64% interest in the
Property in Miami, Florida.
In addition, in December 1997, the Partnership entered into an
agreement to hold a Golden Corral Property in Smithfield, North Carolina, as
tenants-in-common with an affiliate of the General Partners. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
The Partnership owns a 53 percent interest in this Property.
3
<PAGE>
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 rental 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 and the Property held
as tenants-in-common with an affiliate, 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.
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.
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, either directly or
through joint venture arrangements, 40 Properties located in 13 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.
4
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Description of Properties
Land. The Partnership's Property sites range from approximately 10,800
to 110,200 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. Generally, each of the Properties owned by the Partnership
includes a building that is one of a Restaurant Chain's approved designs.
However, the building located on the Checkers Property is owned by the tenant,
while the land parcel is owned by the Partnership.
In addition, the building located on the Partnership's Property in
Daytona Beach, Florida, was demolished in accordance with a condemnation
agreement during 1995. The buildings generally are rectangular and are
constructed from various combinations of stucco, steel, wood, brick and tile.
The sizes of the buildings owned by the Partnership range from approximately 700
to 10,600 square feet. All buildings on Properties 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, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases four Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2005) and the
average minimum base annual rent is approximately $147,800 (ranging from
approximately $137,100 to $166,700).
Restaurant Management Services, Inc. leases five Popeyes restaurants,
one Shoney's restaurant, one Church's Fried Chicken restaurant and one site
currently consisting of land only (formerly operated as a Church's Fried
Chicken). The initial term of each lease is 19 to 20 years (expiring between
2009 and 2010) and the average minimum base annual rent is approximately $53,700
(ranging from approximately $22,100 to $121,000).
Flagstar Enterprises, Inc. leases four Hardee's restaurants. The
initial term of each lease is 20 years (expiring between 2010 and 2012) and the
average minimum base annual rent is approximately $79,100 (ranging from
approximately $70,500 to $89,400).
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of February 28, 1998, there were 3,162 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. Since inception,
the price paid for any Unit transferred pursuant to the Plan has been $.95 per
Unit. The price to be paid for any Unit 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 1997 and 1996 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION>
1997 (1) 1996 (1)
-------- --------
High Low Average High Low Average
---- --- ------- ---- --- -------
<S> <C>
First Quarter $1.00 $ .95 $ .96 $ .88 $ .79 $ .84
Second Quarter .95 .82 .91 .95 .82 .94
Third Quarter .92 .79 .85 .95 .91 .93
Fourth Quarter .84 .81 .83 .78 .75 .76
</TABLE>
(1) A total of 94,606 and 153,050 Units were transferred other than
pursuant to the Plan for the years ended December 31, 1997 and 1996,
respectively.
The capital contribution per Unit was $1. 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, 1997 and 1996, the Partnership
declared cash distributions of $2,700,000 to the Limited Partners. Distributions
of $675,000 were declared at the close of each of the Partnership's calendar
quarters during 1997 and 1996 to the Limited Partners. No amounts distributed to
partners for the years ended December 31, 1997 and 1996, 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.
As indicated in the chart below, these distributions were declared at the close
of each of the Partnership's calendar quarters. These amounts include monthly
distributions made in arrears for the Limited Partners electing to receive
distributions on this basis.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Year Ended December 31:
Revenues (1) $ 2,919,734 $ 2,882,709 $ 2,716,883 $ 2,917,331 $ 2,953,405
Net income (2) 2,606,008 2,326,863 1,982,148 2,503,300 2,433,910
Cash distributions
declared (3) 2,700,000 2,700,000 2,700,002 2,760,002 2,700,000
Net income per Unit (2) 0.086 0.077 0.065 0.083 0.080
Cash distributions
declared per Unit(3) 0.090 0.090 0.090 0.092 0.090
At December 31:
Total assets $25,479,762 $25,523,853 $25,915,616 $26,644,363 $26,872,295
Partners' capital 24,547,778 24,641,770 25,014,907 25,732,761 26,989,463
</TABLE>
(1) Revenues include equity in earnings of unconsolidated joint ventures
and minority interest in income of the consolidated joint venture.
(2) Net income for the years ended December 31, 1997, 1996, 1995 and 1994,
includes $184,627, $195,675, $1,421 and $77,379, respectively, from
gains on dispositions of land and buildings. Net income for the years
ended December 31, 1997 and 1996, includes a loss on sale of land and
building of $19,739 and $235,465, respectively. In addition, net income
for the year ended December 31, 1995, includes a loss on demolition of
building and a loss on sale of land and building of $174,466 and
$6,556, respectively.
(3) Distributions for the year ended December 31, 1994, include a special
distribution to the Limited Partners of $60,000 which represented
cumulative excess operating reserves.
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 August 18, 1989, 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 lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the Partnership owned 40 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, 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 $2,840,459, $2,670,869
and $2,484,538 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cash from operations during 1997 and 1996, each as
compared to the prior year, is primarily a result of changes in income and
expenses as described 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.
In August 1995, the Partnership sold its Property in Florence, South
Carolina, to the tenant for $1,160,000, and in connection therewith, accepted a
promissory note in the principal sum of $1,160,000, collateralized by a
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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 $10,395, with a
balloon payment of $1,106,657 due in July 2000. Collections commenced August 10,
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 under the mortgage note are collected. The Partnership recognized a
gain of $926 and $836 for financial reporting purposes for the years ended
December 31, 1997 and 1996, respectively, and had a deferred gain in the amount
of $126,303 and $127,229 at December 31, 1997 and 1996, respectively. The
mortgage notes receivable balances at December 31, 1997 and 1996, include
principal of $1,131,496 and $1,139,788, respectively, and accrued interest of
$6,235 and $6,281, respectively, and are shown net of the deferred gain of
$126,303 and $127,229, respectively. Proceeds received from the sale of this
Property will be reinvested in additional Properties or used for other
Partnership purposes.
In November 1994, the Partnership received notice from the subtenant of
its Property in Jacksonville, Florida, that it intended to exercise its option
to purchase the Property in accordance with the terms of its sublease agreement.
In December 1995, the Partnership sold its Property in Jacksonville, Florida, to
the subtenant for $240,000, and in connection therewith, accepted a promissory
note in the principal sum of $240,000, collateralized by a mortgage on the
Property. The note bears interest at a rate of ten percent per annum and is
being collected in 119 equal monthly installments of $2,106, with a balloon
payment of $218,252 due December 2005. Collections commenced in January 1996. As
a result of the sale of the Property, the Partnership recognized a loss of
$6,556 for financial reporting purposes for the year ended December 31, 1995.
The mortgage notes receivable balance at December 31, 1997 and 1996, include
principal of $237,192 and $238,666, respectively, and accrued interest of $1,977
and $1,989, respectively. Proceeds received from the sale of this Property will
be distributed to the Limited Partners or will be used for other Partnership
purposes.
In March 1996, the Partnership entered into an agreement with the
tenant of the Property in Daytona Beach, Florida, for payment of certain rental
payment deferrals the Partnership had granted to the tenant through March 31,
1996. Under the agreement, the Partnership agreed to abate approximately $13,200
of the rental payment deferral amounts. The tenant made payments of
approximately $5,700 in each of April 1996 and March 1997 in accordance with the
terms of the agreement, and has agreed to pay the Partnership the remaining
balance due of approximately $28,000 in five remaining annual installments
through 2002.
In July 1996, the Partnership sold its Property in Colorado Springs,
Colorado, for $1,075,000, and received net sales proceeds of $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes. This Property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$144,000 in excess of its original purchase price. In October 1996, the
Partnership reinvested the net sales proceeds, along with additional funds, in a
Boston Market Property located in Marietta, Georgia. A portion of the
transaction relating to the sale of the Property in Colorado Springs, Colorado,
and the reinvestment of the net sales proceeds were structured to qualify as a
like-kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. The Partnership distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes resulting form the sale.
