UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19140
CNL INCOME FUND VII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2963871
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(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 ($1 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 30,000,000 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 $1 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund VII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 18, 1989. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on January 30, 1990, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 1, 1990, as of which date the maximum offering
proceeds of $30,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes. During
1992, the Partnership sold its Property in Kearns, Utah and reinvested the
majority of the net sales proceeds in a Property in Clinton, Tennessee. During
1994, the Partnership sold its Property in St. Paul, Minnesota and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida, consisting of only land, and a Jack in the Box Property in Yuma,
Arizona, which is owned as tenants-in-common with an affiliate of the General
Partners. The lessee of the Property consisting of only land owns the building
currently on the land. During 1995, the Partnership sold its Properties in
Florence, South Carolina and Jacksonville, Florida and accepted promissory notes
in the principal sum of $1,160,000 and $240,000, respectively. In addition, the
building located on the Partnership's Property in Daytona Beach, Florida was
demolished in accordance with a condemnation agreement during 1995. During the
year ended December 31, 1996, the Partnership sold its Properties in Hartland,
Michigan and Colorado Springs, Colorado and reinvested the net sales proceeds
received from the sale of the Colorado Springs, Colorado Property in a Boston
Market Property in Marietta, Georgia. During the year ended December 31, 1997,
the Partnership used the net sales proceeds from the sale of the Property in
Hartland, Michigan to invest in CNL Mansfield Joint Venture with an affiliate of
the General Partners in exchange for a 79% interest in the joint venture. In
addition, during 1997, the Partnership sold its Properties in Columbus, Indiana
and Dunnellon, Florida and sold the Property in Yuma, Arizona, which was owned
as tenants-in-common with an affiliate of the General Partners, and reinvested
the net sales proceeds in a Property in Smithfield, North Carolina and a
Property in Miami, Florida, each as tenants-in-common, with affiliates of the
General Partners. During the year ended December 31, 1999, the Partnership sold
its Property in Maryville, Tennessee and used the net sales proceeds to invest
in a Property in Montgomery, Alabama as tenants-in-common, with affiliates of
the General Partners. In addition, during 1999, the Partnership received a
prepaid principal payment from the borrower relating to one of the promissory
notes the Partnership had previously accepted. The Partnership used the proceeds
to invest in Duluth Joint Venture with affiliates of the General Partners to
construct and hold one restaurant property. In addition, during 1999, Halls
Joint Venture, in which the Partnership owned a 51.1% interest, sold its
Property in Halls, Tennessee.
During the year ended December 31, 2000, the Partnership sold its
Property in Pueblo, Colorado and reinvested the net sales proceeds as
tenants-in-common, with affiliates of the General Partners to purchase and hold
one restaurant Property in Colorado Springs, Colorado. In addition, during 2000,
the Partnership liquidated Halls Joint Venture and used the pro rata share of
the liquidation proceeds it received to enter into a joint venture arrangement,
TGIF Pittsburgh Joint Venture, to purchase and hold one restaurant Property. In
addition, during 2000, the Partnership sold its three Properties in
Jacksonville, Florida; one Property in Lake City, Florida; one Property in
Brunswick, Georgia and one Property in Friendswood, Illinois. In addition,
during 2000, the Partnership purchased additional interest in Duluth Joint
Venture from CNL Income Fund V, Ltd. and CNL Income Fund XV, Ltd., affiliates of
the General Partners. During the year ended December 31, 2001, the Partnership
purchased an additional interest in TGIF Pittsburgh Joint Venture from CNL
Income Fund XVIII, Ltd., an affiliate of the General Partners. In addition,
during 2001, the Partnership reinvested the net sales proceeds from the sale of
three of its Properties (two in Jacksonville, Florida and one in Lake City,
Florida) in a Property in Baton Rouge, Louisiana that was acquired from CNL
Funding 2001-A, LP, an affiliate of the General Partners. In addition, during
2001, the Partnership used the proceeds from the sale of the Property in
Friendswood, Texas and the proceeds from the promissory note related to the 1995
sale of the Property in Florence, South Carolina to invest in CNL VII & XVII
Lincoln Joint Venture with an affiliate of the General Partners to purchase and
hold one restaurant Property and used the remaining proceeds from the promissory
note to invest in CNL VII, XV Columbus Joint Venture with an affiliate of the
General Partners to construct and hold one restaurant Property. In addition,
during 2001, the Partnership sold its Properties in Daytona Beach, Gainesville,
and Saddlebrook, Florida. In connection with the sale of the Property in Daytona
Beach, Florida, the Partnership accepted a promissory note in the principal sum
of $103,581.
As a result of the above transactions, as of December 31, 2001, the
Partnership owned 35 Properties. The 35 Properties included interests in
thirteen Properties owned by joint ventures in which the Partnership is a
co-venturer and four Properties owned with affiliates as tenants-in-common. The
Properties are, in general, leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, ("APF"), pursuant to which the
Partnership would be merged with an into a subsidiary of APF (the "Merger"). APF
is a real estate investment trust whose primary business is the ownership of
restaurant Properties leased on a long-term "triple-net" basis to operators of
national and regional restaurant chains. Under the Agreement and Plan of Merger,
APF was to issue shares of its common stock as consideration for the Merger. On
March 1, 2000, the General Partners and CNL American Properties Fund, Inc.
("APF") announced that they had mutually agreed to terminate the Agreement and
Plan of Merger entered into in March 1999. The agreement to terminate the
Agreement and Plan of Merger was based, in large part, on the General Partners'
concern that, in light of market conditions relating to publicly traded real
estate investment trusts, the value of the transaction had diminished. As a
result of such diminishment, the General Partners' ability to unequivocally
recommend voting for the transaction, in the exercise of their fiduciary duties,
had become questionable. The General Partners are continuing to evaluate
strategic alternatives for the Partnership, including alternatives to provide
liquidity to the Limited Partners.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from five to 20 years (the average being 16 years), and expire
between 2003 and 2022. Generally, the leases are on a triple-net basis, with the
lessee responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$30,000 to $259,900. The majority of the leases provide for percentage rent,
based on sales in excess of a specified amount. In addition, some of the leases
provide that, commencing in specified lease years (generally ranging from the
sixth to the eleventh lease year), the annual base rent required under the terms
of the lease will increase.
