7UNITED 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, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16850
CNL INCOME FUND III, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801-3336
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No X
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on June 1, 1987. The general partners of the Partnership are Robert A.
Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation
(the "General Partners"). Beginning on August 10, 1987, the Partnership offered
for sale up to $25,000,000 in limited partnership interests (the "Units")
(50,000 Units at $500 per Unit) pursuant to a registration statement on Form
S-11 under the Securities Act of 1933, as amended. The offering terminated on
April 29, 1988, as of which date the maximum offering proceeds of $25,000,000
had been received from investors who were admitted to the Partnership as limited
partners (the "Limited Partners").
The Partnership was organized primarily to acquire both newly
constructed and existing restaurant properties, as well as properties upon which
restaurants were to be constructed (the "Properties"), which are leased
primarily to operators of selected national and regional fast-food restaurant
chains (the "Restaurant Chains"). Net proceeds to the Partnership from its
offering of Units, after deduction of organizational and offering expenses,
totalled $22,125,102, and were used to acquire 32 Properties, including
interests in two Properties owned by joint ventures in which the Partnership is
a co-venturer.
As of December 31, 2000, the Partnership owned 20 Properties directly
and seven Properties indirectly through joint venture or tenancy-in-common
arrangements. During 2001, the Partnership sold its Properties in Schererville,
Indiana and Washington, Illinois. During 2002, Titusville Joint Venture, in
which the Partnership owned a 73.4% interest, sold its Property and the
Partnership and the joint venture partner liquidated the joint venture. In
addition, during 2002, the Partnership sold its Properties in Montgomery,
Alabama; Altus, Oklahoma; and Canton Township, Michigan. During 2003, the
Partnership sold its Property in Fayetteville, North Carolina. As of December
31, 2003, the Partnership owned 14 Properties directly and six Properties
indirectly through joint venture or tenancy-in-common arrangements. Generally,
the Properties are leased on a triple-net basis with the lessees responsible for
all repairs and maintenance, property taxes, insurance and utilities.
The Partnership holds 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 consider factors such as potential capital
appreciation, net cash flow, and federal income taxes. Certain lessees 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. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under Property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from 3 to 20 years (the average being 17 years), and expire
between 2006 and 2019. Generally, leases are on a triple-net basis, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties generally provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $23,000 to $191,900. The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount, to be paid
annually. In addition, some leases provide for increases in the annual base rent
during the lease term.
Generally, the leases of the Properties provide for two to four
successive five-year renewal options subject to the same terms and conditions as
the initial lease. Lessees of 16 of the Partnership's 20 Properties also have
been granted options to purchase Properties at each Property's then fair market
value, or pursuant to a formula based on the original cost of the Property, if
greater, after a specified portion of the lease term has elapsed. Fair market
value will be determined through an appraisal by an independent firm.
The leases generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership must first offer the
lessee the right to purchase the Property on the same terms and conditions, and
for the same price, as any offer which the Partnership has received for the sale
of the Property.
In January 2002, Houlihan's Restaurant, Inc., filed for bankruptcy and
rejected the one lease it has with the Partnership. In February 2003, the
Partnership sold this Property to a third party. The Partnership used the sales
proceeds from this sale to make a special distribution to the Limited Partners.
Major Tenants
During 2003, two lessees of the Partnership, Winston's GC No. 1, Inc.,
and IHOP Properties, Inc., each contributed more than 10% of the Partnership's
total rental revenues (including total rental revenues from the Partnership's
consolidated joint venture and the Partnership's share of total rental revenues
from Properties owned by unconsolidated joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). As of December 31,
2003, Winston's GC No. 1, Inc. was the lessee under a lease relating to one
restaurant, and IHOP Properties 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 two lessees will each continue to contribute more
than 10% of the Partnership's total rental revenues in 2004. In addition, five
Restaurant Chains, IHOP, KFC, Golden Corral Buffet and Grill ("Golden Corral"),
Taco Bell, and Pizza Hut each accounted for more than 10% of the Partnership's
total rental revenues during 2003 (including total rental revenues from the
Partnership's consolidated joint venture and the Partnership's share of total
rental revenues from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
In 2004, it is anticipated that these five Restaurant Chains each will continue
to account for more than 10% of total rental revenues to which the Partnership
is entitled under the terms of the leases. Any failure of these lessees or any
of these Restaurant Chains will materially affect the Partnership's operating
results, if the Partnership is not able to re-lease these Properties in a timely
manner. As of December 31, 2003, IHOP Properties, Inc. leased Properties with an
aggregate carrying value in excess of 20% of the total assets of the
Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
Tuscawilla Joint Venture 1987 69.07 % Various third party partners Winter Springs, FL
CNL Income Fund III, Ltd., and CNL 1997 33.00 % CNL Income Fund IX, Ltd. Englewood, CO
Income Fund IX, Ltd., Tenants
in Common
CNL Income Fund III, Ltd., CNL 1997 9.84% CNL Income Fund VII, Ltd. CNL Miami, FL
Income Fund VII, Ltd., CNL Income Fund X, Ltd. CNL
Income Fund X, Ltd., and CNL Income Fund XIII, Ltd.
Income Fund XIII, Ltd., Tenants
in Common
CNL Income Fund II, Ltd., CNL Income 1998 25.87% CNL Income Fund II, Ltd., Overland Park, KS
Fund III, Ltd., and CNL Income CNL Income Fund VI, Ltd.
Fund VI, Ltd., Tenants in Common
RTO Joint Venture 1998 46.88% CNL Income Fund V, Ltd. Orlando, FL
Entity Name Year Ownership Partners Property
CNL Income Fund III, Ltd., and CNL 1999 20.00% CNL Income Fund VI, Ltd Baytown, TX
Income Fund VI, Ltd., Tenants
in Common
Each joint venture and tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership has management control of Tuscawilla Joint Venture and shares
management control equally with the affiliates of the General Partners for the
other joint ventures and tenancy in common arrangements.
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
entity or Property. The Partnership and its partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture or tenancy in common. Net cash flow from operations is distributed to
each joint venture or tenancy in common partner in accordance with its
respective percentage interest in the entity or Property.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partner to dissolve the joint
venture. 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.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partner, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the Property if the proceeds are reinvested in an additional Property.
Certain Management Services
RAI Restaurants, Inc. (the "Advisor"), 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.
Under this agreement, the Advisor is 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. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor an
annual fee of one-half of one percent of Partnership assets (valued at cost)
under management, not to exceed the lesser of one percent of gross rental
revenues or competitive fees for comparable services. Under the management
agreement, the property management fee is subordinated to receipt by the Limited
Partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return"),
calculated in accordance with the Partnership's limited partnership agreement
(the "Partnership Agreement"). In any year in which the Limited Partners have
not received the 10% Preferred Return, no property management fee will be paid.
The property management agreement continues until the Partnership no
longer owns an interest in any Properties unless terminated at an earlier date
upon 60 days' prior notice by either party.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
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.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM 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 Financial 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, 2003, the Partnership owned 20 Properties. Of the 20
Properties, 14 are owned by the Partnership in fee simple, two are owned through
joint venture arrangements and four are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,800
to 67,300 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,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2003 by state.
State Number of Properties
Alabama 1
Arizona 1
California 1
Colorado 1
Florida 4
Georgia 1
Kansas 2
Minnesota 1
Missouri 1
Nebraska 1
Texas 6
--------------
TOTAL PROPERTIES 20
==============
Buildings. Each of the Properties includes a building that is one of a
Restaurant Chain's approved designs. The buildings generally are rectangular and
are constructed from various combinations of stucco, steel, wood, brick and
tile. Building sizes range from approximately 1,900 to 7,900 square feet.
Generally, all buildings on Properties acquired by the Partnership are
freestanding and surrounded by paved parking areas. Buildings are suitable for
conversion to various uses, although modifications may be required prior to use
for other than restaurant operations. As of December 31, 2003, the Partnership
had no plans for renovation of the Properties. Depreciation expense is computed
for buildings and improvements using the straight-line method using depreciable
lives of 31.5 and 39 years for federal income tax purposes.
As of December 31, 2003, the aggregate cost of the Properties owned by
the Partnership and its consolidated joint venture, and the unconsolidated joint
ventures (including the Properties owned through tenancy in common arrangements)
for federal income tax purposes was $9,686,435 and $7,858,323, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Burger King 1
Casey's Grill 1
Chevy's Fresh Mex 1
Golden Corral 1
IHOP 4
KFC 4
Pizza Hut 3
Ruby Tuesday 1
Taco Bell 2
Other 2
--------------
TOTAL PROPERTIES 20
==============
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.
Leases. The Partnership leases the Properties to operators of
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.
The following is a schedule of the average rent per Property and
occupancy rates for each of the years ended December 31:
2003 2002 2001 2000 1999
------------- ------------- --------------- -------------- --------------
Rental Revenues (1)(2) $ 1,426,633 $ 1,536,998 $ 1,869,205 $1,947,948 $ 1,939,767
Properties (2) 20 20 24 26 27
Average Rent per
Property $ 71,332 $ 76,850 $ 77,884 $ 74,921 $ 71,843
Occupancy Rate 100% 95% 96% 96% 98%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements.
(2) Excludes Properties that were vacant at December 31, and that did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2003 for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
---------------- --------------- --------------------- -------------------------
2004 -- -- --
2005 -- -- --
2006 2 $ 126,249 10.02%
2007 4 190,856 15.15%
2008 5 370,481 29.40%
2009 -- -- --
2010 1 46,651 3.70%
2011 -- -- --
2012 2 49,351 3.92%
2013 1 109,978 8.73%
Thereafter 5 366,456 29.08%
---------- --------------- -------------
Total (1) 20 $ 1,260,022 100.00%
========== =============== =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2003 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
IHOP Properties, Inc. leases four IHOP restaurants. The initial term of
each lease is 20 years (expiring between 2017 and 2019) and the average minimum
base annual rent is approximately $147,700 (ranging from approximately $120,200
to $174,300).