In addition, in October 1996, the Partnership sold its Property in
Hartland, Michigan, for $625,000 and received net sales proceeds of $617,035,
resulting in a loss of approximately $235,465, for financial reporting purposes.
In February 1997, the Partnership reinvested the net sales proceeds in CNL
Mansfield Joint Venture. The Partnership has a 79 percent interest in the
profits and losses of CNL Mansfield Joint Venture and the remaining interest in
this joint venture is held by an affiliate of the Partnership which has the same
General Partners.
In May 1997, the Partnership sold its Property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes. In December 1997, the Partnership
reinvested the net sales proceeds, along with additional funds, in a Property in
Miami, Florida, as tenants-in-common with affiliates of the General Partner, in
exchange for a 35.64% interest in this Property.
In October 1997, the Partnership sold its Property in Dunnellon,
Florida, for $800,000 and received net sales proceeds (net of $5,055 which
represents amounts due to the former tenant for prepaid rent) of $752,745,
resulting
8
<PAGE>
in a gain of $183,701 for financial reporting purposes. This Property was
originally acquired by the Partnership in August 1990 and had a cost of
approximately $546,300, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$211,500 in excess of its original purchase price. In December 1997, the
Partnership reinvested these net sales proceeds in a Property in Smithfield,
North Carolina, as tenants-in-common with an affiliate of the General Partner.
The General Partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Dunnellon, Florida and the reinvestment
of the net sales proceeds in the Property in Smithfield, North Carolina, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. 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 October 1997, the Partnership and an affiliate, as
tenants-in-common, sold the Property in Yuma, Arizona, in which the Partnership
owned a 48.33% interest, for a total sales price of $1,010,000 and received net
sales proceeds of $982,025, resulting in a gain, to the tenancy-in-common, of
approximately $128,400 for financial reporting purposes. The Property was
originally acquired in July 1994 and had a total cost of approximately $861,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Property was sold for approximately $120,300 in excess of its original
purchase price. In December 1997, the Partnership reinvested its portion of the
net sales proceeds from the sale of the Yuma, Arizona, Property, along with
funds from the sale of the wholly-owned Property in Columbus, Indiana, in a
Property in Miami, Florida, as tenants-in-common with affiliates of the General
Partners. The General Partners believe that the transaction, or a portion
thereof, relating to the sale of the Property in Yuma, Arizona and the
reinvestment of the net sales proceeds in the Property in Miami, Florida, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. 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.
None of the Properties owned by the Partnership or the joint ventures
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 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 make
distributions to the partners. At December 31, 1997, the Partnership had
$761,317 invested in such short-term investments, as compared to $1,305,429 at
December 31, 1996. The decrease in the amount invested in short-term investments
is primarily a result of the reinvestment of the net sales proceeds received in
1996 from the sale of the Property in Hartland, Michigan, in CNL Mansfield Joint
Venture in February 1997, as described above. The funds remaining at December
31, 1997, will be used for the payment of distributions and other liabilities.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
on behalf of the Partnership $74,968, $97,288 and $94,618, respectively, for
certain operating expenses. As of December 31, 1997 and 1996, the Partnership
owed $27,683 and $1,867, respectively, to affiliates for such amounts and
accounting and administrative services. As of February 28, 1998, the Partnership
had reimbursed the affiliates all such amounts. In addition, during the year
ended December 31, 1995, the Partnership incurred $7,200 in real estate
disposition fees due to an affiliate as a result of its services in connection
with the sale of the Property in Jacksonville, Florida. The payment of such fees
is deferred until the Limited Partners have received the sum of their 10%
Preferred Return and their adjusted capital contributions. Amounts payable to
other parties, including distributions payable, of the Partnership increased to
$749,587 at December 31, 1997, from $724,399 at December 31, 1996, primarily as
a result of an increase in rents paid in advance during the year ended December
31, 1997. Liabilities at December 31, 1997, to the extent they exceed cash and
cash equivalents 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.
Based primarily on current and anticipated future cash from operations,
the Partnership declared distributions to the Limited Partners of $2,700,000 for
each of the years ended December 31, 1997 and 1996, and $2,700,002 for
9
<PAGE>
the year ended December 31, 1995. This represents distributions of $0.090 per
Unit for each of the years ended December 31, 1997, 1996 and 1995. No amounts
distributed to the Limited Partners for the years ended December 31, 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.
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 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 believe that the Partnership has sufficient working capital reserves 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 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 1995, the Partnership owned and leased 33 wholly owned
Properties (including two Properties in Florence, South Carolina, and
Jacksonville, Florida, which were sold in August and December 1995,
respectively), during 1996, the Partnership owned and leased 33 wholly owned
Properties (including two Properties in Colorado Springs, Colorado, and
Hartland, Michigan, which were sold in July and October 1996, respectively),
during 1997, the Partnership owned and leased 31 wholly owned Properties
(including two Properties in Columbus, Indiana and Dunnellon, Florida, which
were sold in May and October 1997, respectively). In addition, during 1996 and
1995, the Partnership was a co-venturer in four separate joint ventures which
owned and leased nine Properties and one Property the Partnership owned and
leased with an affiliate as tenants-in-common. During 1997, the Partnership was
a co-venturer in five separate joint ventures which owned and leased ten
Properties and three Properties the Partnership owned with affiliates as
tenants-in-common (including one Property in Yuma, Arizona which was sold in
October 1997). As of December 31, 1997, the Partnership and its consolidated
joint venture, San Antonio #849 Joint Venture, owned (either directly, as
tenants-in-common with an affiliate or through joint venture arrangements) 40
wholly owned Properties which are 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 $22,100 to $166,700.
Substantially all of the leases provide for percentage rent based on sales in
excess of a specified amount. In addition, some of the leases provide that,
commencing in the specified lease years (generally ranging from the sixth to the
eleventh lease year), the annual base rent required under the terms of the lease
will increase. 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, San Antonio #849 Joint Venture,
earned $2,436,222, $2,459,094 and $2,427,464, respectively, in rental income
from operating leases and earned income from direct financing leases. The
decrease in rental and earned income during 1997, as compared to 1996, was
attributable to a decrease in rental and earned income as a result of the sales
of the Properties in Colorado Springs, Colorado; Hartland, Michigan; Columbus,
Ohio and Dunnellon, Florida, in July 1996, October 1996, May 1997 and October
1997, respectively. This decrease was partially offset by an increase in rental
and earned income as a result of reinvesting the net sales proceeds from the
sale of the Property in Colorado, Springs, Colorado, in a Property in Marietta,
Georgia, in October 1996. Rental and earned income are expected to decrease in
future years as a result of reinvesting the proceeds from the sales of the
Properties
10
<PAGE>
in Hartland, Michigan; Columbus, Ohio and Dunnellon, Florida in joint ventures
and in Properties owned with affiliates, as tenants-in-common, as described
below. However, as a result of reinvesting in joint ventures and in Properties
owned with affiliates, as tenants-in-common, net income earned by unconsolidated
joint ventures is expected to increase in 1998.
Rental and earned income increased during 1996, as compared to 1995, as
a result of recording rental income during 1996 relating to the Properties in
Colorado Springs, and Pueblo, Colorado as compared to recording no rental income
during 1995 due to financial difficulties the tenant was experiencing. The
Property in Colorado Springs, Colorado, was subsequently sold, as described
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 in
rental income during 1996, as a result of the sale of the Partnership Properties
in Florence, South Carolina, and Jacksonville, Florida, in August and December
1995, respectively. However, as a result of the Partnership accepting mortgage
notes for the sale of these Properties, interest income increased during 1996
and 1995, as described below and above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $51,345, $44,973 and $68,820, respectively, in contingent rental
income. The increase in contingent rental income during 1997, as compared to
1996, is primarily a result of increased gross sales of certain restaurant
Properties requiring the payment of contingent rental income. The decrease in
contingent rental income during 1996, as compared to 1995, is primarily
attributable to the change in the percentage rent formula in accordance with the
terms of the lease agreement for one of the Partnership's leases during 1996.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $183,579, $240,079 and $84,390, respectively, in interest and
other income. The decrease in interest and other income for 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, is attributable to the fact that during 1996, the Partnership recognized
approximately $46,500 in other income due to the fact that the corporate
franchisor of the Properties in Pueblo and Colorado Springs, Colorado, paid past
due real estate taxes relating to the Properties and the Partnership reversed
such amounts during 1996 that it had previously accrued as payable during 1995.