Generally, the leases of the Properties provide for two to five
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 24 of the Partnership's 35 Properties also have been
granted options to purchase Properties at the Property's then fair market value
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
offer the lessee the right to purchase that Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In January 2001, the Partnership reinvested the net sales proceeds
received from the sale of three of its Properties (two in Jacksonville, Florida
and one in Lake City, Florida) in a Property in Baton Rouge, Louisiana. In April
2001, the Partnership invested in a joint venture arrangement, CNL VII & XVII
Lincoln Joint Venture with CNL Income Fund XVII, Ltd., a Florida limited
partnership and an affiliate of the General Partners, to purchase and hold one
restaurant Property. In August 2001, the Partnership invested in a joint venture
arrangement, CNL VII, XV Columbus Joint Venture with CNL Income Fund XV, Ltd. a
Florida limited partnership and an affiliate of the General Partners, to
construct and hold one restaurant Property. The lease terms for these Properties
are substantially the same as the Partnership's other leases.
Major Tenants
During 2001, three lessees (or groups of affiliated tenants) of the
Partnership and its consolidated joint venture, (i) Golden Corral Corporation,
(ii) Jack in the Box Inc. and Jack in the Box Eastern Division, L.P. (which are
affiliated entities under common control of Jack in the Box Inc.) (hereinafter
referred to as "Jack in the Box Inc."), and (iii) Waving Leaves, Inc., each
contributed more than ten percent of the Partnership's total rental, earned and
mortgage interest income (including rental income from the Partnership's
consolidated joint venture and the Partnership's share of rental and earned
income from Properties owned by unconsolidated joint ventures and Properties
owned with affiliates of the General Partners as tenants-in-common). As of
December 31, 2001, Golden Corral Corporation was the lessee under leases
relating to six restaurants, Jack in the Box Inc. was the lessee under leases
relating to four restaurants, and Waving Leaves, Inc. was the lessee under
leases relating to four restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, these three lessees each will
continue to contribute more than ten percent of the Partnership's total rental,
earned and mortgage interest income in 2002. In addition, four Restaurant
Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Hardee's,
Jack in the Box, and Burger King, each accounted for more than ten percent of
the Partnership's total rental, earned and mortgage interest income in 2001
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of rental and earned income from Properties owned by
unconsolidated joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). In 2002, it is anticipated that these
four Restaurant Chains each will continue to account for more than ten percent
of the Partnership's total rental, earned and mortgage interest income to which
the Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains could materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner. As of
December 31, 2001, Golden Corral Corporation 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
At December 31, 2001, the Partnership has a joint venture arrangement,
San Antonio #849 Joint Venture, with an unaffiliated entity, to hold one
Property. In addition, the Partnership has six separate joint venture
arrangements with affiliates of the General Partners: CNL Restaurant Investments
II with CNL Income Fund VIII, Ltd. and CNL Income Fund IX, Ltd.; Des Moines Real
Estate Joint Venture with CNL Income Fund XI, Ltd. and CNL Income Fund XII,
Ltd.; CNL Mansfield Joint Venture with CNL Income Fund XVII, Ltd.; and Duluth
Joint Venture with CNL Income Fund XIV, Ltd.
In June 2000, the Partnership entered into a joint venture arrangement,
TGIF Pittsburgh Joint Venture, with CNL Income Fund XV, Ltd., CNL Income Fund
XVI, Ltd., and CNL Income Fund XVIII, Ltd. to purchase and hold one Property.
Each of the CNL Income Funds is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. In
January 2001, the Partnership acquired an additional 19.72% interest in the
joint venture from CNL Income Fund XVIII, Ltd.
In April 2001, the Partnership entered into a joint venture
arrangement, CNL VII & XVII Lincoln Joint Venture, with CNL Income Fund XVII,
Ltd. and in August 2001, the Partnership entered into a joint venture
arrangement, CNL VII, XV Columbus Joint Venture, with CNL Income Fund XV, Ltd.
Each of the CNL Income Funds is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. CNL
Restaurants Investments II was formed to purchase and hold six Properties and
each of the other joint ventures was formed to purchase and hold one Property.
The joint venture arrangements provide for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint venture in accordance with their respective percentage interests in the
joint venture. The Partnership has an 83.3% interest in San Antonio #849 Joint
Venture, an 18% interest in CNL Restaurant Investments II, a 4.79% interest in
Des Moines Real Estate Joint Venture, a 79% interest in CNL Mansfield Joint
Venture, a 56% interest in Duluth Joint Venture, a 36.88% interest in TGIF
Pittsburgh Joint Venture, a 14% interest in CNL VII & XVII Lincoln Joint
Venture, and a 68.75% interest in CNL VII, XV Columbus Joint Venture. The
Partnership and its joint venture partners are also jointly and severally liable
for all debts, obligations and other liabilities of the joint venture.
San Antonio #849 Joint Venture, Des Moines Real Estate Joint Venture,
CNL Mansfield Joint Venture, Duluth Joint Venture and TGIF Pittsburgh Joint
Venture each have an initial term of 20 years and, after the expiration of the
initial term, continue in existence from year to year unless terminated at the
option of any joint venturer or by an event of dissolution. Events of
dissolution include the bankruptcy, insolvency or termination of any joint
venturer, sale of the Property owned by the joint venture and mutual agreement
of the Partnership and each joint venture partner to dissolve the joint venture.
CNL VII & XVII Lincoln Joint Venture and CNL VII, XV Columbus Joint Venture each
have an initial term of 30 years. CNL Restaurant Investments II's joint venture
agreement does not provide a fixed term, but continues in existence until
terminated by any of the joint venturers.