Winston's GC No. 1, Inc. leases one Golden Corral restaurant. The
initial term of the lease is 15 years (expiring in 2013) and a minimum base
annual rent of approximately $110,000.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of
the Partnership, nor any of their respective Properties, is party to, or subject
to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 12, 2004, there were 2,009 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. During 2003, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. From
inception through December 31, 2003, the price paid for any Unit transferred
pursuant to the Plan ranged from $339 to $475 per Unit. The price paid for any
Units transferred other than pursuant to the Plan was 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 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
------------------------------------- ------------------------------------
High Low Average High Low Average
-------- --------- ---------- -------- --------- -----------
First Quarter $330 $ 205 $ 255 $298 $ 212 $ 228
Second Quarter 336 200 268 215 215 215
Third Quarter 339 339 339 323 215 237
Fourth Quarter 339 259 291 181 181 181
(1) A total of 215 and 615 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2003 and 2002,
respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31, 2003 and 2002, the Partnership
declared cash distributions of $1,756,252 and $3,082,500, respectively, to the
Limited Partners. Distributions during 2003 and 2002 included $350,000 and
$1,600,000, respectively, in special distributions, as a result of the
distribution of net sales proceeds from the 2003 sale of the Property in
Fayetteville, North Carolina and the 2002 sales of the Properties in Montgomery,
Alabama; Altus, Oklahoma; and Canton Township, Michigan, and the liquidating
distribution received from Titusville Joint Venture and the 2001 sale of the
Property in Washington, Illinois. These amounts were applied toward the Limited
Partners' cumulative 10% Preferred Return. These special distributions were
effectively a return of a portion of the Limited Partners' investment, although,
in accordance with the Partnership agreement, it was applied to the Limited
Partners' unpaid cumulative preferred return. The reduced number of Properties
for which the Partnership receives rental payments, as well as ongoing
operations, reduced the Partnership's revenues. The decrease in Partnership
revenues, combined with the fact that a significant portion of the Partnership's
expenses are fixed in nature, resulted in a decrease in cash distributions to
the Limited Partners commencing during the quarters ended March 31, 2003,
December 31, 2002 and March 31, 2002. No amounts distributed to the Limited
Partners for the years ended December 31, 2003 and 2002, 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 such
distributions on this basis.
2003 2002
------------- --------------
First Quarter $ 701,563 $ 975,000
Second Quarter 351,563 375,000
Third Quarter 351,563 375,000
Fourth Quarter 351,563 1,357,500
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
(b) Not applicable.
Item 6. Selected Financial Data
2003 2002 2001 2000 1999
-------------- ------------- -------------- -------------- -------------
Year ended December 31:
Continuing Operations:
Revenues $ 1,210,434 $1,274,989 $1,561,515 $ 1,451,913 $ 1,509,847
Equity in earnings of
unconsolidated joint
ventures 211,613 207,800 139,219 23,956 170,966
Income from continuing
operations (1) 1,019,470 1,016,488 974,444 1,035,999 1,453,338
Discontinued Operations (4):
Revenues -- 72,147 312,617 311,885 313,429
Income (loss) from and gain
(loss) on disposal of
discontinued operations (3) (1,898 ) (736,689 ) (56,397 ) 277,433 277,333
Net income 1,017,572 279,799 918,047 1,313,432 1,730,671
Income (loss) per unit:
Continuing operations $ 20.39 $ 20.33 $ 19.49 $ 20.72 $ 29.06
Discontinued operations (0.04 ) (14.73 ) (1.13 ) 5.55 5.55
-------------- ------------- -------------- -------------- -------------
$ 20.35 $ 5.60 $ 18.36 $ 26.27 $ 34.61
============== ============= ============== ============== =============
Cash distributions declared (2) $ 1,756,252 $3,082,500 $ 2,400,000 $ 2,475,000 $ 2,000,000
Cash distributions declared per
Unit (2) 35.13 61.65 48.00 49.50 40.00
At December 31:
Total assets $10,162,667 $11,948,538 $13,680,116 $15,157,134 $ 16,472,518
Total partners' capital 9,416,041 10,154,721 12,957,422 14,439,375 15,600,943
(1) Income from continuing operations for the years ended December 31,
2001, 2000, and 1999, includes gains on sale of assets of $297,741,
$16,855, and $293,512, respectively, and a loss on sale of assets of
$9,945 during the year ended December 31, 2002. In addition, income
from continuing operations for the year ended December 31, 2001,
includes provision for write-down of assets of $553,673.
(2) Distributions for the years ended December 31, 2003, 2002, 2001, and
2000, include a special distribution to the Limited Partners of
$350,000, $1,600,000, $650,000, and $600,000, respectively, as a result
of the distribution of the net sales proceeds from sold Properties.
(3) Income (loss) from and gain (loss) on disposal of discontinued
operations for the years ended December 31, 2002 and 2001 includes
$647,285 and $331,304, respectively, from provisions for write-down of
assets. Income (loss) from and gain (loss) on disposal of discontinued
operations for the years ended December 31, 2003 and 2002 includes
$2,225 from gain on disposal of discontinued operations and $113,780
from loss on disposal of discontinued operations, respectively.
(4) Certain items in prior years' financial data have been reclassified to
conform to 2003 presentation. These reclassifications had no effect on
total net income. The results of operations relating to properties that
were identified for sale as of December 31, 2001 but sold subsequently
are reported as continuing operations. The results of operations
relating to properties that were either identified for sale and
disposed of subsequent to January 1, 2002 or were classified as held
for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on June 1, 1987, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, to be leased primarily to operators of
Restaurant Chains. The leases generally are triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental amounts (payable in monthly installments) ranging from approximately
$23,000 to $191,900. The majority of the leases provide for percentage rent
based on sales in excess of a specified amount. In addition, some leases provide
for increases in the annual base rent during the lease term. As of December 31,
2003, the Partnership owned 14 Properties directly and six Properties indirectly
through joint venture or tenancy-in-common arrangements. As of December 31,
2002, the Partnership owned 15 Properties directly and six Properties indirectly
through joint venture or tenancy-in-common arrangements. As of December 31,
2001, the Partnership owned 18 Properties directly and seven Properties
indirectly through joint venture or tenancy in common arrangements.
Capital Resources
Cash from operating activities was $1,175,884, $1,433,388, and
$1,747,573, during the years ended December 31, 2003, 2002, and 2001,
respectively. The decrease in cash from operating activities during 2003, and
2002, each as compared to the previous year, was the result of changes in the
Partnership's working capital, such as the timing of transactions relating to
the collection of receivables and the payment of expenses, and changes in income
and expenses, such as changes in rental revenues resulting from the sale of
Properties and changes in operating and Property related expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
During 2001, the Partnership sold its Properties in Schererville,
Indiana and Washington, Illinois and received net sales proceeds of
approximately $1,336,700, resulting in a total gain of approximately $297,700.
In connection with these sales, the Partnership received $60,000 from one of the
former tenants in consideration of the Partnership releasing the tenant from its
obligation under the terms of its lease. The Partnership distributed the net
sales proceeds from these sales as special distributions to the Limited
Partners, as described below.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.40% interest, sold its Property, which had been vacant since 1997, to
a third party and received net sales proceeds of approximately $165,600
resulting in a gain of approximately $4,900 to the joint venture. The
Partnership and the joint venture partner dissolved the joint venture in
accordance with the joint venture agreement and the Partnership received
approximately $106,500 representing its pro rata share of the joint venture's
liquidating distribution. No gain or loss was recorded relating to the
dissolution of the joint venture. The Partnership distributed the liquidation
proceeds as a special distribution to the Limited Partners, as described below.
In addition, during 2002, the Partnership sold its Properties in
Montgomery, Alabama; Altus, Oklahoma, and Canton Township, Michigan, each to a
third party and received net sales proceeds of approximately $1,419,100,
resulting in a net loss of approximately $167,100 during the year ended December
31, 2002. The Property in Montgomery, Alabama was identified for sale as of
December 31, 2001 and the Properties in Altus, Oklahoma and Canton Township,
Michigan were identified for sale during 2002. The net sales proceeds from the
sale of the Property in Montgomery, Alabama included cash and $320,000 in the
form of a promissory note. The promissory note bore interest at a rate of ten
percent per annum. In August 2002, the Partnership received a balloon payment
which included the outstanding principal balance and accrued interest. In
addition, the net sales proceeds from the sale of the Property in Canton
Township, Michigan included $640,000 in the form of a promissory note. This
promissory note bore interest at a rate of 10.5% per annum. In December 2002,
the Partnership negotiated for an early payoff at a reduced amount and received
a balloon payment which included $606,800 of the outstanding principal balance.
The Partnership wrote off the accrued interest of $16,800 and remaining
principal balance of $33,200. The Partnership used the sales proceeds from these
three sales to make a special distribution to the Limited Partners and to pay
liabilities of the Partnership.
In February 2003, the Partnership sold its Property in Fayetteville,
North Carolina, to a third party and received net sales proceeds of
approximately $383,300, resulting in a gain on disposal of discontinued
operations of approximately $2,200. The Partnership had recorded provisions for
write-down of assets in previous years relating to this asset. The Partnership
distributed the sales proceeds as a special distribution to the Limited
Partners, as described below.
In connection with the sales of the above Properties, the Partnership
incurred deferred, subordinated real estate disposition fees of $12,375,
$45,300, and $40,928, during the years ended December 31, 2003, 2002, and 2001,
respectively. Payment of the real estate disposition fees is subordinated to the
receipt by the Limited Partners of their aggregate, cumulative 10% Preferred
Return, plus their adjusted capital contributions.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, are
or may be encumbered. Subject to certain restrictions on borrowings from the
General Partners, however, the Partnership may borrow, at the discretion of the
General Partners, for the purpose of maintaining the operations of the
Partnership. The Partnership will not encumber any of the Properties in
connection with any borrowings or advances. The Partnership also will not borrow
under circumstances which would make the Limited Partners liable to creditors of
the Partnership. Affiliates of the General Partners from time to time incur
certain operating expenses on behalf of the Partnership for which the
Partnership reimburses the affiliates without interest.