In addition, the decrease in interest and other income during 1997, as compared
to 1996, was due to the fact that during 1996, the Partnership earned
approximately $10,000 in interest income on the net sales proceeds held in
escrow relating to the Property in Colorado Springs, Colorado. These proceeds
were reinvested in a Property in Marietta, Georgia, in October 1996. The
increase in interest and other income during 1996, as compared to 1995, was
primarily attributable to an increase in interest earned on the mortgage notes
accepted in connection with the sales of the Properties in Florence, South
Carolina, in August 1995, and Jacksonville, Florida, in December 1995, as
discussed above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $267,251, $157,254 and $154,937, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer and Properties owned indirectly with affiliates as
tenants-in-common. The increase in net income earned by joint ventures during
the year ended 1997, is partially due to the fact that in February 1997, the
Partnership reinvested the net sales proceeds it received from the sale, in
October 1996, of the Property in Hartland, Michigan, in CNL Mansfield Joint
Venture, with an affiliate of the Partnership which has the same General
Partners. In addition, the increase in net income earned by joint ventures is
partially attributable to the fact that in October 1997, the Partnership and an
affiliate, as tenants-in-common, sold the Property in Yuma, Arizona, in which
the Partnership owned a 48.33% interest. The tenancy-in-common recognized a gain
of approximately $128,400 for financial reporting purposes, as described above
in "Liquidity and Capital Resources." In addition, the increase in net income
earned by joint ventures during the year ended 1997, as compared to 1996, is
partially due to the Partnership investing in a Property in Smithfield, North
Carolina, in December 1997, with affiliates of the General Partners as
tenants-in-common, as described above in "Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and
1995, three lessees of the Partnership and its consolidated joint venture,
Golden Corral Corporation, Restaurant Management Services, Inc. and Flagstar
Enterprises, Inc., 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 rental income from nine Properties
owned by unconsolidated joint ventures and three Properties owned with
affiliates as tenants-in-common, including one Property owned as
tenants-in-common which sold in October 1997). As of December 31, 1997,
11
<PAGE>
Golden Corral Corporation was the lessee under leases relating to four
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to eight restaurants and Flagstar Enterprises, Inc. was the lessee
under leases relating to four restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, these three lessees each will
continue to contribute more than ten percent of the Partnership's total rental
income during 1998 and subsequent years. In addition, during at least one at
least on of the years ended December 31, 1997, 1996 and 1995, three Restaurant
Chains, Golden Corral, Hardee's and Burger King, each accounted for 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
rental income from nine Properties owned by unconsolidated joint ventures and
three Properties owned with affiliates as tenants-in-common, including one
Property owned as tenants-in-common which was sold in October 1997). In
subsequent years, it is anticipated that these three Restaurant Chains each will
continue to account for more than ten percent of the Partnership's total rental
income to which the Partnership is entitled under the terms of the leases. Any
failure of these lessees or Restaurant Chains could materially affect the
Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $478,614, $516,056 and $555,134 for the years ended December 31, 1997, 1996
and 1995, respectively. The decrease in operating expenses during 1997, as
compared to 1996, was primarily a result of a decrease in accounting and
administrative expenses associated with operating the Partnership and its
Properties. In addition, the decrease in operating expenses during 1997, as
compared to 1996, was due to the fact that in July 1996, the Partnership sold
the Property in Colorado Springs, Colorado, as discussed above in "Liquidity and
Capital Resources," and in connection therewith, paid approximately $9,000 in
1996 real estate taxes which were due upon the sale of the Property. Because of
the sale, no real estate taxes were recorded in 1997. The decrease in operating
expenses during 1996, as compared to 1995, was primarily attributable to the
fact that the Partnership accrued approximately $46,500 for current and past due
real estate taxes relating to the Properties in Colorado Springs and Pueblo,
Colorado, during 1995. As described above, the amounts accrued during 1995 were
reversed and recorded as other income during 1996. No real estate taxes were
recorded during 1996 relating to the Property in Pueblo, Colorado, due to the
fact that the new tenant is responsible for the real estate taxes under the
terms of the assigned lease.
The decrease in operating expenses during 1997, as compared to 1996,
was also partially attributable to a decrease in depreciation expense due to the
sales of the Properties in Hartland, Michigan and Colorado Springs, Colorado in
1996. The decrease in depreciation expense was partially offset by the purchase
of the Property in Marietta, Georgia, in October 1996. The decrease in operating
expenses during 1996, as compared to 1995, was partially attributable to a
decrease in depreciation expense as a result of the demolition of the Property
in Daytona Beach, Florida, the sale of the Property in Florence, South Carolina,
and the sale of the Property in Jacksonville, Florida, during 1995.
The decrease in operating expenses during 1996, as compared to 1995,
was 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.
As a result of the sale of the Property in Columbus, Indiana, during
1997, as described above in "Liquidity and Capital Resources," the Partnership
recognized a loss of $19,739 for financial reporting purposes, for the year
ended December 31, 1997. As a result of the sale of the Property in Dunnellon,
Florida, as described above in "Liquidity and Capital Resources," the
Partnership recognized a gain for financial reporting purposes of $183,701 for
the year ended December 31, 1997.
As a result of the sale of the Property in Colorado Springs, Colorado,
during 1996, as described above in "Liquidity and Capital Resources," the
Partnership recognized a gain of $194,839 for financial reporting purposes for
the year ended December 31, 1996. As a result of the sale of the Property in
Hartland, Michigan, as described above in "Liquidity and Capital Resources," the
Partnership recognized a loss for financial reporting purposes of $235,465 for
the year ended December 31, 1996.
In connection with the sale of its Property in Florence, South
Carolina, during 1995, as described above in "Liquidity and Capital Resources,"
the Partnership recognized a gain for financial reporting purposes of $926, $836
and $1,421 for the years ended December 31, 1997, 1996 and 1995, respectively.
In accordance with Statement of
12
<PAGE>
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate,"
the Partnership recorded the sale using the installment sales method. As such,
the gain on sale was deferred and is being recognized as income proportionately
as payments under the mortgage note are collected. Therefore, the balance of the
deferred gain of $126,303 at December 31, 1997 is being recognized as income in
future periods as payments are collected. For federal income tax purposes, a
gain of approximately $97,300 from the sale of this Property was also deferred
during 1995 and is being recognized as payments under the mortgage note are
collected.
In addition, as a result of the sale of the Property in Jacksonville,
Florida, during 1995, as described above in "Liquidity and Capital Resources,"
the Partnership recognized a loss for financial reporting purposes of $6,556 for
the year ended December 31, 1995. In addition, as a result of the demolition of
the Property in Daytona Beach, Florida, as described above in "Liquidity and
Capital Resources," the Partnership recognized a loss on demolition of building
for financial reporting purposes of $174,466 for the year ended December 31,
1995.
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on its 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.
The Partnership's leases as of December 31, 1997, are 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. Inflation has had a minimal effect on income from operations. 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
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
13
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
Page
----
Report of Independent Accountants 15
Financial Statements:
Balance Sheets 16
Statements of Income 17
Statements of Partners' Capital 18
Statements of Cash Flows 19
Notes to Financial Statements 22
14
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund VII, Ltd.