The Partnership has management control of the San Antonio #849 Joint
Venture and shares management control equally with affiliates of the General
Partners for CNL Restaurant Investments II, Des Moines Real Estate Joint
Venture, CNL Mansfield Joint Venture, Duluth Joint Venture, TGIF Pittsburgh
Joint Venture, CNL VII & XVII Lincoln Joint Venture and CNL VII, XV Columbus
Joint Venture. The joint venture agreements restrict each venturer's ability to
sell, transfer or assign its joint venture interest without first offering it
for sale to its joint venture partner, either upon such terms and conditions as
to which the venturers may agree or, in the event the venturers cannot agree, on
the same terms and conditions as any offer from a third party to purchase such
joint venture interest.
Net cash flow from operations of San Antonio #849 Joint Venture, CNL
Restaurant Investments II, Des Moines Real Estate Joint Venture, CNL Mansfield
Joint Venture, Duluth Joint Venture, and TGIF Pittsburgh Joint Venture, CNL VII
& XVII Lincoln Joint Venture and CNL VII, XV Columbus Joint Venture is
distributed 83.3%, 18%, 4.79%, 79%, 56%, 36.88%, 14% and 68.75%, respectively,
to the Partnership and the balance is distributed to each of the other joint
venture partners in accordance with their respective percentage interests in the
joint venture. Any liquidation proceeds, after paying joint venture debts and
liabilities and funding reserves for contingent liabilities, will be distributed
first to the joint venture partners with positive capital account balances in
proportion to such balances until such balances equal zero, and thereafter in
proportion to each joint venture partner's percentage interest in the joint
venture.
In addition to the above joint venture arrangements, the Partnership
has an agreement to hold a Property in Miami, Florida, as tenants-in-common with
CNL Income Fund III, Ltd., CNL Income Fund X, Ltd. and CNL Income Fund XIII,
Ltd., affiliates of the General Partners. In addition, the Partnership has an
agreement to hold a Golden Corral Property in Smithfield, North Carolina, as
tenants-in-common with CNL Income Fund II, Ltd., an affiliate of the General
Partners; an agreement to hold a Property in Montgomery, Alabama, as
tenants-in-common, with CNL Income Fund IX, Ltd., an affiliate of the General
Partners; and an agreement to hold a Property in Colorado Springs, Colorado, as
tenants-in-common with CNL Income Fund XII, Ltd., an affiliate of the General
Partners. The agreements provide for the Partnership and the affiliates to share
in the profits and losses of the Property in proportion to each co-tenant's
percentage interest. The Partnership owns a 35.64%, a 53%, a 71% and a 43%
interest, respectively, in these Properties.
Each of the affiliates is a limited partnership organized pursuant to
the laws of the state of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property. The
affiliates are limited partnerships organized pursuant to the laws of the state
of Florida.
Certain Management Services
CNL APF Partners, LP, an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL APF Partners, LP (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 percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer and the
Property held as tenants-in-common with an affiliate, but not in excess of
competitive fees for comparable services. Under the management agreement, the
management fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, cumulative, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return"), calculated in
accordance with the Partnership's limited partnership agreement (the
"Partnership Agreement"). In any year in which the Limited Partners have not
received the 10% Preferred Return, no property management fee will be paid.
During 2000, CNL Fund Advisors, Inc. assigned its rights in, and its
obligations under, the management agreement with the Partnership to CNL APF
Partners, LP. All of the terms and conditions of the management agreement,
including the payment of fees, as described above, remain unchanged.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of APF, the parent company of the
Advisor 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, 2001, the Partnership owned 35 Properties. Of the 35
Properties, 18 are owned by the Partnership in fee simple, 13 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. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs including acquisition fees and certain acquisition
expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 20,600
to 110,200 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation.
State Number of Properties
Alabama 1
Arizona 1
Colorado 1
Florida 3
Georgia 3
Indiana 1
Louisiana 2
Michigan 2
Minnesota 1
Nebraska 1
North Carolina 1
Ohio 7
Pennsylvania 1
Tennessee 2
Texas 7
Washington 1
-------
TOTAL PROPERTIES 35
=======
Buildings. Generally, each of the Properties owned by the Partnership
includes a building that is one of a Restaurant Chain's approved designs.
However, the building located on the Checkers Property is owned by the tenant,
while the land parcel is owned by the Partnership. The buildings generally are
rectangular and are constructed from various combinations of stucco, steel,
wood, brick and tile. The sizes of the buildings owned by the Partnership range
from approximately 700 to 10,600 square feet. All buildings on Properties are
freestanding and surrounded by paved parking areas. Buildings are suitable for
conversion to various uses, although modifications may be required prior to use
for other than restaurant operations. As of December 31, 2001, 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 40 years for federal income tax purposes.
As of December 31, 2001, the aggregate cost of the Properties owned by
the Partnership (including its consolidated joint venture) and the
unconsolidated joint ventures (including the Properties owned through
tenants-in-common arrangements), for federal income tax purposes was $16,104,595
and $22,942,477, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by Restaurant Chain.
Restaurant Chain Number of Properties
Bennigan's 1
Boston Market 1
Burger King 8
Checkers 1
Chevy's Fresh Mex 1
Golden Corral 6
Hardee's 6
IHOP 1
Jack in the Box 4
KFC 1
Rally's 1
Roadhouse Grill 1
Sonny's Bar-B-Q 1
Taco Bell 1
TGI Friday's 1
-------
TOTAL PROPERTIES 35
=======
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 selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 2001, 2000, 1999, 1998, and 1997, all of the Properties
were occupied. The following is a schedule of the average rent per Property for
each of the years ended December 31:
2001 2000 1999 1998 1997
------------- ------------- --------------- -------------- --------------
Rental Revenues (1) $ 2,686,849 $ 2,801,210 $ 2,902,968 $2,879,831 $2,751,418
Properties 35 35 40 40 40
Average Rent per
Property $ 76,767 $ 80,035 $ 72,574 $ 71,996 $ 68,785
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements. Rental
revenues have been adjusted, as applicable, for any amounts for which
the Partnership has established an allowance for doubtful accounts.
The following is a schedule of lease expirations for leases in place as
of December 31, 2001 for the next ten years and thereafter.