At December 31, 2003, the Partnership had $771,278 in cash and cash
equivalents, as compared to $1,994,246 at December 31, 2002. At December 31,
2003, these funds were held in non-interest bearing demand deposit accounts at a
commercial bank. The decrease in cash and cash equivalents was primarily a
result of the Partnership distributing to the Limited Partners, in the form of a
special distribution as described below, sales proceeds that were held at
December 31, 2002. The funds remaining at December 31, 2003, after the payment
of distributions and other liabilities, will be used to meet the Partnership's
working capital needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and generally leasing them under triple-net leases to operators who generally
meet specified financial standards minimizes the Partnership's operating
expenses. The General Partners believe that the leases will continue to generate
net cash flow in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations 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 and, for the years ended December 31, 2003, 2002, and 2001, the
liquidating distribution received from Titusville joint venture and a portion of
the sales proceeds received from the sales of Properties, the Partnership
declared distributions to the Limited Partners of $1,756,252, $3,082,500, and
$2,400,000, for the years ended December 31, 2003, 2002, and 2001, respectively.
This represents distributions of $35.13, $61.65, and $48.00, per Unit for the
years ended December 31, 2003, 2002, and 2001, respectively. Distributions for
2003 included $350,000 in a special distribution as a result of the distribution
of net sales proceeds from the sale of the Property in Fayetteville, North
Carolina. Distributions for 2002 included $1,600,000 in special distributions as
a result of the distribution of net sales proceeds from the 2002 sales of the
Properties in Montgomery, Alabama; Altus, Oklahoma; and Canton Township,
Michigan, the liquidating distribution received from Titusville Joint Venture,
and the 2001 sale of the Property in Washington, Illinois. Distributions for
2001 included $650,000 as a result of the distribution of the net sales proceeds
from the sale of the Property in Schererville, Indiana. These special
distributions were effectively a return of a portion of the Limited Partners'
investment, although, in accordance with the Partnership agreement, it was
applied to the Limited Partner's unpaid cumulative 10% Preferred Return. As a
result of the sales of the Properties, the Partnership's total revenue was
reduced and is expected to remain reduced in subsequent periods, while the
majority of the Partnership's operating expenses remained and are expected to
remain fixed. Due to the sales of Properties and current and anticipated future
cash from operations, distributions of net cash flow were adjusted during 2003,
2002, and 2001. No amounts distributed to the Limited Partners for the years
ended December 31, 2003, 2002, or 2001, 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 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income during the years ended December 31,
2003, 2002, or 2001.
At December 31, 2003 and 2002, the Partnership owed $8,094 and $10,652,
respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 12, 2004, these amounts had been reimbursed
to affiliates. In addition, during the years ended December 31, 2003 and 2002,
the Partnership incurred $12,375 and $45,300, respectively, in real estate
disposition fees due to an affiliate as a result of services provided in
connection with the sale of several Properties, as described above. The payment
of such fees is deferred until the Limited Partners have received the sum of
their cumulative 10% Preferred Return and their adjusted capital contributions.
Other liabilities, including distributions payable, were $434,222 and $1,426,015
at December 31, 2003 and 2002, respectively. The decrease at December 31, 2003,
as compared to December 31, 2002, was primarily a result of the Partnership
paying the special distribution declared at December 31, 2002 during 2003. The
General Partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for using either the direct financing or the
operating methods. FAS 13 requires management to estimate the economic life of
the leased property, the residual value of the leased property and the present
value of minimum lease payments to be received from the tenant. In addition,
management assumes that all payments to be received under its leases are
collectible. Changes in management's estimates or assumption regarding
collectibility of lease payments could result in a change in accounting for the
lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the
decision to sell or commits to a plan to sell a Property within one year, its
operating results are reported as discontinued operations.
Results of Operations
Comparison of year ended December 31, 2003 to year ended December 31, 2002
Rental revenues from continuing operations were $1,030,610 during the
year ended December 31, 2003, as compared to $1,077,046 for the same period of
2002. Rental revenues from continuing operations were lower during 2003, as
compared to 2002, due to the Partnership selling its Property in Montgomery,
Alabama in May 2002. The tenant of this Property experienced financial
difficulties during 2002. Rental revenues from continuing operations were also
lower during 2003 due to the Partnership terminating the leases relating to the
Properties in Hastings, Nebraska and Wichita, Kansas during 2002. Each lease was
scheduled to expire in 2002. In connection with the terminated lease in Wichita,
Kansas, the Partnership received approximately $8,000 in lease termination
income in consideration for the Partnership releasing the tenant from its
obligation under the lease. The Partnership re-leased both of these Properties
during 2002, each to a new tenant with slightly lower rents. The Partnership
also earned $175,424 in contingent rental income during the year ended December
31, 2003, as compared to $171,047 during the same period of 2002.
The Partnership also earned $211,613 attributable to net income earned
by unconsolidated joint ventures during the year ended December 31, 2003, as
compared to $207,800 during the same period of 2002. Net income earned by
unconsolidated joint ventures remained constant during 2003, as compared to
2002, because there were no changes in the leased Properties owned by the joint
ventures and the tenancies in common.
During 2003, two lessees of the Partnership, Winston's GC No. 1, Inc.,
and IHOP Properties, Inc., each contributed more than 10% of the Partnership's
total rental revenues (including total rental revenues from the Partnership's
consolidated joint venture and the Partnership's share of total rental revenues
from Properties owned by unconsolidated joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). As of December 31,
2003, Winston's GC No. 1, Inc. was the lessee under a lease relating to one
restaurant, and IHOP Properties 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 two lessees will each continue to contribute more
than 10% of the Partnership's total rental revenues in 2004. In addition, five
Restaurant Chains, IHOP, KFC, Golden Corral, Taco Bell, and Pizza Hut each
accounted for more than 10% of the Partnership's total rental revenues during
2003 (including total rental revenues from the Partnership's consolidated joint
venture and the Partnership's share of total rental revenues from Properties
owned by unconsolidated joint ventures and Properties owned with affiliates of
the General Partners as tenants-in-common). In 2004, it is anticipated that
these five Restaurant Chains each will continue to account for more than 10% of
total rental revenues to which the Partnership is entitled under the terms of
the leases. Any failure of these lessees or any of these Restaurant Chains will
materially affect the Partnership's operating results, if the Partnership is not
able to re-lease these Properties in a timely manner.
The Partnership earned $4,400 in interest and other income during the
year ended December 31, 2003, as compared to $18,916 during the same period of
2002. Interest and other income was higher during 2002 because the Partnership
earned interest on a mortgage note receivable held in connection with the 2002
sale of the Property in Montgomery, Alabama. The mortgage note receivable was
paid in full in August 2002. In addition, the Partnership distributed sales
proceeds during 2002 that had been held in interest bearing bank accounts.
Operating expenses, including depreciation expense, were $385,349
during the year ended December 31, 2003, as compared to $439,066 during the same
period of 2002. Operating expenses were lower during 2003, due to a decrease in
the amount of state tax expense relating to several states in which the
Partnership conducts business and a decrease in the costs incurred for
administrative expenses for servicing the Partnership and its Properties. In
addition, operating expenses were higher during 2002 because the Partnership
incurred Property expenses such as legal fees, real estate taxes, insurance and
repairs and maintenance relating to the Property in Montgomery, Alabama. The
tenant of this Property experienced financial difficulty during 2002. The
Partnership sold this Property in May 2002. The Partnership did not incur
Property expenses relating to this Property subsequent to its sale.
As a result of the sale of the Property in Montgomery, Alabama, the
Partnership recognized a loss on sale of assets of approximately $9,900 during
the year ended December 31, 2002. Because this Property was identified for sale
prior to the January 2002 implementation of Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," the results of operations relating to this Property were included as
Income from Continuing Operations in the accompanying financial statements.
During the year ended December 31, 2002, the Partnership identified for
sale three Properties that were classified as Discontinued Operations in the
accompanying financial statements. The Partnership recognized a net rental loss
(rental revenues less Property related expenses and provision for write-down of
assets) of $622,909 during the year ended December 31, 2002, relating to these
three Properties. The net rental loss was primarily a result of the Partnership
recording provisions for write-down of assets. The Partnership recorded
provisions for write-down of assets of approximately $567,600 and $79,700
relating to the Properties in Fayetteville, North Carolina and Altus, Oklahoma,
respectively. The tenant of the Fayetteville Property filed for bankruptcy in
January 2002 and rejected the lease related to this Property. The Partnership
sold the Properties in Altus, Oklahoma and Canton Township, Michigan in
September 2002 and recognized a loss on disposal of discontinued operations of
approximately $80,600 relating to the Property in Canton Township, Michigan. In
December 2002, the Partnership recorded an additional loss of approximately
$33,200 relating to this Property, as described above. In February 2003, the
Partnership sold the Property in Fayetteville, North Carolina, and recorded a
gain on disposal of discontinued operations of approximately $2,200. The
Partnership had recorded provisions for write-down of assets in previous years
relating to this Property. The Partnership recognized a net rental loss of
$4,123 during the year ended December 31, 2003 relating to this Property.
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Rental revenues from continuing operations were $1,077,046 during the
year ended December 31, 2002, as compared to $1,262,340 for the same period of
2001. Rental revenues from continuing operations were lower during 2002, as
compared to 2001, because the Partnership sold several Properties during 2001
and 2002. Rental revenues are expected to remain at reduced amounts due to the
fact that the Partnership used the majority of these net sales proceeds to pay
liabilities of the Partnership and to make distributions to the Limited
Partners.
The Partnership also earned $171,047 in contingent rental income during
the year ended December 31, 2002, as compared to $195,533 during the same period
of 2001. The decrease in contingent rental income during 2002, as compared to
2001, was primarily due to a decrease in the reported gross sales of the
restaurants with leases that require the payment of contingent rental income.