We have audited the financial statements and the financial statement schedules
of CNL Income Fund VII, 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 VII, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 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
January 15, 1998
15
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
December 31,
ASSETS 1997 1996
------ ---- ----
Land and buildings on operating
leases, less accumulated
depreciation $15,382,863 $15,930,547
Net investment in direct financing
leases 3,447,152 4,098,192
Investment in joint ventures 3,393,932 1,789,238
Mortgage notes receivable, less
deferred gain 1,250,597 1,259,495
Cash and cash equivalents 761,317 1,305,429
Receivables, less allowance for
doubtful accounts of $32,959
and $43,234 64,092 63,386
Prepaid expenses 4,755 4,654
Accrued rental income, less
allowance for doubtful accounts
of $9,845 and $10,786 1,114,632 1,012,490
Other assets 60,422 60,422
$25,479,762 $25,523,853
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 6,131 $ 6,502
Escrowed real estate taxes
payable 7,785 4,192
Distributions payable 675,000 675,000
Due to related parties 34,883 9,067
Rents paid in advance 60,671 38,705
Total liabilities 784,470 733,466
Minority interest 147,514 148,617
Partners' capital 24,547,778 24,641,770
$25,479,762 $25,523,853
See accompanying notes to financial statements.
16
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C>
Revenues:
Rental income from operating
leases $1,960,724 $1,954,033 $1,888,830
Earned income from direct
financing leases 475,498 505,061 538,634
Contingent rental income 51,345 44,973 68,820
Interest and other income 183,579 240,079 84,390
2,671,146 2,744,146 2,580,674
Expenses:
General operating and
administrative 138,560 159,001 146,747
Professional services 23,546 27,640 27,379
Bad debt expense 4,613 - 2,584
Real estate taxes 2,979 9,010 46,512
State and other taxes 4,560 2,448 2,562
Depreciation and amortization 304,356 317,957 329,350
478,614 516,056 555,134
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures,
Gain (Loss) on Sale of Land
and Buildings and Loss on
Demolition of Building 2,192,532 2,228,090 2,025,540
Minority Interest in Income of
Consolidated Joint Venture (18,663) (18,691) (18,728)
Equity in Earnings of Unconsoli-
dated Joint Ventures 267,251 157,254 154,937
Gain (Loss) on Sale of Land
and Buildings 164,888 (39,790) (5,135)
Loss on Demolition of Building - - (174,466)
Net Income $2,606,008 $2,326,863 $1,982,148
Allocation of Net Income:
General partners $ 24,300 $ 23,586 $ 20,784
Limited partners 2,581,708 2,303,277 1,961,364
$2,606,008 $2,326,863 $1,982,148
Net Income Per Limited Partner
Unit $ 0.086 $ 0.077 $ 0.065
Weighted Average Number of
Limited Partner Units
Outstanding 30,000,000 30,000,000 30,000,000
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- ----------------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
------- -------- ------- ------- -------- ----- -----
<S> <C>
Balance, December 31, 1994 $1,000 $111,415 $30,000,000 $(12,077,621) $11,137,967 $(3,440,000) $25,732,761
Distributions to limited
partners ($0.090 per
limited partner unit) - - - (2,700,002) - - (2,700,002)
Net income - 20,784 - - 1,961,364 - 1,982,148
Balance, December 31, 1995 1,000 132,199 30,000,000 (14,777,623) 13,099,331 (3,440,000) 25,014,907
Distributions to limited
partners ($0.090 per
limited partner unit) - - - (2,700,000) - - (2,700,000)
Net income - 23,586 - - 2,303,277 - 2,326,863
Balance, December 31, 1996 1,000 155,785 30,000,000 (17,477,623) 15,402,608 (3,440,000) 24,641,770
Distributions to limited
partners ($0.090 per
limited partner unit) - - - (2,700,000) - - (2,700,000)
Net income - 24,300 - - 2,581,708 - 2,606,008
Balance, December 31, 1997 $1,000 $180,085 $30,000,000 $(20,177,623) $17,984,316 $(3,440,000) $24,547,778
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C>
Increase (Decrease) in Cash
and Cash Equivalents:
Cash Flows From Operating
Activities:
Cash received from
tenants $ 2,500,189 $ 2,549,406 $ 2,399,249
Distributions from
unconsolidated
joint ventures 300,696 191,174 190,398
Cash paid for expenses (140,819) (248,523) (174,993)
Interest received 180,393 178,812 69,884
Net cash provided
by operating
activities 2,840,459 2,670,869 2,484,538
Cash Flows From Investing
Activities:
Additions to land and
buildings on opera-
ting leases - (1,041,555) -
Proceeds from sale of
land and buildings 976,334 1,661,943 -
Investment in joint
ventures (1,650,905) - -
Collections on mortgage
notes receivable 9,766 8,821 12,725
Net cash provided
by (used in)
investing
activities (664,805) 629,209 12,725
Cash Flows From Financing
Activities:
Distributions to
limited partners (2,700,000) (2,700,000) (2,760,002)
Distributions to holder
of minority interest (19,766) (19,723) (17,240)
Net cash used in
financing
activities (2,719,766) (2,719,723) (2,777,242)
Net Increase (Decrease) in
Cash and Cash Equivalents (544,112) 580,355 (279,979)
Cash and Cash Equivalents at
Beginning of Year 1,305,429 725,074 1,005,053
Cash and Cash Equivalents at
End of Year $ 761,317 $ 1,305,429 $ 725,074
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C>
Reconciliation of Net Income
to Net Cash Provided by
Operating Activities:
Net income $ 2,606,008 $ 2,326,863 $ 1,982,148
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 304,356 317,957 328,982
Amortization - - 368
Minority interest in
income of consoli-
dated joint venture 18,663 18,691 18,728
Loss (gain) on sale of
land and buildings (164,888) 39,790 5,135
Loss on demolition of
building - - 174,466
Equity in earnings of
unconsolidated joint
ventures, net of
distributions 33,445 33,920 35,461
Decrease (increase) in
receivables 17,173 (14,827) 799
Decrease (increase) in
prepaid expenses (101) 379 (3,320)
Decrease in net invest-
ment in direct
financing leases 76,941 70,329 70,872
Increase in accrued
rental income (102,142) (104,639) (169,520)
Increase (decrease) in
accounts payable and
accrued expenses 3,222 (40,072) 46,367
Increase (decrease) in
due to related
parties 25,816 (4,244) 6,111
Increase (decrease) in
rents paid in advance 21,966 26,722 (12,059)
Total adjustments 234,451 344,006 502,390
Net Cash Provided by Operating
Activities $ 2,840,459 $ 2,670,869 $ 2,484,538
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
Year Ended December 31,
1997 1996 1995
---- ---- ----
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Mortgage notes accepted
in exchange for sale of
land and buildings $ - $ - $ 1,400,000
=========== =========== ===========
Distributions declared and
unpaid at December 31 $ 675,000 $ 675,000 $ 675,000
=========== =========== ===========
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund VII, 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 and family-style 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 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.
22
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
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, are removed from the
accounts and gains or losses from sales are 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, the assets are
adjusted to their fair 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 83
percent interest in San Antonio #849 Joint Venture using the
consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany
accounts and transactions have been eliminated.
The Partnership's investments in Halls Joint Venture, CNL
Restaurant Investments II, Des Moines Real Estate Joint
Venture and CNL Mansfield Joint Venture, and a property in
23
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
Smithfield, North Carolina, and a property in Miami, Florida, for which
each of the two properties is held as tenants-in-common with
affiliates, are accounted for using the equity method since the
Partnership shares control with affiliates which have 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.
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.
24
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
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 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. 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.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style
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, some 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 portions of the majority of these leases are
operating leases. Substantially all leases are for 13 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 to
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.
25
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
1997 1996
---- ----
Land $ 8,430,465 $ 8,673,793
Buildings 9,121,968 9,121,968
17,552,433 17,795,761
Less accumulated
depreciation (2,169,570) (1,865,214)
----------- -----------
$15,382,863 $15,930,547
=========== ===========
In July 1996, the Partnership sold its property in Colorado Springs,
Colorado, for $1,075,000 and received net sales proceeds of $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes. This
property was originally acquired by the Partnership in July 1990 and
had a cost of approximately $900,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $144,000 in excess of its original purchase
price. In October 1996, the Partnership reinvested the net sales
proceeds along with additional funds, in a Boston Market property
located in Marietta, Georgia.