Percentage of
Expiration Year Number Annual Rental Gross Annual
of Leases Revenues Rental Income
----------------- ---------------- ----------------- --------------------------
2002 -- $ -- --
2003 1 30,000 1.07%
2004 1 137,061 4.90%
2005 9 561,873 20.10%
2006 1 61,192 2.18%
2007 -- -- --
2008 1 101,133 3.61%
2009 -- -- --
2010 9 709,529 25.38%
2011 -- -- --
Thereafter 13 1,195,666 42.76%
---------- ------------------ -------------
Total 35 $ 2,796,454 100.00%
========== ================== =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2001 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases six Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2015) and the
average minimum base annual rent is approximately $154,900 (ranging from
approximately $137,100 to $185,500).
Jack in the Box Inc. leases four Jack in the Box restaurants. The
initial term of each lease is 18 to 20 years (expiring between 2010 and 2018)
and the average minimum base annual rent is approximately $109,700 (ranging from
approximately $80,000 to $140,900).
Waving Leaves, Inc. leases four Hardee's restaurants. The initial term
of each lease is 13 years (expiring in 2010) and the average minimum base annual
rent is approximately $70,700 (ranging from approximately $60,600 to $78,900).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties, is a party to, or
subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 15, 2002, there were 3,143 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 2001,
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, 2001, the price paid for
any Unit transferred pursuant to the Plan was $.95 per Unit. The price paid for
any Unit 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 2001 and 2000 other than
pursuant to the Plan, net of commissions.
2001 (1) 2000 (1)
----------------------------------------- --------------------------------------
High Low Average High Low Average
---------- --------- ----------- ---------- --------- -----------
First Quarter (2) (2) (2) $ .77 $ .77 $ .77
Second Quarter (2) (2) (2) (2) (2) (2)
Third Quarter 1.00 .54 .73 .88 .68 .71
Fourth Quarter .88 .60 .82 .68 .65 .68
(1) A total of 161,877 and 138,570 Units were transferred other than
pursuant to the Plan for the years ended December 31, 2001 and 2000,
respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the plan.
The capital contribution per Unit was $1. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 2001 and 2000, the Partnership
declared cash distributions of $2,700,000 to the Limited Partners. Distributions
of $675,000 were declared at the close of each of the Partnership's calendar
quarters during 2001 and 2000 to the Limited Partners. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive distributions on this basis. No amounts distributed to partners for the
years ended December 31, 2001 and 2000, are required to be or have been treated
by the Partnership as a return of capital for purposes of calculating the
Limited Partners' return on their adjusted capital contributions. No
distributions have been made to the General Partners to date.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
(b) Not applicable.
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
-------------- -------------- --------------- -------------- --------------
Year ended December 31:
Revenues (1) $ 2,742,568 $ 2,842,101 $ 2,992,933 $ 2,948,217 $ 2,919,734
Net income (2) 2,215,570 3,221,515 2,545,690 2,466,018 2,606,008
Cash distributions declared 2,700,000 2,700,000 2,700,000 2,700,000 2,700,000
Net income per Unit (2) 0.074 0.107 0.084 0.081 0.086
Cash distributions declared
per Unit 0.090 0.090 0.090 0.090 0.090
At December 31:
Total assets $25,073,220 $ 25,607,914 $ 25,146,133 $25,218,258 $25,479,762
Partners' capital 24,196,571 24,681,001 24,159,486 24,313,796 24,547,778
(1) Revenues include equity in earnings of unconsolidated joint ventures
and minority interest in income of the consolidated joint venture.
(2) Net income for the years ended December 31, 2001, 2000, 1999, 1998, and
1997, includes $382,122, $878,347, $189,826, $1,025, and $184,627,
respectively, from gains on sale of assets. Net income for the year
ended December 31, 1997, includes a loss on sale of assets of $19,739.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on August 18, 1989, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are generally triple-net leases, with the lessees generally responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
December 31, 2001, the Partnership owned 35 Properties, either directly or
indirectly through joint venture or tenancy in common arrangements.
Capital Resources
The Partnership generated cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest received,
less cash paid for expenses) for the years ended December 31, 2001, 2000, and
1999. Cash from operations was $2,375,682, $2,620,009, and $2,679,493, for the
years ended December 31, 2001, 2000, and 1999, respectively. The decrease in
cash from operations during 2001 and 2000 as compared to the previous year, was
primarily a result of changes in the Partnership's working capital and changes
in income and expenses as described in "Results of Operations," below.
Other significant sources and uses of capital included the following
during the years ended December 31, 2001, 2000, and 1999.
The Partnership had a mortgage note receivable relating to a sale in
1995 of a Property in Florence, South Carolina. In February 2001, the
Partnership received a balloon payment of $1,115,301 which included the
outstanding principal balance and $14,419 of accrued interest. The Partnership
used the majority of the net sales proceeds to acquire a Property in Lincoln,
Nebraska, and a Property in Columbus, Georgia, each of which is held with
affiliates of the General Partners as tenants-in-common, as described below.
In June 1999, the Partnership sold its Property in Maryville,
Tennessee, to the tenant in accordance with the purchase option under the lease
agreement for $1,068,802 and received net sales proceeds of $1,059,954,
resulting in a gain of $188,691. In November 1999, the Partnership reinvested
these net sales proceeds in a Property in Montgomery, Alabama, as
tenants-in-common with an affiliate of the General Partners. The sale of the
Property in Maryville, Tennessee and the reinvestment of the net sales proceeds
in the Property in Montgomery, Alabama qualified as a like-kind exchange
transaction in accordance with Section 1031 of the Internal Revenue Code.
In addition, in June 1999, Halls Joint Venture, in which the
Partnership owned a 51.1% interest, sold its Property to the tenant in
accordance with the purchase option under the lease agreement for $891,915,
resulting in a gain to the joint venture of approximately $239,300. During 2000,
the Partnership and the joint venture partner liquidated Halls Joint Venture and
the Partnership received approximately $460,900, representing its pro rata share
of the liquidation proceeds. In June 2000, the Partnership used a portion of the
net sales proceeds from the sale of the Property to enter into a joint venture
arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., and CNL Income Fund XVIII, Ltd., each a Florida limited
partnership and an affiliate of the General Partners, to purchase and hold one
restaurant Property. As of December 31, 2000, the Partnership owned a 17.16%
interest in the profits and losses of the joint venture. The Partnership
distributed amounts sufficient to enable the limited partners to pay federal and
state income taxes, if any (at a level reasonably assumed by the General
Partners), resulting from the sale. In January 2001, the Partnership acquired an
additional 19.72% interest in TGIF Pittsburgh Joint Venture, from CNL Income
Fund XVIII, Ltd. for an aggregate purchase price of approximately $500,000. As
of December 31, 2001, the Partnership owned a 36.88% interest in the profits and
losses of this joint venture.