In August 2002, the lease for the Property in Wichita, Kansas, which
was scheduled to expire in November 2002, was terminated by the Partnership and
the tenant. The Partnership re-leased this Property to a new tenant with terms
substantially the same as the Partnership's other leases. In June 2001, the
lease for the Property in Washington, Illinois, which was scheduled to expire in
November 2002, was terminated by the Partnership and the tenant. The Partnership
re-leased this Property to a new tenant with terms substantially the same as the
Partnership's other leases. In addition, in September 2001, the Partnership sold
its Property in Schererville, Indiana and released the tenant from further
obligation under its lease. In connection with these transactions, during the
years ended December 31, 2002 and 2001, the Partnership received approximately
$8,000 and $80,000, respectively, in lease termination income, in consideration
for the Partnership releasing the tenants from their obligations under each
lease.
The Partnership also earned $207,800 attributable to net income earned
by unconsolidated joint ventures during the year ended December 31, 2002, as
compared to $139,219 during the same period of 2001. Net income earned by
unconsolidated joint ventures was lower during the year ended December 31, 2001,
as compared to the same period of 2002 because during 2001, Titusville Joint
Venture, in which the Partnership owned a 73.4% interest, recorded a provision
for write-down of assets of approximately $38,300. The Property owned by the
joint venture became vacant during 1997. Titusville Joint Venture had previously
recorded a provision for write-down of assets relating to this Property. The
increase in the provision during 2001 represented the difference between the
Property's net carrying value and its estimated fair value. In January 2002,
Titusville Joint Venture sold its Property to a third party and received net
sales proceeds of approximately $165,600 resulting in a gain of approximately
$4,900 to the joint venture. The Partnership and the joint venture partner
dissolved the joint venture in accordance with the joint venture agreement. No
gain or loss was recorded relating to the dissolution of the joint venture.
The Partnership earned $18,916 in interest and other income during the
year ended December 31, 2002, as compared to $23,642 during the same period of
2001.
Operating expenses, including depreciation expense and provision for
write-down of assets, were $439,066 for the year ended December 31, 2002, as
compared to $1,006,751 for the same period of 2001. Operating expenses were
higher during 2001, as compared to 2002, partially because the Partnership
recorded a provision for write-down of assets of approximately $553,700 relating
to the Property in Montgomery, Alabama during 2001. The tenant of this Property
experienced financial difficulties. The provision represented the difference
between the net carrying value of the Property at December 31, 2001 and its
estimated fair value. In addition, the Partnership incurred property expenses
such as insurance, repairs and maintenance, legal fees and real estate taxes
relating to this Property. In May 2002, the Partnership sold this Property.
Operating expenses were lower during 2002, as compared to 2001, because
depreciation was lower as a result of the sale of several Properties during 2001
and 2002. The decrease in operating expenses during the year ended December 31,
2002 was partially offset by an increase in the amount of state tax expense
relating to certain states in which the Partnership conducts business.
As a result of Property sales during 2002 and 2001 the Partnership
recognized a loss on sale of assets of approximately $9,900 and a gain on sale
of assets of approximately $297,700, during the years ended December 31, 2002,
and 2001, respectively. Because these Properties were identified for sale prior
to the January 2002 implementation of Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," the results of operations relating to these Properties were included as
Income from Continuing Operations in the accompanying financial statements.
During the year ended December 31, 2002, the Partnership identified for
sale three Properties that were classified as Discontinued Operations in the
accompanying financial statements. The Partnership recognized a net rental loss
(rental revenues less Property related expenses and provision for write-down of
assets) of $622,909 and $56,397 during the years ended December 31, 2002 and
2001, respectively, relating to these three Properties. The net rental loss
during 2002 and 2001 was primarily a result of the Partnership recording
provisions for write-down of assets. The Partnership recorded provisions for
write-down of assets of approximately $567,600 and $331,300 relating to the
Property in Fayetteville, North Carolina during the years ended December 31,
2002 and 2001, respectively. The tenant of the Fayetteville Property filed for
bankruptcy in January 2002 and rejected the lease related to this Property. In
addition, the net rental loss during 2002 was partially a result of the
Partnership recording a provision for write-down of assets of approximately
$79,700 relating to the Property in Altus, Oklahoma. The Partnership sold the
Properties in Altus, Oklahoma and Canton Township, Michigan in September 2002
and recognized a loss on disposal of discontinued operations of approximately
$80,600 relating to the Property in Canton Township, Michigan. In December 2002,
the Partnership recorded an additional loss of approximately $33,200 relating to
this Property, as described above. In February 2003, the Partnership sold the
Property in Fayetteville, North Carolina, as described above.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003 are generally
triple-net leases and, in general, contain provisions that the General Partners
believe mitigate the adverse effect of inflation. Such provisions include
clauses requiring the payment of percentage rent based on certain restaurant
sales above a specified level and/or automatic increases in base rent at
specified times during the term of the lease. Inflation, overall, has had a
minimal effect on the results of operations of the Partnership. Continued
inflation 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.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify certain
financial instruments as liabilities (or assets in some circumstances) that
previously were classified as equity. One requirement of FAS 150 is that
minority interests for majority owned finite lived entities be classified as a
liability and recorded at fair market value. FAS 150 initially applied
immediately to all financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite lived
Partnerships. The deferral of these provisions is expected to remain in effect
while these interests are addressed in either Phase II of the FASB's Liabilities
and Equity project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these provisions has
been stated. The implementation of the currently effective aspects of FAS 150
did not have an impact on the Partnership's results of operations. The
implementation of the provisions of FAS 150 that have been deferred is not
expected to have a material impact on the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 19
Financial Statements:
Balance Sheets 20
Statements of Income 21
Statements of Partners' Capital 22
Statements of Cash Flows 23-24
Notes to Financial Statements 25-36
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund III, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund III, Ltd. (a Florida limited
partnership) at December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and the
financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
------------------ ----------------
ASSETS
Real estate properties with operating leases, net $ 7,153,757 $ 7,362,460
Real estate held for sale -- 368,737
Investment in joint ventures 2,073,601 2,084,178
Cash and cash equivalents 771,278 1,994,246
Receivables 11,793 10,165
Due from related parties -- 30
Accrued rental income 118,373 95,861
Other assets 33,865 32,861
------------------ ----------------
$ 10,162,667 $ 11,948,538
================== ================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 4,758 $ 21,199
Real estate taxes payable 10,070 11,892
Distributions payable 351,563 1,357,500
Due to related parties 190,544 243,170
Rents paid in advance and deposits 67,831 35,424
------------------ ----------------
Total liabilities 624,766 1,669,185
Minority interest 121,860 124,632
Partners' capital 9,416,041 10,154,721
------------------ ----------------
$ 10,162,667 $ 11,948,538
================== ================
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
-------------- -------------- --------------
Revenues:
Rental income from operating leases $ 1,030,610 $ 1,060,789 $ 1,221,725
Earned income from direct financing leases -- 16,257 40,615
Contingent rental income 175,424 171,047 195,533
Lease termination income -- 7,980 80,000
Interest and other income 4,400 18,916 23,642
-------------- -------------- --------------
1,210,434 1,274,989 1,561,515
-------------- -------------- --------------
Expenses:
General operating and administrative 167,151 186,618 195,785
Property related 5,263 19,425 7,995
State and other taxes 4,232 24,322 14,395
Depreciation 208,703 208,701 234,903
Provisions for write-down of assets -- -- 553,673
-------------- -------------- --------------
385,349 439,066 1,006,751
-------------- -------------- --------------
Income before gain (loss) on sale of assets, minority
interest, and equity in earnings of unconsolidated joint
ventures 825,085 835,923 554,764
Gain (loss) on sale of assets -- (9,945 ) 297,741
Minority interest (17,228 ) (17,290 ) (17,280 )
Equity in earnings of unconsolidated joint ventures 211,613 207,800 139,219
-------------- -------------- --------------
Income from continuing operations 1,019,470 1,016,488 974,444
-------------- -------------- --------------
Discontinued operations:
Loss from discontinued operations (4,123 ) (622,909 ) (56,397 )
Gain (loss) on disposal of discontinued operations 2,225 (113,780 ) --
-------------- -------------- --------------
(1,898 ) (736,689 ) (56,397 )
-------------- -------------- --------------
Net income $ 1,017,572 $ 279,799 $ 918,047
============== ============== ==============
Income (loss) per limited partner unit:
Continuing operations $ 20.39 $ 20.33 $ 19.49
Discontinued operations (0.04 ) (14.73 ) (1.13 )
-------------- -------------- --------------
$ 20.35 $ 5.60 $ 18.36
============== ============== ==============
Weighted average number of limited partner units
outstanding 50,000 50,000 50,000
============== ============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
General Partners Limited Partners
-------------------------------------- ---------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2000 $ 161,500 $ 209,871 $ 25,000,000 $ (31,102,387 ) $ 23,035,289
Distributions to limited
partners ($48.00 per
limited partner unit) -- -- -- (2,400,000 ) --
Net income -- -- -- -- 918,047
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2001 161,500 209,871 25,000,000 (33,502,387 ) 23,953,336
Distributions to limited
partners ($61.65 per
limited partner unit) -- -- -- (3,082,500 ) --
Net income -- -- -- -- 279,799
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2002 161,500 209,871 25,000,000 (36,584,887 ) 24,233,135
Distributions to limited
partners ($35.13 per
limited partner unit) -- -- -- (1,756,252 ) --
Net income -- -- -- -- 1,017,572
----------------- ------------------ ---------------- ---------------- ------------------
Balance, December 31, 2003 $ 161,500 $ 209,871 $ 25,000,000 $ (38,341,139 ) $ 25,250,707
================= ================== ================ ================ ==================
See accompanying notes to financial statements.
