UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19140
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
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The Form 10-K of CNL Income Fund VII, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund 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
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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 owned 40 Properties as of December 31,
1997. The 40 Properties include 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.
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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 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
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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. As of December 31, 1997, Golden
Corral Corporation leased Properties with an aggregate carrying value in excess
of 20 percent of the total assets of the Partnership.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into a joint venture arrangement, San
Antonio #849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property. In addition, the Partnership has entered into four separate joint
venture arrangements: Halls Joint Venture with CNL Income Fund V, Ltd., an
affiliate of the General Partners, to purchase and hold one Property; CNL
Restaurant Investments II with CNL Income Fund VIII, Ltd. and CNL Income Fund
IX, Ltd., affiliates of the General Partners, to purchase and hold six
Properties; Des Moines Real Estate Joint Venture with CNL Income Fund XI, Ltd.
and CNL Income Fund XII, Ltd., affiliates of the General Partners, to purchase
and hold one Property; and CNL Mansfield Joint Venture with CNL Income Fund
XVII, Ltd., an affiliate of
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the General Partners to purchase and hold one Property. The affiliates are
limited partnerships organized pursuant to the laws of the State of Florida. 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 has an 83 percent interest in San Antonio #849 Joint Venture, a 51
percent interest in Halls Joint Venture, an 18 percent interest in CNL
Restaurant Investments II, a 4.79% interest in Des Moines Real Estate Joint
Venture, and a 79 percent interest in CNL Mansfield 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
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the Box Property as tenants in common with CNL Income Fund VI, Ltd., an
affiliate of the General Partners. The agreement provided 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 CNL Income Fund III, Ltd., CNL Income
Fund X, Ltd. and CNL Income Fund XIII, Ltd., 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 CNL Income Fund II, Ltd., 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.
Each of the affiliates is a limited partnership organized pursuant to
the laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property. The
affiliates are limited partnerships organized pursuant to the laws of the State
of Florida.
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
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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.
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 40 Properties. Of the 40
Properties, 28 are owned by the Partnership in fee simple, ten are owned through
joint venture arrangements and two are owned through a tenancy in common
arrangement. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the Properties and their respective costs, including acquisition
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fees and certain acquisition expenses.
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.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
State Number of Properties
Arizona 1
Colorado 1
Florida 10
Georgia 2
Indiana 1
Louisiana 1
Michigan 2
Minnesota 1
North Carolina 1
Ohio 7
Tennessee 4
Texas 8
Washington 1
------
TOTAL PROPERTIES: 40
======
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. As of December 31, 1997, the
Partnership had no plans for renovation of the Properties. Depreciation expense
is computed for buildings and improvements using the straight line method using
a depreciable life of 40 years for federal income tax purposes. As of December
31, 1997, the aggregate cost basis of the Properties owned by the Partnership
and joint ventures (including Properties held through tenancy in common
arrangements) for federal income tax purposes was $21,303,689 and $10,187,585,
respectively.
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The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
Boston Market 1
Burger King 10
Checkers 1
Chevy's Fresh Mex 1
Church's 2
Golden Corral 5
Hardee's 6
Jack in the Box 3
KFC 2
Popeyes 5
Rally's 1
Shoney's 2
Taco Bell 1
------
TOTAL PROPERTIES 40
======
The General Partners consider the Properties to be well-maintained
and sufficient for the Partnership's operations.
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.
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.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993 all of the Properties
were occupied. The following is a schedule of the average annual rent for each
of the five years ended December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1997 1996 1995 1994 199
----------- ----------- ----------- ------------ -----------
<S> <C>
Rental Revenues (1) $2,751,418 $2,850,721 $2,699,624 $2,939,995 $2,984,072
Properties 40 40 41 43 42
Average Rent per Unit $68,785 $71,268 $65,844 $68,372 $71,049
</TABLE>
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(1) Rental revenues include the Partnership's share of rental revenues from
the ten Properties owned through joint venture arrangements and the two
properties owned through tenancy in common arrangements. Rental
revenues have been adjusted, as applicable, for any amounts for which
the Partnership has established an allowance for doubtful accounts.
The following is a schedule of lease expirations for leases in place as
of December 31, 1997 for each of the ten years beginning with 1998 and
thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
<S> <C>
1998 1 30,000 1.10%
1999 - - -
2000 - - -
2001 - - -
2002 - - -
2003 1 107,991 3.98%
2004 2 179,231 6.60%
2005 9 571,939 21.06%
2006 1 62,086 2.29%
2007 - - -
Thereafter 26 1,764,587 64.97%
-------- ------------- -------------
Totals 40 2,715,834 100.00%
======== ============= =============
</TABLE>
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).
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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.
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PART II
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 or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $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 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
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$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 to pay Partnership liabilities.
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 to pay Partnership
liabilities.
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 from the sale.
In addition, in October 1996, the Partnership sold its
15
<PAGE>
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 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
16
<PAGE>
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 or
the tenancy in common arrangement in which the Partnership owns an interest, is
or may be encumbered. Under its Partnership Agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties, pending reinvestment in additional
Properties or use for the payment of Partnership liabilities, are invested in
money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, CDs and money market accounts with
less than a 30-day maturity date, pending the Partnership's use of such funds to
pay Partnership expenses or 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.
As of December 31, 1997, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately two
percent annually. The funds remaining at December 31, 1997, will be used for the
payment of distributions and other liabilities.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties
for cash and leasing them under triple-net leases to operators
who generally meet specified financial standards minimizes the
Partnership's operating expenses. The General Partners believe
17
<PAGE>
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.
The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution. Based
primarily on current and anticipated future cash from operations, 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 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.
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
18
<PAGE>
or, in the event the General Partners elect to make additional capital
contributions, from future General Partner contributions.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1995, the Partnership owned and leased 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
19
<PAGE>
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 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 "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 "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
20
<PAGE>
the sales of the Properties in Florence, South Carolina, in August 1995, and
Jacksonville, Florida, in December 1995, as discussed above in "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 "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 "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, 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
21
<PAGE>
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 "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 "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
22
<PAGE>
above in "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 "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 "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 "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 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 " 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, the Partnership recognized a loss on
demolition of building for financial reporting purposes of $174,466 for the year
ended December 31, 1995. The Partnership has continued receiving rental payments
on this Property in accordance with the terms of the lease agreement.
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
23
<PAGE>
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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
July, 1999.
CNL INCOME FUND 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, Treasure and Director July 29, 1999
- ------------------------- (Principal Financial and
Robert A. Bourne Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director July 29, 1999
- --------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