In July 1999, the Partnership collected the outstanding principal
balance of $235,564 relating to the promissory note accepted in connection with
the 1995 sale of the Property in Jacksonville, Florida. In December 1999, the
Partnership reinvested these amounts in Duluth Joint Venture with CNL Income
Fund V, Ltd., CNL Income Fund XIV, Ltd., and CNL Income Fund XV, Ltd., each a
Florida limited partnership and an affiliate of the General Partners, to
construct and hold one restaurant Property. During 2000 and 1999, the
Partnership contributed approximately $969,300 and $119,100, respectively, to
purchase land and pay for construction costs relating to the joint venture. As
of December 31, 1999, the Partnership had an 11% interest in the profits and
losses of this joint venture. In October 2000, the Partnership acquired an
additional 45% interest in Duluth Joint Venture, from CNL Income Fund V, Ltd.
and CNL Income Fund XV, Ltd. for an aggregate purchase price of approximately
$610,000. As of December 31, 2001, the Partnership had a 56% interest in the
profits and losses of this joint venture.
In June 2000, the Partnership sold its Property in Pueblo, Colorado, to
an unrelated third party and received net sales proceeds of $1,005,000,
resulting in a gain of $97,056. In August 2000, the Partnership with CNL Income
Fund XII, Ltd., an affiliate of the General Partners, used the majority of the
net sales proceeds to acquire an interest in a Property in Colorado Springs,
Colorado, from CNL BB Corp., an affiliate of the General Partners, for a
purchase price of $2,226,134. CNL BB Corp. had purchased and temporarily held
title to this property in order to facilitate the acquisition of the property by
the Partnership. The purchase price paid represents the costs incurred by CNL BB
Corp. to acquire and carry the Property, including closing costs. The
Partnership distributed amounts sufficient to be able to enable the Limited
Partners to pay federal and state income taxes, if any, (at a level reasonably
assumed by the General Partners), resulting from the sale.
In September 2000, the Partnership sold its Property in Brunswick,
Georgia, its Property in Lake City, Florida, and three Properties in
Jacksonville, Florida, to unrelated third parties for a total of approximately
$2,404,800 and received net sales proceeds of approximately $2,392,300,
resulting in a total gain of $619,495. In January 2001, the Partnership
reinvested the net sales proceeds received from the sales of two Properties in
Jacksonville, Florida and the Property in Lake City, Florida in a Jack in the
Box Property in Baton Rouge, Louisiana. The Partnership acquired the Property
from CNL Funding 2001-A, LP, an affiliate of the General Partners. The
Partnership intends to reinvest the remaining net sales proceeds in additional
Properties. A portion of the transaction relating to the sales of these
Properties and the reinvestment of the net sales proceeds in additional
Properties qualified as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code. The Partnership distributed amounts
sufficient to be able to enable the Limited Partners to pay federal and state
income taxes, if any, (at a level reasonably assumed by the General Partners),
resulting from the sales.
In addition, in December 2000, the Partnership sold its Property in
Friendswood, Texas to its tenant and received net sales proceeds of $725,000
resulting in a gain of $160,649. In April 2001, the Partnership used a portion
of these proceeds and a portion of the amount collected from the promissory note
accepted in connection with the 1995 sale of the Property in Florence, South
Carolina, as described above, to invest in a joint venture arrangement, CNL VII
& XVII Lincoln Joint Venture, with CNL Income Fund XVII, Ltd., a Florida limited
partnership and affiliate of the General Partners, to purchase and hold one
restaurant Property. The joint venture acquired the Property from CNL BB Corp.,
an affiliate of the General Partners, who had purchased and temporarily held
title to the Property in order to facilitate the acquisition of the Property by
the joint venture. As of December 31, 2001, the Partnership owned a 14% interest
in the profits and losses of the joint venture. In addition, in August 2001, the
Partnership used a portion of the amount collected from the promissory note
accepted in connection with the 1995 sale of the Property in Florence, South
Carolina, as described above, to invest in a joint venture arrangement, CNL VII,
XV Columbus Joint Venture, with CNL Income Fund XV, Ltd., a Florida limited
partnership and affiliate of the General Partners, to purchase and construct one
restaurant Property. During 2001, the Partnership contributed approximately
$1,025,500 to purchase land and pay for construction costs relating to the joint
venture and has agreed to contribute additional amounts during 2002 for
additional construction costs. As of December 31, 2001, the Partnership had a
68.75% interest in the profits and losses of this joint venture. The Partnership
distributed amounts sufficient to be able to enable the Limited Partners to pay
federal and state income taxes, if any, (at a level reasonably assumed by the
General Partners), resulting from the sale.