- ------------------
Syndication
Costs Total
- ------------------ ---------------
$ (2,864,898 ) $ 14,439,375
-- (2,400,000 )
-- 918,047
- ------------------ ---------------
(2,864,898 ) 12,957,422
-- (3,082,500 )
-- 279,799
- ------------------ ---------------
(2,864,898 ) 10,154,721
-- (1,756,252 )
-- 1,017,572
- ------------------ ---------------
$ (2,864,898 ) $ 9,416,041
================== ===============
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
--------------- --------------- ---------------
Cash Flows From Operating Activities:
Net income $ 1,017,572 $ 279,799 $ 918,047
--------------- --------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 208,703 239,520 269,355
Amortization of investment in direct financing
leases -- 6,634 20,457
Minority interest 17,228 17,290 17,280
Equity in earnings of unconsolidated joint
ventures, net of distributions 10,577 15,195 38,911
Loss (gain) on sale of assets (2,225 ) 123,725 (297,741 )
Provision for write-down of assets -- 647,285 884,977
Decrease (increase) in receivables (1,628 ) 17,363 (21,748 )
Decrease in due from related parties 30 -- 6,956
Increase in accrued rental income (22,512 ) (21,106 ) (57,270 )
Decrease (increase) in other assets (1,004 ) (938 ) 1,553
Increase (decrease) in accounts payable and
accrued expenses and real estate taxes payable (18,263 ) 8,255 (142 )
Increase (decrease) in due to related parties (65,001 ) 68,885 (4,496 )
Increase (decrease) in rents paid in advance and
deposits 32,407 31,481 (28,566 )
--------------- --------------- ---------------
Total adjustments 158,312 1,153,589 829,526
--------------- --------------- ---------------
Net cash provided by operating activities 1,175,884 1,433,388 1,747,573
--------------- --------------- ---------------
Cash Flows From Investing Activities:
Additions to real estate properties with operating
leases -- (25,200 ) --
Collections on mortgage note receivable -- 926,800 --
Proceeds from sale of assets 383,337 492,394 1,336,681
Liquidating distribution from joint venture -- 106,521 --
--------------- --------------- ---------------
Net cash provided by investing activities 383,337 1,500,515 1,336,681
--------------- --------------- ---------------
Cash Flows From Financing Activities:
Distributions to limited partners (2,762,189 ) (2,162,500 ) (2,400,000 )
Distributions to holder of minority interest (20,000 ) (20,088 ) (20,069 )
--------------- --------------- ---------------
Net cash used in financing activities (2,782,189 ) (2,182,588 ) (2,420,069 )
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,222,968 ) 751,315 664,185
Cash and cash equivalents at beginning of year 1,994,246 1,242,931 578,746
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 771,278 $ 1,994,246 $ 1,242,931
=============== =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
-------------- ------------- --------------
Supplemental schedule on non-cash investing and
financing activities
Deferred real estate disposition fee incurred and
unpaid at end of year $ 12,375 $ 45,300 $ 40,928
============== ============= ==============
Mortgage note accepted in exchange for sale of assets $ -- $ 960,000 $ --
============== ============= ==============
Distributions declared and unpaid at end of year $ 351,563 $ 1,357,500 $ 437,500
============== ============= ==============
See accompanying notes to financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Organization and Nature of Business - CNL Income Fund III, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% 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
acquisitions of real estate properties at cost, including acquisition
and closing costs. The real estate properties are leased to 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. During
the years ended December 31, 2003, 2002 and 2001, tenants paid, or are
expected to pay, directly to real estate taxing authorities
approximately $120,900, $120,600 and $139,800, respectively, in
estimated real estate taxes in accordance with the terms of their
leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The Partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
operating or the direct financing methods.
Operating method - 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.
Direct financing method - 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). 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. For the leases classified as direct financing
leases, the building portions of the property leases are
accounted for as direct financing leases while the land
portion of these leases are operating leases.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. 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.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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. If an impairment is indicated, the assets are
adjusted to their estimated fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is made to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partners'
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 RTO Joint Venture, and a property in
each of Englewood, Colorado, Miami, Florida, Overland Park, Kansas, and
Baytown, Texas held as tenants-in-common with affiliates of the general
partners, are accounted for using the equity method since each joint
venture or tenancy in common agreement requires the consent of all
partners on all key decisions affecting the operations of the
underlying property.
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. 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 may exceed federally insured levels;
however, the Partnership has not experienced any losses in such
accounts.
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 represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2003 presentation.
These reclassifications had no effect on partners' capital, net income
or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. The assessment is based on the
carrying amount of the asset at the date it is tested for
recoverability. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds its estimated fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The general partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Statement of Financial Accounting Standards No. 150 - In May 2003, the
FASB issued FASB Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS
150"). FAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify
certain financial instruments as liabilities (or assets in some
circumstances) that previously were classified as equity. One
requirement of FAS 150 is that minority interests for majority owned
finite lived entities be classified as a liability and recorded at fair
market value. FAS 150 initially applied immediately to all financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning
after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite
lived Partnerships. The deferral of these provisions is expected to
remain in effect while these interests are addressed in either Phase II
of the FASB's Liabilities and Equity project or Phase II of the FASB's
Business Combinations project; therefore, no specific timing for the
implementation of these provisions has been stated. The implementation
of the currently effective aspects of FAS 150 did not have an impact on
the Partnership's results of operations. The implementation of the
provisions of FAS 150 that have been deferred is not expected to have a
material impact on the Partnership's results of operations.
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
------------------- ------------------
Land $ 3,781,959 $ 3,781,959
Buildings 6,178,603 6,178,603
------------------- ------------------
9,960,562 9,960,562
Less accumulated depreciation (2,806,805 ) (2,598,102 )
------------------- ------------------
$ 7,153,757 $ 7,362,460
=================== ==================
During the year ended December 31, 2001, the Partnership recorded a
provision for write-down of assets of approximately $244,700 relating
to the property located in Montgomery, Alabama, the building portion of
which was classified as a direct financing lease. The tenant of this
property experienced financial difficulties and vacated the property.
The provision represented the difference between the net carrying value
of the property at December 31, 2001 and its estimated fair value. In
May 2002, the Partnership sold this property to a third party for
$400,000. The Partnership received net sales proceeds of approximately
$398,300 (consisting of approximately $66,300 in cash and $320,000 in
the form of a promissory note) resulting in a loss of approximately
$9,900 during the year ended December 31, 2002. The Partnership had
recorded a provision for write-down of assets in previous years. In
connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $12,000. This property was
identified for sale as of December 31, 2001.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases - Continued
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2003:
2004 $ 1,010,322
2005 1,021,423
2006 938,777
2007 896,446
2008 543,913
Thereafter 2,529,702
---------------------
$ 6,940,583
=====================
3. Mortgage Notes Receivable
In connection with the 2002 sale of its property in Montgomery,
Alabama, the Partnership accepted a promissory note in the principal
sum of $320,000, collateralized by a mortgage on the property. The
promissory note bore interest at a rate of ten percent per annum. In
August 2002, the Partnership received a balloon payment which included
the outstanding principal balance and accrued interest.
In connection with the 2002 sale of its property in Canton Township,
Michigan, the Partnership accepted a promissory note in the principal
sum of $640,000, collateralized by a mortgage on the property. The
promissory note bore interest at a rate of 10.5% per annum. In December
2002, the Partnership negotiated for an early payoff at a reduced
amount and received a balloon payment which included $606,800 of the
outstanding principal balance. The Partnership wrote off the accrued
interest of $16,800 and remaining principal balance of $33,200.
4. Investment in Joint Ventures
As of December 31, 2003, the Partnership had a 46.88% interest in the
profits and losses of RTO Joint Venture. The remaining interest in RTO
Joint Venture is held by an affiliate of the general partners. The
Partnership also had a 33%, a 9.84%, a 25.87%, and a 20% interest in
the profits and losses of a property in each of Englewood, Colorado;
Miami, Florida; Overland Park, Kansas; and Baytown, Texas,
respectively. Each property is held as tenants-in-common with
affiliates of the general partners.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.4% interest, sold its property to a third party and received
net sales proceeds of approximately $165,600, resulting in a gain of
approximately $4,900 to the joint venture. The property had been vacant
since 1997. The Partnership and the joint venture partner dissolved the
joint venture and the Partnership received approximately $106,500
representing its pro rata share of the joint venture's liquidating
distribution. No gain or loss was recorded relating to the dissolution
of the joint venture. This property was identified for sale as of
December 31, 2001.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
As of December 31, 2003, RTO Joint Venture, and the Partnership and
affiliates, as tenants-in-common in four separate tenancy-in-common
arrangements, each owned one property. The following presents the
combined, condensed financial information for these joint venture and
tenancy in common arrangements at:
December 31,
2003 2002
-------------------- -----------------
Real estate properties with operating
leases, net $ 4,114,961 $ 4,174,084
Net investment in direct financing
leases 3,270,072 3,318,332
Cash 64,186 21,217
Accrued rental income 421,178 378,316
Other assets -- 122
Liabilities 66,112 28,002
Partners' capital 7,804,285 7,864,069
2003 2002 2001
---------------- ------------ ---------------
Revenues $ 840,811 $ 824,515 $ 874,954
Expenses (62,437 ) (74,104 ) (68,292 )
---------------- ------------ ---------------
Net income $ 778,374 $ 750,411 $ 806,662
================ ============ ===============
The Partnership recognized income of $211,613, $207,800, and $139,219,
for the years ended December 31, 2003, 2002, and 2001, respectively,
from these joint ventures and properties held as tenants in common.
5. Discontinued Operations
In July 2002, the Partnership entered into an agreement with a third
party to sell the Golden Corral property in Altus, Oklahoma. In
connection with the anticipated sale of the property, the Partnership
recorded a provision for write-down of assets of approximately $79,700
during the quarter ended June 30, 2002. In September 2002, the
Partnership sold this property and received net sales proceeds of
approximately $298,500. In connection with the sale, the Partnership
incurred a deferred, subordinated, real estate disposition fee of
$9,300.
In September 2002, the Partnership sold its Red Oaks Steakhouse
property in Canton Township, Michigan, to a third party for $800,000.