In addition, in October 1996, the Partnership sold its property in
Hartland, Michigan, for $625,000 and received net sales proceeds of
$617,035, resulting in a loss of approximately $235,465 for financial
reporting purposes.
In May 1997, the Partnership sold its property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in
a loss of $19,739 for financial reporting purposes.
26
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases - Continued:
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, 1997, 1996 and 1995, the Partnership
recognized $102,142, $104,639 and $169,520, respectively, of such
rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
1998 $ 1,879,999
1999 1,891,776
2000 1,925,741
2001 2,022,708
2002 2,034,710
Thereafter 12,545,975
----------
$22,300,909
===========
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 terms. 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 the net investment in direct
financing leases at December 31:
1997 1996
---- ----
Minimum lease payments
receivable $ 6,411,161 $ 7,824,101
Estimated residual values 1,008,935 1,266,893
Less unearned income (3,972,944) (4,992,802)
----------- -----------
Net investment in direct
financing leases $ 3,447,152 $ 4,098,192
=========== ===========
27
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
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, 1997:
1998 $ 495,609
1999 495,609
2000 495,609
2001 496,766
2002 496,766
Thereafter 3,930,802
---------
$6,411,161
==========
In October 1997, the Partnership sold its property in Dunnellon,
Florida, for $800,000 and received net sales proceeds (net of $5,055
which represents amounts due to the former tenant for prepaid rent) of
$752,745, resulting in a gain of $183,701 for financial reporting
purposes. This property was originally acquired by the Partnership in
August 1990 and had a cost of approximately $546,300, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $211,500 in excess of
its original purchase price.
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 Ventures:
The Partnership has a 51 percent interest, an 18 percent interest and a
4.79% interest in the profits and losses of Halls Joint Venture, CNL
Restaurant Investments II and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
In February 1997, the Partnership entered into a joint venture
arrangement, CNL Mansfield Joint Venture, with an affiliate of the
Partnership which has the same general partners, to hold one restaurant
property in Mansfield, Texas. As of December 31, 1997, the Partnership
and its co-venture partner had contributed $616,245 and $163,964,
respectively, to the joint venture to acquire the restaurant property.
As of December 31, 1997, the Partnership and its co-venture partner
owned a
28
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures - Continued:
79 percent and 21 percent interest, respectively, in the profits and
losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the
Partnership shares control with the affiliate.
As of December 31, 1996, the Partnership had a 48.33% interest in a
property in Yuma, Arizona, with an affiliate of the Partnership that
has the same general partners, as tenants-in-common. In October 1997,
the Partnership and the affiliate, as tenants-in-common, sold the
property in Yuma, Arizona, for a total sales price of $1,010,000 and
received net sales proceeds of $982,025 resulting in a gain of
approximately $128,400 for financial reporting purposes. The property
was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the property was sold for
approximately $120,300 in excess of its original purchase price. In
December 1997, the Partnership reinvested its portion of the net sales
proceeds from the sale of the Yuma, Arizona, property, along with funds
from the sale of a wholly-owned Property in Columbus, Indiana, in a
property in Miami, Florida, as tenants-in-common with affiliates of the
general partners. The Partnership accounts for its investment in the
property in Miami, Florida, using the equity method since the
Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December
31, 1997, the Partnership owned a 35.64% interest in the Miami, Florida
property owned with affiliates as tenants-in-common.
In December 1997, the Partnership acquired a property in Smithfield,
North Carolina as tenants-in-common with an affiliate of the general
partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in
investment in joint ventures. As of December 31, 1997, the Partnership
owned a 53 percent interest in this property.
29
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures - Continued:
CNL Restaurant Investments II owns and leases six properties to an
operator of national fast-food or family-style restaurants, and Halls
Joint Venture, Des Moines Real Estate Joint Venture and the Partnership
and affiliates as tenants-in-common in two separate tenancy-in-common
arrangements, each own and lease one property to an operator of
national fast-food or family-style restaurants. The following presents
the combined, condensed financial information for the joint ventures
and the two properties held as tenants-in-common with affiliates at
December 31:
1997 1996
---- ----
Land and buildings on
operating leases, less
accumulated deprecia-
tion $10,892,405 $ 7,778,815
Cash 750 1,106
Receivables 18,819 14,495
Accrued rental income 147,685 154,782
Other assets 1,079 1,115
Liabilities 8,625 1,216
Partners' capital 11,052,113 7,949,097
Revenues 1,012,624 911,833
Net income 905,117 689,075
The Partnership recognized income totalling $267,251, $157,254 and
$154,937 for the years ended December 31, 1997, 1996 and 1995,
respectively, from these joint ventures and the two properties held as
tenants-in-common with affiliates.
6. Mortgage Notes Receivable:
In connection with the sale of its property in Florence, South
Carolina, the Partnership accepted a promissory note in the principal
sum of $1,160,000, collateralized by a mortgage on the property. The
promissory note bears interest at a rate of 10.25% per annum and is
being collected in 59 equal monthly installments of $10,395, with a
balloon payment of $1,106,657 due in July 2000.
30
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
6. Mortgage Notes Receivable - Continued:
In addition, the Partnership accepted a promissory note in the
principal sum of $240,000 in connection with the sale of its property
in Jacksonville, Florida. The note is collateralized by a mortgage on
the property. The promissory note bears interest at a rate of ten
percent per annum and is being collected in 119 equal monthly
installments of $2,106, with a balloon payment of $218,252 due in
December 2005.
The mortgage notes receivable consisted of the following at December
31:
1997 1996
---- ----
Principal balance $1,368,688 $1,378,454
Accrued interest receivable 8,212 8,270
Less deferred gain on sale
of land and building (126,303) (127,229)
--------- ---------
$1,250,597 $1,259,495
========== ==========
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, approximate the
outstanding principal amount based on estimated current rates at which
similar loans would be made to borrowers with similar credit and for
similar maturities.
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, cumulative, noncompounded annual return on
their adjusted capital contributions (the "10% Preferred Return").
31
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
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 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, 1997 and 1996, the
Partnership declared distributions to the limited partners of
$2,700,000, and during the year ended December 31, 1995, the
partnership declared distributions to the limited partners of
$2,700,002. No distributions have been made to the general partners to
date.
32
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Net income for financial
reporting purposes $2,606,008 $2,326,863 $1,982,148
Depreciation for tax
reporting purposes in
excess of depreciation
for financial reporting
purposes (25,552) (24,753) (36,960)
Gain or loss on sale of
land and buildings for
financial reporting
purposes in excess of
gain or loss for tax
reporting purposes (178,348) (163,152) 174,513
Direct financing leases
recorded as operating
leases for tax reporting
purposes 76,941 70,329 70,872
Equity in earnings of
unconsolidated joint
ventures for tax reporting
purposes in excess of
(less than) equity in
earnings of unconsolidated
joint ventures for
financial reporting purposes (55,911) 1,420 (68)
Accrued rental income (102,142) (104,639) (169,520)
Rents paid in advance 21,966 26,722 (12,059)
Minority interest in
timing differences of
consolidated joint
venture 981 981 3,525
Other (10,275) - (20,722)
---------- ---------- ----------
Net income for federal
income tax purposes $2,333,668 $2,133,771 $1,991,729
========== ========== ==========
</TABLE>
33
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
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 Fund Advisors, Inc. The other individual general partner, Robert A.