In November 2001, the Partnership sold its Properties in Daytona Beach
and Gainesville, Florida to the tenant in accordance with the purchase option
under the lease agreement for a total of $502,063 and received aggregate net
sales proceeds of $499,813, resulting in a gain of $184,894. In connection with
the sales of the Properties, the Partnership received $396,232 in cash and
accepted an uncollateralized promissory note in the amount of $103,581 related
to the Property in Daytona Beach, Florida. The promissory note bears interest at
a rate of 12.34% per annum and is being collected in 35 monthly installments of
interest only and thereafter, the entire principal balance will become due. In
December 2001, the Partnership sold its Property in Saddlebrook, Florida to an
unrelated third party for $700,000 and received net sales proceeds of $698,050,
resulting in a gain of $74,232. The Partnership intends to use the net sales
proceeds received to invest in additional Properties. The Partnership
distributed amounts sufficient to be able to enable the Limited Partners to pay
federal and state income taxes, if any, (at a level reasonably assumed by the
General Partners), resulting from the sales.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Under its partnership agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties, any net
sales proceeds from the sale of Properties pending reinvestment in additional
Properties, and any amounts collected from the promissory notes are invested in
money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, money market accounts and
certificates of deposit with less than a 90-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses, invest in
additional Properties, or make distributions to the partners. At December 31,
2001, the Partnership had $1,747,363 invested in such short-term investments as
compared to $1,557,525 at December 31, 2000. The increase in cash and cash
equivalents was primarily attributable to the fact that the Partnership received
net sales proceeds from the sale of several Properties during 2001 and received
the payoff of the promissory note, as described above. The increase in cash and
cash equivalents was partially offset by the fact that the Partnership invested
in two joint venture arrangements, CNL VII & XVII Lincoln Joint Venture and CNL
VII, XV Columbus Joint Venture, as described above. As of December 31, 2001, the
average interest rate earned on the rental income deposited in demand deposit
accounts at commercial banks was approximately 3.4% annually. The funds
remaining at December 31, 2001, after payment of distributions and other
liabilities, will be used to invest in additional Properties and 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 leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all leases of the Partnership's Properties are
on a triple-net basis, it is not anticipated that a permanent reserve for
maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, the Partnership declared distributions to the Limited Partners of
$2,700,000 for each of the years ended December 31, 2001, 2000, and 1999. This
represents distributions of $0.090 per Unit for each of the years ended December
31, 2001, 2000, and 1999. No amounts distributed to the Limited Partners for the
years ended December 31, 2001, 2000, and 1999 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 and did not receive any distributions
during the years ended December 31, 2001 and 2000.
As of December 31, 2001 and 2000, the Partnership owed $21,837 and
$67,815, respectively, to affiliates for accounting and administrative services
and other amounts. As of March 15, 2002, the Partnership had reimbursed the
affiliates of all such amounts. Other liabilities, including distributions
payable, of the Partnership were $713,022 at December 31, 2001, as compared to
$714,730 at December 31, 2000. The General Partners believe that the Partnership
has sufficient cash on hand to meet its current working capital needs.
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 Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and
have been accounted for using either the direct financing or the operating
method. 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 at the
inception of 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 its Properties and investments in unconsolidated
entities periodically (no less than once per year) for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through operations. Management determines whether
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 fair value.
Results of Operations
During 1999, the Partnership and its consolidated joint venture, San
Antonio #849 Joint Venture, owned and leased 29 wholly owned Properties
(including one Property which was sold in June 1999) and during 2000, the
Partnership, and its consolidated joint venture, owned and leased 27 wholly
owned Properties (including seven Properties which were sold in 2000). During
2001, the Partnership and its consolidated joint venture owned and leased 22
wholly owned Properties (including three Properties which were sold during
2001). During 1999, the Partnership, and its consolidated joint venture, was a
co-venturer in five, separate unconsolidated joint ventures which owned and
leased ten Properties (including one Property which was sold in June 1999), and
owned and leased three Properties with affiliates as tenants-in-common. During
2000, the Partnership, and its consolidated joint venture, was a co-venturer in
six separate unconsolidated joint ventures which owned and leased ten
Properties, and owned and leased four Properties with affiliates as
tenants-in-common. During 2001, the Partnership, and its consolidated joint
venture, was a co-venturer in seven separate joint ventures which owned and
leased 12 Properties, and owned and leased four Properties with affiliates as
tenants-in-common. As of December 31, 2001, the Partnership and its consolidated
joint venture owned (either directly, as tenants-in-common with an affiliate or
through joint venture arrangements) 35 Properties which are generally subject to
long-term, triple-net leases. The leases of the Properties provide for minimum
base annual rental amounts (payable in monthly installments) ranging from
approximately $30,000 to $259,900. Substantially all of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in the specified lease years
(generally ranging from the sixth to the eleventh lease year), the annual base
rent required under the terms of the lease will increase. For further
description of the Partnership's leases and Properties, see Item 1. Business -
Leases and Item 2. Properties, respectively.
During the years ended December 31, 2001, 2000, and 1999, the
Partnership and its consolidated joint venture earned $1,866,700, $2,145,945,
and $2,318,042, respectively, in rental income from operating leases and earned
income from direct financing leases. The decrease in rental and earned income
during 2001 and 2000, each as compared to the previous year, was primarily a
result of the sale of several Properties, as described in "Capital Resources."
The decrease in rental and earned income during 2001 as compared to 2000, was
also partially due to the fact that the tenant of the Property in Saddlebrook,
Florida ceased restaurant operations in April 2001. In July 2001, the
Partnership and the tenant terminated the lease relating to the Property and in
December 2001, the Partnership sold the Property, as described in "Capital
Resources." As a result, the General Partners ceased collection efforts of past
due amounts and wrote off such amounts as uncollectible. The Partnership intends
to reinvest these net sales proceeds in an additional Property.
Rental and earned income were lower during 2001, as compared to 2000,
due to the fact that during 2000, the lease relating to the Property in
Marietta, Georgia was amended to provide for rent reductions from November 2000
through October 2015. The decrease, during 2001 as compared to 2000, was
partially offset due to the reinvestment of a portion of the net sales proceeds
received during 2000 in a Property in Baton Rouge, Louisiana, as described in
"Capital Resources". Rental and earned income are expected to remain at reduced
amounts in future years as a result of the Partnership reinvesting the proceeds
from the sales of several Properties in joint ventures and in Properties owned
with affiliates, as tenants-in-common, as described in "Capital Resources."
However, as a result of the Partnership reinvesting in joint ventures and in
Properties owned with affiliates as tenants-in-common, net income earned by
unconsolidated joint ventures increased in 2001 and 2000, each as compared to
the previous year, as described below.
For the years ended December 31, 2001, 2000, and 1999, the Partnership
also earned $75,571, $91,842, and $76,601, respectively, in contingent rental
income. The decrease in contingent rental income during 2001, as compared to
2000, was primarily attributable to the sale of several Properties during 2000.