The Partnership received net sales proceeds of approximately $722,300
(consisting of approximately $82,300 in cash and $640,000 in the form
of a promissory note), resulting in a loss on disposal of discontinued
operations of approximately $80,600 during the year ended December 31,
2002. In connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $24,000. The Partnership
accepted a mortgage note receivable relating to the sale of this
property. In December 2002, when the Partnership negotiated for an
early payoff at a reduced amount and received a balloon payment, the
Partnership wrote off the accrued interest of $16,800 and remaining
principal balance of $33,200.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
5. Discontinued Operations - Continued
In December 2002, the Partnership entered into an agreement with a
third party to sell its property in Fayetteville, North Carolina. As a
result, the Partnership reclassified the asset from land and building
with operating leases to real estate held for sale. The reclassified
asset was recorded at the lower of its carrying amount or fair value,
less cost to sell. In connection with the anticipated sale of the
property, the Partnership recorded a provision for write-down of assets
of approximately $567,600 during the quarter ended December 31, 2002.
The Partnership had recorded provisions for write-down of assets in
previous years, including approximately $331,300 during the year ended
December 31, 2001 relating to this property. The provisions represented
the difference between the property's net carrying value and its then
estimated fair value. In February 2003, the Partnership sold this
property, and received net sales proceeds of approximately $383,300,
resulting in a gain on disposal of discontinued operations of
approximately $2,200. In connection with the sale, the Partnership
incurred a deferred, subordinated, real estate disposition fee of
$12,375. The financial results for these properties are reflected as
Discontinued Operations in the accompanying financial statements.
The operating results of the discontinued operations for these
properties are as follows:
Year Ended December 31,
2003 2002 2001
---------------- ------------------ ---------------
Rental revenues $ -- $ 72,147 $ 312,617
Expenses (4,123 ) (47,771 ) (37,710 )
Provision for write-down of assets -- (647,285 ) (331,304 )
---------------- ------------------ ---------------
Loss from discontinued operations $ (4,123 ) $ (622,909 ) $ (56,397 )
================ ================== ===============
6. Allocations and Distributions
From inception through December 31, 1999, generally, all net income and
net losses of the Partnership, excluding gains and losses from the sale
of properties, were allocated 99% to the limited partners and one
percent to the general partners. From inception through December 31,
1999, distributions of net cash flow were made 99% to the limited
partners and one percent to the general partners. However, the one
percent of net cash flow distributed to the general partners was
subordinated to receipt by the limited partners of an aggregate, 10%,
noncumulative, noncompounded annual return on their adjusted capital
contributions (the "10% Preferred Return").
From inception through December 31, 1999, generally, net sales proceeds
from the sale of properties not in liquidation of the Partnership, to
the extent distributed, were distributed first to the limited partners
in an amount sufficient to provide them with their cumulative 10%
Preferred Return, plus the return of their adjusted capital
contributions. The general partners then received, 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 were distributed 95% to the
limited partners and five percent to the general partners. Any gain
from the sale of a property not in liquidation of the Partnership was,
in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property was, in general,
allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95% to the limited
partners and five percent to the general partners.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
6. Allocations and Distributions - Continued
Generally, net sales proceeds from a liquidating sale of properties
will be used in the following order: (i) first to pay and discharge all
of the Partnership's liabilities to creditors, (ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, (iii) third,
to pay all of the Partnership's liabilities, if any, to the general and
limited partners, (iv) fourth, after allocations of net income, gains
and/or losses, to distribute to the partners with positive capital
accounts balances, in proportion to such balances, up to amounts
sufficient to reduce such positive balances to zero, and (v)
thereafter, any funds remaining shall then be distributed 95% to the
limited partners and five percent to the general partners.
Effective January 1, 2000, the general partners waived their right to
receive future distributions from the Partnership, including both
distributions of operating cash flow and distributions of liquidation
proceeds, to the extent that the cumulative amount of such
distributions would exceed the balance in the general partners' capital
account as of December 31, 1999. Accordingly, for years commencing
January 1, 2000 and after, the Partnership's net income will be
allocated entirely among the limited partners. However, if losses are
allocated to the general partners in a year, an amount of income equal
to the sum of such losses may be allocated to the general partner in
succeeding years. Accordingly, the general partners were not allocated
any net income during the years ended December 31, 2003, 2002, and
2001.
During the years ended December 31, 2003, 2002, and 2001, the
Partnership declared distributions to the limited partners of
$1,756,252, $3,082,500, and $2,400,000, respectively. Distributions for
the years ended December 31, 2003, 2002, and 2001, included $350,000,
$1,600,000, and $650,000, respectively in special distributions, as a
result of the distribution of the net sales proceeds from the 2003 sale
of the property in Fayetteville, North Carolina and the 2002 sales of
the properties in Montgomery, Alabama; Altus, Oklahoma, and Canton
Township, Michigan, the liquidating distribution received from
Titusville Joint Venture, and the 2001 sales of the properties in
Washington, Illinois and Schererville, Indiana. These amounts were
applied toward the limited partners' cumulative 10% Preferred Return.
No distributions have been made to the general partners to date.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
7. 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:
2003 2002 2001
------------- ------------- -------------
Net income for financial reporting purposes $1,017,572 $ 279,799 $ 918,047
Effect of timing differences relating to
deprecation 14,012 3,962 (12,508 )
Provision for write-down of assets -- 647,285 884,977
Direct financing leases recorded as operating
leases for tax reporting purposes -- 6,634 20,457
Effect of timing differences relating to
gains/losses on real estate property sales (527,289 ) (467,924 ) (21,271 )
Effect of timing differences relating to
equity in earnings of unconsolidated
joint ventures (8,356 ) (436,140 ) (134 )
Effect of timing differences relating to
allowance for doubtful accounts -- (28,216 ) 28,216
Accrued rental income (22,512 ) (21,106 ) (57,270 )
Rents paid in advance 32,407 12,580 (28,566 )
Effect of timing differences relating to
minority interest (1,813 ) (133 ) (133 )
------------- ------------- -------------
Net income (loss) for federal income tax
purposes $ 504,021 $ (3,259 ) $ 1,731,815
============= ============= =============
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Holdings, Inc. The other individual
general partner, Robert A. Bourne, serves as President and Treasurer of
CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings,
Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL Restaurant
Properties, Inc. (formerly known as CNL American Properties Fund,
Inc.), served as the Partnership's advisor until January 1, 2002, when
it assigned its rights and obligations under a management agreement to
RAI Restaurants, Inc. (the "Advisor"). The Advisor is a wholly owned
subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP"). The
individual general partners are stockholders and directors of CNL-RP.
The Advisor provides services pursuant to a management agreement with
the Partnership. In connection therewith, the Partnership has agreed to
pay the Advisor an annual, noncumulative, subordinated management fee
of one-half of one percent of the Partnership assets under management
(valued at cost) annually. The property management fee is limited to
one percent of the sum of gross operating revenues from joint ventures
or competitive fees for comparable services. In addition, these fees
are incurred and payable only after the limited partners receive their
aggregate, noncumulative 10% Preferred Return. Due to the fact that
these fees are noncumulative, if the limited partners do not receive
their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of
such threshold, no property management fees were incurred during the
years ended December 31, 2003, 2002, and 2001.
The Advisor is 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 Advisor
provides a substantial amount of services in connection with the sales.
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 the receipt by the limited partners of their aggregate,
cumulative 10% Preferred Return, plus their adjusted capital
contributions. During the years ended December 31, 2003, 2002, and
2001, the Partnership incurred $12,375, $45,300, and $40,928,
respectively, in deferred, subordinated real estate disposition fees as
a result of the Partnership's sale of the property in Fayetteville,
North Carolina; the properties in Montgomery, Alabama; Altus, Oklahoma;
and Canton Township, Michigan; and the properties in Schererville,
Indiana and Washington, Illinois, respectively.
The Partnership's affiliates provided accounting and administrative
services. The Partnership incurred $98,400, $133,609, and $130,412, for
the years ended December 31, 2003, 2002, and 2001, respectively, for
such services.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions - Continued
The amount due to related parties consisted of the following at
December 31:
2003 2002
--------------- ----------------
Expenditures incurred on behalf of the
Partnership $ 1,007 $ 780
Accounting and administrative services 7,088 9,866
Deferred, subordinated real estate
disposition fees 182,449 170,074
Other -- 62,450
--------------- ----------------
$ 190,544 $ 243,170
=============== ================
9. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than 10% of the Partnership's total
rental revenues (including total rental revenues from the Partnership's
consolidated joint venture and the Partnership's share of total rental
revenues from unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates of the general partners) for each of
the years ended December 31:
2003 2002 2001
-------------- -------------- ---------------
IHOP Properties, Inc. $ 279,036 $ 279,795 $ 280,071
Winston's GC No. 1, Inc. 211,040 204,252 261,191
Golden Corral Corp. N/A N/A 267,273
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than 10% of the
Partnership's total rental revenues (including total rental revenues
from the Partnership's consolidated joint venture and the Partnership's
share of total rental revenues from unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates of the general
partners) for each of the years ended December 31:
2003 2002 2001
--------------- ---------------- --------------
IHOP $ 279,036 $ 279,795 $ 280,071
KFC 273,290 279,300 253,969
Golden Corral Buffet and Grill 211,040 320,971 528,464
Taco Bell 181,026 178,897 N/A
Pizza Hut 159,933 N/A N/A
The information denoted by N/A indicates that for each period
presented, the tenant or chains did not represent more than 10% of the
Partnership's total rental and earned income.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
9. Concentration of Credit Risk - Continued
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains will significantly impact the Partnership's operating
results if the Partnership is not able to re-lease the properties in a
timely manner.
10. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2003 and
2002.