Bourne, served as president of CNL Fund Advisors, Inc. through October
1997. 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, 1997, 1996 and
1995, 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, 1997, 1996 and 1995, certain
Affiliates acted as manager of the Partnership's properties pursuant to
a management agreement with the Partnership. In connection therewith,
the Partnership agreed to pay the Affiliates an annual, noncumulative,
subordinated management fee of one percent of the sum of gross revenues
from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property
held as tenants-in-common with an affiliate, but not in excess of
competitive fees for comparable services. These fees will be incurred
and will be payable only after the limited partners receive their 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 management fee will be due or payable for such
year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are also entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one
or more properties based on the lesser of one-half of a competitive
real estate commission or three percent of the sales price if the
Affiliates provide a substantial amount of services in connection with
the sale. However, if the net sales proceeds are reinvested in a
replacement property, no such real estate disposition fees will be
incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition
fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital
34
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
9. Related Party Transactions - Continued:
contributions. During the year ended December 31, 1995, the Partnership
incurred $7,200 in deferred, subordinated real estate disposition fees
as a result of the Partnership's sale of its Property in Jacksonville,
Florida. No deferred, subordinated real estate disposition fees were
incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996 and 1995, Affiliates
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $77,078, $92,985 and $81,259
for the years ended December 31, 1997, 1996 and 1995, respectively, for
such services.
The due to related parties consisted of the following at December 31:
1997 1996
---- ----
Due to Affiliates:
Expenditures incurred on
behalf of the Partnership $20,321 $ 63
Accounting and administrative
services 7,362 1,804
Deferred, subordinated real
estate disposition fee 7,200 7,200
------- -------
$34,883 $ 9,067
======= =======
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the two properties held as
tenants-in-common with affiliates), for at least one of the years ended
December 31:
1997 1996 1995
---- ---- ----
Golden Corral
Corporation $625,724 $608,852 $618,413
Restaurant Management
Services, Inc. 444,069 446,867 446,279
Flagstar Enterprises,
Inc. 307,738 464,042 469,374
35
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1997, 1996 and 1995
10. Concentration of Credit Risk - Continued:
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 total rental and earned income
from the unconsolidated joint ventures and the two properties held as
tenants-in-common with affiliates) for at least one of the years ended
December 31:
1997 1996 1995
---- ---- ----
Golden Corral
Family Steakhouse
Restaurants $625,724 $608,852 $618,413
Hardees 447,074 524,625 548,221
Burger King 466,626 478,901 486,944
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.
36
<PAGE>
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 51, 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., CNL Real Estate 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 through December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., 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 a director, 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 a director,
Chairman of the Board and Chief Executive Officer of CNL American Properties
Fund, Inc. since 1994, and has served as a director, 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 $60 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 III, Ltd., CNL Income Fund IV, Ltd., CNL Income
Fund V, Ltd., CNL Income Fund VI, 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.
37
<PAGE>
Robert A. Bourne, age 50, 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, and prior to its merger with
CNL Fund Advisors, Inc., effective January 1, 1996, CNL Income Fund Advisors,
Inc., and Chief Investment Officer, Vice Chairman of the Board of Directors, a
director and Treasurer of CNL Institutional Advisors, Inc., a registered
investment advisor. Mr. Bourne served as President of CNL Institutional
Advisors, Inc. from the date of its inception through June 30, 1997 and served
as President of CNL Fund Advisors, Inc. from the date of its inception through
October 1997. Mr. Bourne also has served as a director since 1992, as President
from July 1992 to February 1996, as Secretary and Treasurer from February 1996
through December 1997, and since February 1996, served as Vice Chairman of the
Board of Directors 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, served as Treasurer and Vice Chairman of CNL Realty Advisors, Inc. through
December 31, 1997, at which time CNL Realty Advisors, Inc. merged with
Commercial Net Lease Realty, 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, 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., was organized in 1980 under the laws of the State of Florida. CNL Group,
Inc. is a diversified real estate company which provides a wide range of real
estate, development and financial services to companies in the United States
through the activities of its subsidiaries. These activities are primarily
focused on the franchised restaurant and hospitality industries. 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.
38
<PAGE>
Curtis B. McWilliams, age 42, joined CNL Fund Advisors, Inc. in April
1997 and currently serves as President of CNL Fund Advisors, Inc. and as
Executive Vice President of CNL American Properties Fund, Inc. In addition, Mr.
McWilliams serves as Executive Vice President of CNL Group, Inc. and as
President of CNL Financial Services, Inc. and certain other subsidiaries of CNL
Group, Inc. From September 1983 through March 1997, Mr. McWilliams was employed
by Merrill Lynch. From January 1991 to August 1996, Mr. McWilliams was a
managing director in the corporate banking group of Merrill Lynch's investment
banking division. During this time, he was a senior relationship manager with
Merrill Lynch and as such was responsible for a number of the firm's larger
clients. From February 1990 to February 1993, he also served as co-head of one
of the Industrial Banking Groups within Merrill Lynch's investment banking
division and had administrative responsibility for a group of bankers and client
relationships, including the firm's transportation group. From September 1996 to
March 1997, Mr. McWilliams served as Chairman of Merrill Lynch's Private
Advisory Services. Mr. McWilliams received a B.S.E. in Chemical Engineering from
Princeton University in 1977 and a Masters of Business Administration with a
concentration in finance from the University of Chicago in 1983.
John T. Walker, age 39, is 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 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 49, 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, served as a director and Secretary of CNL Realty Advisors, Inc. since its
inception in 1991 through December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., 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 300 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. She was licensed as a certified public accountant in 1979.
39
<PAGE>
Jeanne A. Wall, age 39, has served as Chief Operating Officer of CNL
Investment Company and of CNL Securities Corp. since November 1994 and has
served as Executive Vice President of CNL Investment Company since January 1991.
In 1984, Ms. Wall joined CNL Securities Corp. In 1985, Ms. Wall became Vice
President of CNL Securities Corp., in 1987, she became Senior Vice President and
in July 1997, she became Executive 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 product development, partnership administration and
investor services for programs offered through participating brokers, and
corporate communications for CNL Group, Inc. and Affiliates. 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 through 1997, as Vice
President of Commercial Net Lease Realty, Inc. from 1992 through 1997, 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 34, has served as Chief Financial Officer of
CNL Fund Advisors, Inc. since September 1996 and as Chief Financial Officer of
CNL American Properties Fund, Inc. since January 1997. 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 audit 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.
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, 1998, 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, 1998, the beneficial
ownership interests of the General Partners in the Registrant.
<TABLE>
<CAPTION>
Amount and Nature of
Title of Class Name of Partner Beneficial Ownership Percent of Class
-------------- --------------- -------------------- ----------------
<S> <C>
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
100%
</TABLE>
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.
40
<PAGE>
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, 1997, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1997
-------------------- --------------------- -----------------------
<S> <C>
Reimbursement to affiliates for Operating expenses are reimbursed Operating expenses incurred on
operating expenses at the lower of cost or 90 percent behalf of the Partnership:
of the prevailing rate at which $74,968
comparable services could have
been obtained in the same Accounting and administrative
geographic area. Affiliates of the services: $77,078
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 manage- One percent of the sum of gross $ - 0 -
ment fee to affiliates 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
and the Property owned with an
affiliate as tenants-in-common,
subordinated to certain minimum returns
to the Limited Partners. The management
fee will not exceed competitive fees
for comparable services. Due to the
fact that these fees are
non-cumulative, 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.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1997
-------------------- --------------------- -----------------------
<S> <C>
Deferred, subordinated real estate A deferred, subordinated real $ - 0 -
disposition fee payable to affiliates estate disposition fee, payable
upon sale 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' deferred, sub-
ordinated share of Partnership net A deferred, subordinated share $ - 0 -
cash flow equal to one percent of Partnership
distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, sub- A deferred, subordinated share
ordinated share of Partnership net equal to five percent of $ - 0 -
sales proceeds from a sale or sales Partnership distributions of such
net sales proceeds, subordinated to
certain minimum returns to the
Limited Partners.
</TABLE>
42
<PAGE>
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, 1997 and 1996
Statements of Income for the years ended December 31, 1997,
1996 and 1995
Statements of Partners' Capital for the years ended December
31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 1997, 1996 and
1995
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1997
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1997
Schedule IV - Mortgage Loans on Real Estate at December 31,
1997
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 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership
of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2
to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein
by reference.)