The decrease during 2001 was partially offset by an increase in gross sales of
certain restaurant Properties, the leases of which require the payment of
contingent rent. Contingent rental income was lower during 1999 than 2000,
primarily due to fluctuations in gross sales.
For the years ended December 31, 2001, 2000, and 1999, the Partnership
also earned $717,096, $456,050, and $429,997, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer and Properties owned indirectly with affiliates as
tenants-in-common. The increase in net income earned by unconsolidated joint
ventures during 2001 and 2000 each as compared to the previous year is primarily
due to the Partnership investing in CNL VII & XVII Lincoln Joint Venture in
April 2001, CNL VII, XV Columbus Joint Venture in August 2001, TGIF Pittsburgh
Joint Venture, in June 2000, and Properties in Colorado Springs, Colorado and
Montgomery, Alabama, with affiliates of the General Partners as
tenants-in-common in August 2000 and November 1999, respectively, as described
above in "Capital Resources." In addition, the increase in net income earned by
unconsolidated joint ventures during 2001, as compared to 2000, was partially
the result of the Partnership acquiring an additional 45% interest in Duluth
Joint Venture in October 2000, as described above in "Capital Resources."
During the year ended December 31, 2001, three lessees (or groups of
affiliated tenants) of the Partnership and its consolidated joint venture,
Golden Corral Corporation, Jack in the Box Inc. and Jack in the Box Eastern
Division, L.P. (which are affiliated entities under common control of Jack in
the Box Inc.) (hereinafter referred to as "Jack in the Box Inc."), and Waving
Leaves, Inc., each contributed more than ten percent of the Partnership's total
rental, earned and mortgage interest income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of rental
and earned income from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
As of December 31, 2001, Golden Corral Corporation was the lessee under a lease
relating to six restaurants, Jack in the Box Inc. was the lessee under leases
relating to four restaurants, and Waving Leaves, Inc. was the lessee under
leases relating to four restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, Golden Corral Corporation, Jack
in the Box Inc., and Waving Leaves, Inc. each will continue to contribute more
than ten percent of the Partnership's total rental, earned and mortgage interest
income during 2002. In addition, during the year ended December 31, 2001, four
Restaurant Chains, Golden Corral, Hardee's, Jack in the Box and Burger King,
each accounted for more than ten percent of the Partnership's total rental,
earned and mortgage interest income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of rental
and earned income from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the General Partners as tenants-in-common).
In 2002, it is anticipated that these four Restaurant Chains each will continue
to account for more than ten percent of the Partnership's total rental, earned
and mortgage interest income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to
re-lease the Properties in a timely manner.
During the years ended December 31, 2001, 2000, and 1999, the
Partnership earned $101,543, $166,946, and $186,933, respectively, in interest
and other income. The decrease in interest and other income during 2001, as
compared to 2000, was primarily attributable to the Partnership collecting the
outstanding balance of the mortgage note related to the 1995 sale of the
Property in Florence, South Carolina during 2001, as described in "Capital
Resources." The decrease in interest and other income during 2001 was partially
offset by an increase in interest income earned on the net sales proceeds
relating to the sale of several Properties pending the reinvestment of the net
sales proceeds in additional Properties. The decrease in interest and other
income during 2000, as compared to 1999, is primarily attributable to the
Partnership collecting the outstanding balance of the mortgage note related to
the 1995 sale of the Property in Jacksonville, Florida during 1999, as described
in "Capital Resources." In addition, the decrease in 2000, as compared to 1999,
was partially attributable to the fact that in November 1999, the net sales
proceeds from the 1999 sale of the Property in Maryville, Tennessee were
invested in an IHOP Property in Montgomery, Alabama, as described above in
"Capital Resources."
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets were $909,120, $498,933, and $637,069, for
the years ended December 31, 2001, 2000, and 1999, respectively. The increase in
operating expenses during 2001, as compared to 2000, was partially attributable
to the Partnership recording a provision for write-down of assets, as described
below. The increase in operating expenses during 2001, was also partially
attributable to an increase in the costs incurred for administrative expenses
for servicing the Partnership and its Properties, as permitted by the
Partnership agreement. In addition, the increase during 2001, as compared to
2000, was partially due to the fact that the tenant of the Property in
Saddlebrook, Florida ceased restaurant operations in April 2001. The Partnership
incurred operating expenses such as insurance and real estate tax expenses,
relating to this Property. The Partnership sold the Property in December 2001.
The increase in operating expenses during 2001 was partially offset by and the
decrease during 2000, as compared to 1999, was partially due to the fact that
the Partnership incurred $35,134 and $160,426 during 2000 and 1999,
respectively, in transaction costs related to the General Partners retaining
financial and legal advisors to assist them in evaluating and negotiating the
proposed and terminated merger with APF, as described in "Termination of
Merger." No such expenses were incurred during the year ended December 31, 2001.
In addition, the increase in operating expenses during 2001, as compared to
2000, was partially due to the Partnership incurring additional state taxes due
to changes in tax laws of a state in which the Partnership conducts business. In
addition, the increase in operating expenses during 2001 as compared to 2000,
was partially offset by, and the decrease during 2000 as compared to 1999 was
partially attributable to a decrease in depreciation expense as a result of the
sales of several Properties during 2000 and 2001.
During the year ended December 31, 2001, the Partnership recorded a
provision for write-down of assets in the amount of $279,862 due to the fact
that the tenant of the Property in Saddlebrook, Florida ceased restaurant
operations and vacated the Property. The provision represented the difference
between the net carrying value of the Property at September 30,2001 and the
anticipated sales price for the Property. The Partnership sold the Property in
December 2001, as described above. No such provisions were recorded during the
years ended December 31, 2000 and 1999.
In connection with the sale of its Property in Florence, South
Carolina, during 1995, the Partnership recognized a gain of $122,996, $1,147,
and $1,135, for the years ended December 31, 2001, 2000, and 1999, respectively.