2003 Quarter First Second Third Fourth Year
------------------------------- ----------- ------------- ------------ ------------- ---------------
Continuing Operations (1):
Revenues $ 281,608 $ 281,285 $ 264,376 $ 383,165 $ 1,210,434
Equity in earnings of
unconsolidated joint
ventures 53,401 52,815 52,645 52,752 211,613
Income from continuing
operations 221,617 235,211 218,639 344,003 1,019,470
Discontinued Operations (1):
Revenues -- -- -- -- --
Loss from and gain on
disposal of
discontinued
operations (2) (1,898 ) -- -- -- (1,898 )
Net income 219,719 235,211 218,639 344,003 1,017,572
Income (loss) per limited partner
unit:
Continuing operations $ 4.43 $ 4.70 $ 4.37 $ 6.89 $ 20.39
Discontinued operations (0.04 ) -- -- -- (0.04 )
----------- ------------- ------------ ------------- ---------------
$ 4.39 $ 4.70 $ 4.37 $ 6.89 $ 20.35
=========== ============= ============ ============= ===============
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
2002 Quarter First Second Third Fourth Year
------------------------------- ----------- ------------- ------------ ------------- ---------------
Continuing Operations (1):
Revenues $ 311,235 $ 290,390 $ 297,161 $ 376,203 $ 1,274,989
Equity in earnings of
unconsolidated joint
ventures 50,630 51,929 52,707 52,534 207,800
Income from continuing
operations 222,644 221,231 246,799 325,814 1,016,488
Discontinued Operations (1):
Revenues 41,974 15,342 14,831 -- 72,147
Loss from and loss on
disposal of
discontinued
operations (2) (26,638 ) (95,958 ) (85,710 ) (528,383 ) (736,689 )
Net income (loss) (2) 196,006 125,273 161,089 (202,569 ) 279,799
Income (loss) per limited partner
unit:
Continuing operations $ 4.45 $ 4.43 $ 4.94 $ 6.51 $ 20.33
Discontinued operations (0.53 ) (1.92 ) (1.72 ) (10.56 ) (14.73 )
----------- ------------- ------------ ------------- ---------------
$ 3.92 $ 2.51 $ 3.22 $ (4.05 ) $ 5.60
=========== ============= ============ ============= ===============
(1) Certain items in the quarterly financial data have been
reclassified to conform to the 2003 presentation. This
reclassification had no effect on net income. The results of
operations relating to properties that were identified for sale as
of December 31, 2001 but sold subsequently are reported as
continuing operations. The results of operations relating to
properties that were either identified for sale and disposed of
subsequent to January 1, 2002 or were classified as held for sale
as of December 31, 2003 are reported as discontinued operations
for all periods presented.
(2) In March 2002, the Partnership entered into an agreement to sell
the property in Fayetteville, North Carolina. Based on the pending
contract, the Partnership recorded a provision for write-down of
assets of approximately $46,300 during the quarter ended March 31,
2002. This contract was subsequently terminated and in December
2002, the Partnership entered into a new agreement to sell this
property. Based on the new contract, the Partnership recorded an
additional provision for write-down of assets of approximately
$521,300 during the fourth quarter of 2002. The Partnership sold
this property in February 2003.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The General Partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
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-RP, CCM, CNL Financial Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. 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
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has
served as Director and Chairman of the Board of CNL-RP, a public, unlisted real
estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer
of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from
December 2000 through September 2003. Mr. Seneff served as Chairman of the Board
and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, from its inception in 1990 until it merged with a
wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors,
Inc., formerly CNL Institutional Advisors, Inc., is a registered investment
advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent
company of CNL Financial Group, Inc., a diversified real estate company, and has
served as a Director, Chairman of the Board and Chief Executive Officer of CNL
Financial Group, Inc. since 1973. CNL Financial Group, Inc. is and is the parent
company, either directly or indirectly through subsidiaries, of CNL Real Estate
Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL
Securities Corp., all of which are engaged in the business of real estate
finance. Mr. Seneff also serves as a Director and Chairman of the Board of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from
its inception in 1997 until 2003 and served as Co-Chief Executive Officer from
February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board
of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since
its inception in 1997. Mr. Seneff also served as Chief Executive Officer from
its inception in 1997 through February 2003, and currently serves as Co-Chief
Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and
Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief
Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement
Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real
estate investment trust. Mr. Seneff has also served as Director and Chairman of
the Board of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, since 1992 and served as
Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through
February 2004. Mr. Seneff has served as a Director, Chairman of the Board, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff has
served as Chairman of the Board and Chief Executive Officer of CNL Commercial
Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of
CNLBank, an independent, state-chartered commercial bank. 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 the
Florida state retirement plan. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 56. Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne has
served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr.
Bourne also served as President of CNL-RP from 1994 through February 1999 and
served as Treasurer from February 1999 through August 1999 and from May 1994
through December 1994. Mr. Bourne served in various executive positions with CNL
Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP
including, President from 1994 through September 1997, and Director from 1994
through August 1999. Mr. Bourne serves as President and Treasurer of CNL
Financial Group, Inc. Mr. Bourne serves as Director, Vice Chairman of the Board
and Treasurer and from 1997 until June 2002 served as President of CNL
Hospitality Properties, Inc. and as Director, President and Treasurer of CNL
Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL
Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement
Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also served as
a Director since 1992, Vice Chairman of the Board since February 1996, Secretary
and Treasurer from February 1996 through 1997, and President from July 1992
through February 1996, of Commercial Net Lease Realty, Inc. Mr. Bourne serves as
Director, President and Treasurer for various affiliates of CNL Financial Group,
Inc. including, CNL Investment Company, CNL Securities Corp. and CNL
Institutional Advisors, Inc. Mr. Bourne began his career as a certified public
accountant employed by Coopers & Lybrand, Certified Public Accountants, from
1971 through 1978, where he attained the position of Tax Manager in 1975. Mr.
Bourne graduated from Florida State University in 1970 where he received a B.A.
in Accounting, with honors.
Curtis B. McWilliams, age 48. Mr. McWilliams has served as President of
CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September
2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from
December 2000 through September 2003 and served as Chief Executive Officer from
September 1999 through December 2000. Mr. McWilliams also served as President
and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned
subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from
February 1999 until September 1999 and as Executive Vice President of CNL-RP
from 1997 through February 1999. Mr. McWilliams served as an Executive Vice
President of CNL Financial Group, Inc. from the time he joined the company in
April 1997 until September 1999. Mr. McWilliams served as President of CNL Fund
Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the
business of real estate financing, from April 1997 until the acquisition of such
entities by wholly owned subsidiaries of CNL-RP in September 1999. From
September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch
& Co. The majority of his career at Merrill Lynch & Co. was in the Investment
Banking division where he served as a Managing Director. Mr. McWilliams received
a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master
of Business Administration degree with a concentration in finance from the
University of Chicago in 1983.
Steven D. Shackelford, age 40. Mr. Shackelford was promoted to
Executive Vice President and Chief Operating Officer of CNL-RP in September
2003. Mr. Shackelford has also served as Chief Financial Officer since January
1997. He served as Senior Vice President of CNL-RP from January 1997 through
July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has
also served as Secretary and Treasurer of CNL-RP since September 1999. He also
served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996
to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse LLP 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 was a manager in the
Paris, France office of Price Waterhouse, serving several multi-national
clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor
of Arts degree in Accounting, with honors, and a Master of Business
Administration degree from Florida State University and is a certified public
accountant.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it
was formed in July 2003 to provide strategic advisory services to the General
Partners. He has served in various consulting capacities to CNL Hospitality Corp
and other CNL affiliates since January 2003. Since November 2001 he has been an
independent consultant working for a variety of operating and investment
companies in the hospitality industry. Until October 2001, Mr. Arasi was
President & Chief Executive Officer, and a member of the Board of Directors of
Lodgian, Inc., a New York Stock Exchange traded company, one of the largest
independent hotel owner/operators in North America, with hotel properties under
most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by
Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997
through November 2000, Mr. Arasi was a member of the Management Committee and
held several top operating positions with Bass Hotels & Resorts, one of the
leading international owners, operators and franchisors of hotels, most recently
serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly
President of Tishman Hotel Corporation, Vice President of Salomon Brothers,
Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton,
Westin and HVS International. Mr. Arasi graduated from Cornell University in
January 1981, where he received a Bachelor's degree in Hotel and Restaurant
Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the
officers of the corporate general partner, and persons who own more than ten
percent of a registered class of the Partnership's equity securities
(collectively, the "Reporting Persons"), to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are
required by SEC regulation to furnish the Partnership with copies of all Forms
3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such
forms the Partnership has received and written representations from certain
Reporting Persons that they were not required to file Forms 5 for the last
fiscal year, the General Partners believe that all Reporting Persons complied
with all filing requirements applicable to them with respect to transactions
during fiscal 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not
adopted a code of business conduct applicable exclusively to the Partnership.
However, employees of the General Partners or their affiliates, including the
individual General Partners, are bound by the Code of Business Conduct adopted
November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor
are bound by the similar Code of Business Conduct adopted by CNL Restaurant
Properties, Inc. Each of these codes of business conduct will be made available
to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does
not have an audit committee that is responsible for supervising the
Partnership's relationship with its independent auditors. For the Partnership,
this role is performed by the General Partners. Based on his previous service as
the principal financial officer of companies with businesses similar to that of
the Partnership, Robert A. Bourne, one of the General Partners, has the
requisite experience to be considered an "audit committee financial expert" as
defined in the rules under the Securities Exchange Act of 1934, if the
Partnership had an audit committee. As a General Partner, Mr. Bourne is not
independent of the Partnership.
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 and
Related Stockholder Matters
As of March 12, 2004 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 March 12, 2004 the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
--------
100%
========
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
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, 2003, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 2003
------------- ----------- -----------------------
Reimbursement to affiliates for Operating expenses are reimbursed Accounting and administrative
operating expenses at the lower of cost or 90% of the services: $98,400
prevailing rate at which comparable
services could have been obtained
in the same geographic area. If the
General Partners or their
affiliates loan funds to the
Partnership, the General Partners
or their affiliates will be
reimbursed for the interest and
fees charged to them by
unaffiliated lenders for such
loans. Affiliates of the General
Partners from time to time incur
certain operating expenses on
behalf of the Partnership for which
the Partnership reimburses the
affiliates without interest.
Annual, subordinated property One-half of one percent per year $-0-
management fee to affiliates of Partnership assets under
management (valued at cost),
subordinated to certain minimum
returns to the Limited Partners.