10.1 Management Agreement between CNL Income Fund VII,
Ltd. and CNL Investment Company (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
43
<PAGE>
10.2 Assignment of 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 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.)
27 Financial Data Schedule (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period
from October 1, 1997 through December 31, 1997.
44
<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 13th day of
March, 1998.
CNL INCOME FUND VII, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Robert A. Bourne President, Treasurer and Director March 13, 1998
- --------------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 13, 1998
- --------------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<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>
1995 Allowance for
doubtful
accounts (a) $177,042 $ 886 $304,609(b) $ 11,747 $ 492 $470,298
======== ======== ======== ======== ======== ========
1996 Allowance for
doubtful
accounts (a) $470,298 $ - $ 11,187(b) $412,202 $ 15,263 $ 54,020
======== ======== ======== ======== ======== ========
1997 Allowance for
doubtful
accounts (a) $ 54,020 $ - $ 5,000(b) $ 10,497 $ 5,719 $ 42,804
======== ======== ======== ======== ======== ========
</TABLE>
(a) Deducted from receivables and accrued rental income on the balance
sheet.
(b) Reduction of rental, earned and other income.
F-1
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
-------------------------- ----------------------
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
------- ---- ------------ ----- -----
<S> <C>
Properties the Partnership
has Invested in Under
Operating Leases:
Boston Market Restaurant:
Marietta, Georgia - $ 534,421 $ 507,133 $ - $ -
Burger King Restaurants:
Jefferson City, Tennessee - 216,633 546,967 - -
Maryville, Tennessee - 419,766 545,880 - -
Sierra Vista, Arizona - 421,170 - - -
Checkers Drive-In Restaurant:
Winter Springs, Florida - 397,536 - - -
Church's Fried Chicken
Restaurants:
Gainesville, Florida (h) - 79,395 124,653 - -
Daytona Beach, Florida - 149,701 - - -
Golden Corral Family
Steakhouse Restaurants:
Odessa, Texas - 502,364 815,831 - -
Midland, Texas - 481,748 857,185 - -
El Paso, Texas - 745,506 - 802,132 -
Harlingen, Texas - 503,799 - 890,878 -
Hardee's Restaurants:
Akron, Ohio - 198,086 - - -
Dalton, Ohio - 180,556 - - -
Minerva, Ohio - 143,775 - - -
Orrville, Ohio - 176,169 - - -
Seville, Ohio - 245,648 - - -
Clinton, Tennessee - 295,861 - - -
Jack in the Box Restaurant:
San Antonio, Texas - 525,720 - 381,591 -
KFC Restaurants:
Friendswood, Texas - 161,906 - - -
Arcadia, Florida - 175,020 333,759 - -
</TABLE>
<PAGE>
<TABLE>
<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
---- ------------ ----- ------------ --------- -------- ------------
<S> <C>
$ 534,421 $ 507,133 $ 1,041,554 $ 19,768 1994 10/96 (b)
216,633 546,967 763,600 138,365 1988 01/90 (b)
419,766 545,880 965,646 139,436 1986 01/90 (b)
421,170 (f) 421,170 - 1990 06/90 (d)
397,536 - 397,536 (g) - 07/94 (g)
79,395 124,653 204,048 28,915 1983 01/91 (b)
149,701 - 149,701 - 1985 01/91 (i)
502,364 815,831 1,318,195 210,998 1990 03/90 (b)
481,748 857,185 1,338,933 221,146 1990 04/90 (b)
745,506 802,132 1,547,638 194,783 1990 05/90 (b)
503,799 890,878 1,394,677 218,774 1990 06/90 (b)
198,086 (f) 198,086 - 1990 11/90 (d)
180,556 (f) 180,556 - 1990 11/90 (d)
143,775 (f) 143,775 - 1990 11/90 (d)
176,169 (f) 176,169 - 1990 11/90 (d)
245,648 (f) 245,648 - 1990 11/90 (d)
295,861 (f) 295,861 - 1992 09/92 (d)
525,720 381,591 907,311 94,510 1990 05/90 (b)
161,906 (f) 161,906 - 1990 06/90 (d)
175,020 333,759 508,779 82,388 1985 08/90 (b)
</TABLE>
F-2
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
Popeyes Famous Fried
Chicken Restaurants:
Jacksonville, Florida - 128,398 139,768 136,262 -
Lake City, Florida - 130,300 254,747 139,099 -
Jacksonville, Florida - 142,490 137,396 134,259 -
Brunswick, Georgia - 104,720 251,955 150,888 -
Rally's Restaurant:
Toledo, Ohio - 281,880 196,608 47,002 -
Shoney's Restaurants:
Pueblo, Colorado - 492,230 559,769 - -
Saddlebrook, Florida - 427,238 - 765,532 -
Taco Bell Restaurant:
Detroit, Michigan - 168,429 - 402,674 -
$8,430,465 $5,271,651 $3,850,317 $ -
Property of Joint Venture
in Which the Partnership
has a 51% Interest and has
Invested in Under an
Operating Lease:
Burger King Restaurant:
Knoxville, Tennessee - $ 283,961 $ 430,406 $ - $ -
Properties of Joint Venture
in Which the Partnership
has an 18% Interest and has
Invested in Under Operating
Leases:
Burger King Restaurants:
Columbus, Ohio - $ 345,696 $ 651,985 $ - $ -
San Antonio, Texas - 350,479 623,615 - -
Pontiac, Michigan - 277,192 982,200 - -
Raceland, Louisiana - 174,019 986,879 - -
New Castle, Indiana - 264,239 662,265 - -
Hastings, Minnesota - 155,553 657,159 - -
$1,567,178 $4,564,103 $ - $ -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
<S> <C>
128,398 276,030 404,428 68,855 1985 04/90 (b)
130,300 393,846 524,146 98,674 1985 04/90 (b)
142,490 271,655 414,145 67,995 1985 04/90 (b)
104,720 402,843 507,563 98,627 1974 04/90 (b)
281,880 243,610 525,490 56,776 1990 01/91 (b)
492,230 559,769 1,051,999 137,616 1989 08/90 (b)
427,238 765,532 1,192,770 193,096 1990 04/90 (b)
168,429 402,674 571,103 98,848 1990 06/90 (b)
$8,430,465 $9,121,968 $17,552,433 $2,169,570
$ 283,961 $ 430,406 $ 714,367 $ 113,341 1985 01/90 (b)
$ 345,696 $ 651,985 $ 997,681 $ 136,114 1986 09/91 (b)
350,479 623,615 974,094 130,190 1986 09/91 (b)
277,192 982,200 1,259,392 205,051 1987 09/91 (b)
174,019 986,879 1,160,898 206,028 1988 09/91 (b)
264,239 662,265 926,504 138,259 1988 09/91 (b)
155,553 657,159 812,712 137,193 1990 09/91 (b)
$1,567,178 $ 4,564,103 $ 6,131,281 $ 952,835
</TABLE>
F-3
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
Property of Joint Venture in Which
the Partnership has a 4.79%
Interest and has Invested in
Under an Operating Lease:
Jack in the Box Restaurant:
Des Moines, Washington - $ 322,726 $ 791,658 $ - $ -
Property of Joint Venture in Which
the Partnership has a 79%
Interest and has Invested in
Under an Operating Lease:
Jack in the Box Restaurant:
Mansfield, Texas - $ 297,295 $ 482,914 $ - $ -
Property in Which the Partnership
has a 53% Interest as Tenants-
in-Common and has Invested in
Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina - $ 264,272 $1,155,018 $ - $ -
Property in Which the Partnership
has a 35.64% Interest as Tenants-
in-Common and has Invested in
Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Miami, Florida - $ 976,357 $ 974,016 $ - $ -
Properties the Partnership
has Invested in Under
Direct Financing Leases:
Burger King Restaurant:
Sierra Vista, Arizona - $ - $ - $ 333,212 $ -
Hardee's Restaurants:
Akron, Ohio - - 540,215 - -
Dalton, Ohio - - 490,656 - -
Minerva, Ohio - - 436,663 - -
Orrville, Ohio - - 446,337 - -
Seville, Ohio - - 487,630 - -
Clinton, Tennessee - - 338,216 - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
<S> <C>
$ 322,726 $ 791,658 $ 1,114,384 $ 137,507 1992 10/92 (b)
$ 297,295 $ 482,914 $ 780,209 $ 12,778 1997 02/97 (b)
$ 264,272 $ 1,155,018 $ 1,419,290 $ 949 1996 12/97 (b)
$ 976,357 $ 974,016 $ 1,950,373 $ 89 1995 12/97 (b)
- (f) (f) (d) 1990 06/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1992 09/92 (d)
</TABLE>
F-4
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
KFC Restaurants:
Friendswood, Texas - - - 359,055 -
Popeyes Famous Fried
Chicken Restaurant:
Jacksonville, Florida - 78,842 146,035 142,348 -
$ 78,842 $2,885,752 $ 834,615 $ -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
<S> <C>