The property management fee will
not exceed the lesser of one
percent of gross operating revenues
or competitive fees for comparable
services. Due to the fact that
these fees are noncumulative, if
the Limited Partners do not receive
their 10% Preferred Return in any
particular year, no management fees
will be due or payable for such
year.
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 2003
------------- ----------- -----------------------
Deferred, subordinated real estate A deferred, subordinated real $12,375
disposition fee payable to estate disposition fee, payable
affiliates 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, A deferred, subordinated share $-0-
subordinated share of Partnership equal to one percent of
net cash flow Partnership distributions of net
cash flow, subordinated to certain
minimum returns to the Limited
Partners.
General Partners' deferred, A deferred, subordinated share $-0-
sub-ordinated share of Partnership equal to five percent of
net sales proceeds from a sale or Partnership distributions of such
sales not in liquidation of the net sales proceeds, subordinated
Partnership to certain minimum returns to the
Limited Partners.
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 2003
------------- ----------- -----------------------
General Partners' share of Distributions of net sales $-0-
Partnership net sales proceeds from proceeds from a sale or sales of
a sale or sales in liquidation of substantially all of the
the Partnership Partnership's assets will be
distributed in the following order
or priority: (i) first, to pay all
debts and liabilities of the
Partnership and to establish
reserves; (ii) second, to Partners
with positive capital account
balances, determined after the
allocation of net income, net loss,
gain and loss, in proportion to
such balances, up to amounts
sufficient to reduce such balances
to zero; and (iii) thereafter, 95%
to the Limited Partners and 5% to
the General Partners.
Item 14. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the
Partnership for the audit and other services provided by the Partnership's
independent certified public accountants, PricewaterhouseCoopers LLP, for the
years ended December 31:
2003 2002
--------------------- ---------------------
Audit Fees (1) $ 7,019 $ 6,000
Tax Fees (2) 4,769 6,324
--------------------- ---------------------
Total $ 11,788 $ 12,324
===================== =====================
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002
consisted of the examination of the financial statements of the
Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the
General Partners. Due to its organization as a limited partnership, the
Partnership does not have an audit committee.
PART IV
Item 15. 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 Certified Public Accountants
Balance Sheets at December 31, 2003 and 2002
Statements of Income for the years ended December 31, 2003, 2002, and
2001
Statements of Partners' Capital for the years ended December 31,
2003, 2002, and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002,
and 2001
Notes to Financial Statements
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation at December
31, 2003
Notes to Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2003
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.1 to Amendment No. 1 to Registration
Statement No. 33-15374 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 4.1 to Amendment No. 1 to Registration
Statement No. 33-15374 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
10.1 Property Management Agreement between CNL Income Fund III, Ltd.
and CNL Investment Company. (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on April
5, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as Exhibit
10.2 to Form 10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated herein by
reference.)
10.3 Assignment of Property Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
10.3 to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein by
reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc.
to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q
filed with the Securities and Exchange Commission on August 10,
2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP to
CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form
10-Q filed with the Securities and Exchange Commission on August
14, 2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 2003 through December 31, 2003.
(c) Not applicable.
(d) Other Financial Information
The Partnership is required to file audited financial information of
its tenant, IHOP Corp. because this tenant leased more than 20% of the
Partnership's total assets for the year ended December 31, 2003. The
summarized financial information presented for IHOP Corp. and
Subsidiaries as of December 31, 2003 and 2002, and for the three years
in the period ended December 31, 2003 was obtained from the Form 10-K
filed by IHOP Corp. and Subsidiaries with the Securities and Exchange
Commission.
IHOP Corp. and Subsidiaries
Selected Financial Data
(In Thousands)
Consolidated Balance Sheet Data:
December 31,
2003 2002
-------------- --------------
Current Assets $ 127,081 $ 159,101
Noncurrent Assets 715,923 660,699
-------------- --------------
Total Assets $ 843,004 $ 819,800
============== ==============
Current Liabilities $ 45,373 $ 53,564
Noncurrent Liabilities 415,271 401,847
Stockholders' Equity 382,360 364,389
-------------- --------------
Total Liabilities and Stockholders' Equity $ 843,004 $ 819,800
============== ==============
Consolidated Statements of Operations Data:
Year Ended December 31,
2003 2002 2001
------------- ---------------- -------------
Gross Revenues $ 404,805 $ 365,874 $ 324,436
Costs and Expenses (including income taxes) (368,023 ) (325,026 ) (284,148 )
------------- ---------------- -------------
Net Income $ 36,782 $ 40,848 $ 40,288
============= ================ =============
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 23rd day of
March, 2004.
CNL INCOME FUND III, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
----------------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
----------------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
----------------------------------
JAMES M. SENEFF, JR.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert A. Bourne President, Treasurer and Director March 23, 2004
--------------------------- (Princial Financial and Accounting
Robert A. Bourne (Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 23, 2004
--------------------------- (Principal Executive Office)
James M. Seneff, Jr.
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund
III, Ltd. (Included as Exhibit 3.1 to Amendment No. 1
to the Registration Statement No. 33-15374 on Form
S-11 and incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 5, 1993,
and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund
III, Ltd. (Included as Exhibit 4.1 to Amendment No. 1
to Registration Statement No. 33-15374 on Form S-11
and incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 5, 1993,
and incorporated herein by reference.)
10.1 Property Management Agreement between CNL Income Fund
III, Ltd. and CNL Investment Company. (Included as
Exhibit 10.1 to Form 10-K filed with the Securities
and Exchange Commission on April 5, 1993, and
incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995,
and incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996,
and incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities
and Exchange Commission on August 10, 2001, and
incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF
Partners, LP to CNL Restaurants XVIII, Inc. (Included
as Exhibit 10.5 to Form 10-Q filed with the
Securities and Exchange Commission on August 14,
2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Costs Capitalized
Subsequent To Net Cost Basis at Which
Initial Cost Acquisition Carried at Close of Period (c)
-------------------- -------------------- --------------------------------------
Encum- Buildings Improve- Carrying Buildings and Accumulated
brances Land Improvements ments Costs Land Improvements Total Depreciation
----------------- ---------- -------- --------- ---- ------------- ------- ------------
Properties the Partnership has
Invested in Under Operating
Leases:
Burger King Restaurant:
Kansas City, Missouri - $236,055 $573,739 - - $236,055 $573,739 $809,794 $307,591
Golden Corral Buffet and
Grill Restaurant:
Stockbridge, Georgia - 384,644 685,511 150,000 - 384,644 835,511 1,220,155 408,791
IHOP Restaurant:
Auburn, Alabama - 373,763 1,060,478 - - 373,763 1,060,478 1,434,241 147,956
KFC Restaurants:
Calallen, Texas - 219,432 - 332,043 - 219,432 332,043 551,475 171,551
Katy, Texas - 266,768 - 279,486 - 266,768 279,486 546,254 146,338
Burnsville, Minnesota - 196,159 - 437,895 - 196,159 437,895 634,054 223,808
Page, Arizona - 328,729 - 270,755 - 328,729 270,755 599,484 141,017
Pizza Hut Restaurants:
Jacksboro, Texas - 54,274 147,337 - - 54,274 147,337 201,611 78,986
Seminole, Texas - 183,284 134,531 - - 183,284 134,531 317,815 72,128
Austin, Texas - 301,778 372,137 - - 301,778 372,137 673,915 196,926
Taco Bell Restaurants:
Bishop, California - 363,964 - 272,150 - 363,964 272,150 636,114 137,966
Longwood, Florida - 346,832 - 394,088 - 346,832 394,088 740,920 198,696
Other:
Winter Springs, Florida - 268,128 270,372 - - 268,128 270,372 538,500 144,574
Hastings, Nebraska - 110,800 332,400 23,636 - 110,800 356,036 466,836 192,262
Wichita, Kansas - 147,349 442,045 - - 147,349 442,045 589,394 238,215
--------- --------- --------- ------ --------- --------- ---------- ---------
$3,781,959 $4,018,550$2,160,053 $ - $3,781,959$6,178,603 $9,960,562 $2,806,805
========= ========= ========= ====== ========= ========= ========== =========
Life on Which
Depreciation in
Date Latest Income
of Con- Date Statement is
struction Acquired Computed
- --------- -------- ------- --
1984 12/87 (b)
1987 11/87 (b)
1998 10/99 (b)
1988 12/87 (b)
1988 02/88 (b)
1988 02/88 (b)
1988 02/88 (b)
1983 12/87 (b)
1977 12/87 (b)
1987 02/88 (b)
1988 05/88 (b)
1988 06/88 (b)
1987 01/88 (b)
1987 10/87 (b)
1987 11/87 (b)
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation are summarized
below. The balances in 2003, 2002, and 2001, have been adjusted to
reflect the reclassification of Properties accounted for as
discontinued operations.
Accumulated
Cost Depreciation
---------------- ------------------
Properties the Partnership has Invested
in Under Operating Leases:
Balance, December 31, 2000 $ 11,770,564 $ 2,641,372
Dispositions (1,483,004) (486,874)
Provision for write-down of assets (d) (205,980) --
(d)
Depreciation expense -- 234,903
---------------- ------------------
Balance, December 31, 2001 10,081,580 2,389,401
Dispositions (121,018 ) --
Depreciation expense -- 208,701
---------------- ------------------
Balance, December 31, 2002 9,960,562 2,598,102
Depreciation expense -- 208,703
---------------- ------------------
Balance, December 31, 2003 $ 9,960,562 $ 2,806,805
================ ==================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2003, the aggregate cost of the Partnership's wholly
owned Properties and the Property owned by the consolidated joint
venture was $9,686,435 for federal income tax purposes. All of the
leases are treated as operating leases for federal income tax purposes.
(d) The undepreciated cost of the Property in Montgomery, Alabama, for
which the building portion had been classified as a direct financing
lease, was written down to net realizable value due to an impairment in
value. The Partnership recognized the impairment by recording a
provision for write-down of assets of approximately $515,000 as of
December 31, 2001. The provision represented the difference between the
Property's net carrying value and its estimate fair value. The
Partnership sold this Property in May 2002.
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2