- (f) (f) (d) 1990 06/90 (d)
(f) (f) (f) (e) 1985 04/90 (e)
F-5
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(a) Transactions in real estate and accumulated depreciation during 1997,
1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
<S> <C>
Properties the Partnership
has Invested in Under
Operating Leases:
Balance, December 31, 1994 $19,700,344 $1,530,089
Dispositions (1,612,306) (172,952)
Depreciation expense - 328,982
Balance, December 31, 1995 18,088,038 1,686,119
Acquisitions 1,041,554 -
Dispositions (1,333,831) (138,862)
Depreciation expense - 317,957
Balance, December 31, 1996 17,795,761 1,865,214
Dispositions (243,328) -
Depreciation expense - 304,356
Balance, December 31, 1997 $17,552,433 $2,169,570
Property of Joint Venture in
Which the Partnership has a 51%
Interest and has Invested in
Under an Operating Lease:
Balance, December 31, 1994 $ 714,367 $ 70,300
Depreciation expense - 14,347
Balance, December 31, 1995 714,367 84,647
Depreciation expense - 14,347
Balance, December 31, 1996 714,367 98,994
Depreciation expense - 14,347
Balance, December 31, 1997 $ 714,367 $ 113,341
</TABLE>
F-6
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
<S> <C>
Properties of Joint Venture in
Which the Partnership has
an 18% Interest and has
Invested in Under Operating
Leases:
Balance, December 31, 1994 $ 6,131,281 $ 496,424
Depreciation expense - 152,137
Balance, December 31, 1995 6,131,281 648,561
Depreciation expense - 152,137
Balance, December 31, 1996 6,131,281 800,698
Depreciation expense - 152,137
Balance, December 31, 1997 $ 6,131,281 $ 952,835
Property of Joint Venture in Which
the Partnership has a 4.79%
Interest and has Invested in
Under an Operating Lease:
Balance, December 31, 1994 $ 1,114,384 $ 58,341
Depreciation expense - 26,388
Balance, December 31, 1995 1,114,384 84,729
Depreciation expense - 26,389
Balance, December 31, 1996 1,114,384 111,118
Depreciation expense - 26,389
Balance, December 31, 1997 $ 1,114,384 $ 137,507
Property in Which the Partnership
has a 48.33% Interest as
Tenants-in-Common and has
Invested in Under an Operating
Lease:
Balance, December 31, 1994 $ 881,033 $ 9,720
Depreciation expense - 20,860
Balance, December 31, 1995 881,033 30,580
Depreciation expense - 20,860
Balance, December 31, 1996 881,033 51,440
Depreciation expense - 17,383
Dispositions (881,033) (68,823)
Balance, December 31, 1997 $ - $ -
</TABLE>
F-7
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
<S> <C>
Property of Joint Venture in
Which the Partnership has
an 79% Interest and has
Invested in Under Operating
Leases:
Balance, December 31, 1996 $ - $ -
Acquisitions 780,209 -
Depreciation expense - 12,778
Balance, December 31, 1997 $ 780,209 $ 12,778
Property of Joint Venture in
Which the Partnership has a 53%
Interest as Tenants-in-Common
and has Invested in Under an
Operating Lease:
Balance, December 31, 1996 $ - $ -
Acquisitions 1,419,290 -
Depreciation expense - 949
Balance, December 31, 1997 $ 1,419,290 $ 949
Property in Which the Partnership
has a 35.64% Interest as
Tenants-in-Common and has
Invested in Under an Operating
Lease:
Balance, December 31, 1996 $ - $ -
Acquisitions 1,950,373 -
Depreciation expense - 89
Balance, December 31, 1997 $ 1,950,373 $ 89
</TABLE>
F-8
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1997
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 1997, the aggregate cost of the Properties owned by
the Partnership and its consolidated joint venture, and the
unconsolidated joint ventures (including the Property held as
tenants-in-common) for federal income tax purposes was $21,303,689 and
$10,187,585, 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 the net investment in direct
financing lease; therefore, depreciation is not applicable.
(e) For financial reporting purposes, the lease for the land and building
has been recorded as a direct financing lease. The cost of the land and
building has been included in net investment in direct financing
leases; therefore, depreciation is not applicable.
(f) 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.
(g) The building portion of this Property is owned by the tenant;
therefore, depreciation is not applicable.
(h) The tenant of this Property, Restaurant Management Services, Inc., has
subleased this Property to a local, independent restaurant. Restaurant
Management Services, Inc. continues to be responsible for complying
with all the terms of the lease agreement and is continuing to pay rent
on this Property, subject to certain rent concessions, to the
Partnership.
(i) The building located on this Property was demolished in 1995;
therefore, depreciation is not applicable.
F-9
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
<S> <C>
Perkins - Florence, SC
First Mortgage 10.25% July, 2000 (1) $ - $1,160,000 $1,011,428 $ -
Church's - Jacksonville, FL
First Mortgage 10.00% December, 2005 (2) - 240,000 239,169 -
Total $ - $1,400,000 $1,250,597(3) $ -
</TABLE>
(1) Monthly payments of principal and interest at an annual rate of 10.25%,
with a balloon payment at maturity of $1,106,657.
(2) Monthly payments of principal and interest at an annual rate of 10.00%,
with a balloon payment at maturity of $218,252.
(3) The tax carrying value of the notes is approximately $1,279,215, which
is net of deferred gain of $95,933.
(4) The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C>
Balance at beginning of period $1,259,495 $1,267,849 $ -
New mortgage loans - - 1,400,000
Interest earned 140,188 140,822 47,887
Collection of principal and
interest (150,012) (150,012) (51,973)
Deferred gain on sale of land
and building - - (128,065)
Recognition of deferred gain
on sale of land and building 926 836 -
Balance at end of period $1,250,597 $1,259,495 $1,267,849
</TABLE>
F-10
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number Page
3.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund VII, Ltd. (Included as Exhibit 3.1 to Registration
Statement No. 33-31482 on Form S-11 and incorporated herein by
reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund VII, Ltd. (Included as Exhibit 3.1 to Registration
Statement No. 33-31482 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund VII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on April 1,
1996, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund VII, Ltd. and CNL
Investment Company (Included as Exhibit 10.1 to Form 10-K
filed with the Securities and Exchange Commission on April 1,
1996, and incorporated herein by reference.)
10.2 Assignment of 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 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.)
27 Financial Data Schedule (Filed herewith.)
i
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund VII, Ltd. at December 31, 1997, 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 VII, Ltd. for the year ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 761,317
<SECURITIES> 0
<RECEIVABLES> 97,051
<ALLOWANCES> 32,959
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,552,433
<DEPRECIATION> 2,169,570
<TOTAL-ASSETS> 25,479,762
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,547,778
<TOTAL-LIABILITY-AND-EQUITY> 25,479,762
<SALES> 0
<TOTAL-REVENUES> 2,671,146
<CGS> 0
<TOTAL-COSTS> 474,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,613
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,606,008
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,606,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,606,008
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund VII, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