In accordance with Statement of Financial Accounting Standards No. 66,
"Accounting for Sales of Real Estate," the Partnership recorded the sale using
the installment sales method. As such, the gain on sale was deferred and was
being recognized as income proportionately as payments under the mortgage note
were collected. For federal income tax purposes, a gain of approximately $93,421
from the sale of this Property was also deferred during 1995 and was being
recognized as payments under the mortgage note were collected. In February,
2001, the Partnership collected the outstanding balance relating to the
promissory note collateralized by the Property. As a result, during 2001, the
Partnership recognized the remaining deferred gain of $122,996.
As a result of the sales of several Properties during 2001 and 2000, as
described above in "Capital Resources," the Partnership recognized gains
totaling $259,126 and $877,200, respectively. As a result of the sale of the
Property in Maryville, Tennessee, during 1999, as described above in "Capital
Resources" the Partnership recognized a gain of $188,691 during the year ended
December 31, 1999.
The restaurant industry, as a whole, has been one of the many
industries affected by the general slowdown in the economy. While the
Partnership has experienced some losses due to the financial difficulties of a
limited number of restaurant operators, the General Partners remain confident in
the overall performance of the fast-food and family style restaurants, the
concepts that comprise the Partnership's portfolio. Industry data shows that
these restaurant concepts continue to outperform and remain more stable than
high-end restaurants, those that have been more adversely affected by the
slowing economy.
The Partnership's leases as of December 31, 2001, are generally
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation also may cause
capital appreciation of the Partnership's Properties. Inflation and changing
prices, however, also may have an adverse impact on the sales of the restaurants
and on potential capital appreciation of the Properties.
In December 1999, the Securities and Exchange Commission released SAB
101, which provides the staff's view in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 requires the
Partnership to defer recognition of certain percentage rental income until
certain defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material impact on the
partnership's result of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). The Partnership has reviewed both statements and
has determined that both FAS 141 and FAS 142 do not apply to the Partnership as
of December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). 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 fair
value. If an impairment is recognized, the adjusted carrying amount of a
long-lived asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this Statement
retained the fundamental provisions of FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Termination of Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to
issue shares of its common stock as consideration for the Merger. On March 1,
2000, the General Partners and APF announced that they had mutually agreed to
terminate the Agreement and Plan of Merger entered into in March 1999. The
agreement to terminate the Agreement and Plan of Merger was based, in large
part, on the General Partners' concern that, in light of market conditions
relating to publicly traded real estate investment trusts, the value of the
transaction had diminished. As a result of such diminishment, the General
Partners' ability to unequivocally recommend voting for the transaction, in the
exercise of their fiduciary duties, had become questionable. The General
Partners are continuing to evaluate strategic alternatives for the Partnership
including alternatives to provide liquidity to the Limited Partners.
Interest Rate Risk
The Partnership has provided a fixed rate note to a borrower. The
General Partners believe that the estimated fair value of the note at December
31, 2001 approximated the outstanding principal amounts. The Partnership is
exposed to equity loss in the event of changes in interest rates. The following
table presents the expected cash flows of principal that are sensitive to these
changes:
Notes Fixed Rates
-----------------------
2002 $ --
2003 --
2004 103,581
2005 --
2006 --
Thereafter --
-----------------------
$ 103,581
=======================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership accepted a promissory note in conjunction with the sale
of a Property. The General Partners believe that the estimated fair value of the
promissory note at December 31, 2001 approximated the outstanding principal
amount.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND VII, 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 25-42
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VII, 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 VII, Ltd. (a Florida limited
partnership) at December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 14(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statement statements. These financial
statements and financial statements schedules are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits 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.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 8, 2002
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2001 2000
---------------- -----------------
ASSETS
Land and buildings on operating leases, net $11,333,419 $11,297,040
Net investment in direct financing leases 2,452,964 2,548,324
Investment in joint ventures 8,212,208 6,452,604
Mortgage and other notes receivable, less deferred
gain 104,717 994,593
Cash and cash equivalents 1,747,363 1,454,025
Certificate of deposit -- 103,500
Restricted cash -- 1,503,929
Receivables, less allowance for doubtful accounts of
$504 in 2000 74,097 86,351
Due from related parties 12,968 1,256
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 2000 1,058,589 1,078,762
Other assets 76,895 87,530
---------------- -----------------
$25,073,220 $25,607,914
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 12,306 $ 31,415
Distributions payable 675,000 675,000
Due to related parties 21,837 67,815
Rents paid in advance and deposits 25,716 8,315
---------------- -----------------
Total liabilities 734,859 782,545
Minority interest 141,790 144,368
Partners' capital 24,196,571 24,681,001
---------------- -----------------
$25,073,220 $25,607,914
================ =================
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
------------------ ------------------ ---------------
Revenues:
Rental income from operating leases $ 1,559,410 $ 1,765,623 $ 1,914,671
Earned income from direct financing leases 307,290 380,322 403,371
Contingent rental income 75,571 91,842 76,601
Interest and other income 101,543 166,946 186,933
------------------ ------------------ ---------------
2,043,814 2,404,733 2,581,576
------------------ ------------------ ---------------
Expenses:
General operating and administrative 261,329 162,242 139,519
Professional services 60,021 24,451 28,903
State and other taxes 61,173 14,209 14,422
Depreciation 246,735 262,897 293,799
Provision for write-down of assets 279,862 -- --
Transaction costs -- 35,134 160,426
------------------ ------------------ ---------------
909,120 498,933 637,069
------------------ ------------------ ---------------
Income Before Gain on Sale of Assets, Minority Interest in
Income of Consolidated Joint Venture and Equity in
Earnings of Unconsolidated Joint Ventures 1,134,694 1,905,800 1,944,507
Gain on Sale of Assets 382,122 878,347 189,826
Minority Interest in Income of Consolidated
Joint Venture (18,342 ) (18,682 ) (18,640 )
Equity in Earnings of Unconsolidated Joint
Ventures 717,096 456,050 429,997
------------------ ------------------ ---------------
Net Income $ 2,215,570 $ 3,221,515 $ 2,545,690
================== ================== ===============
Allocation of Net Income
General partners $ -- $ -- $ 25,187
Limited partners 2,215,570 3,221,515 2,520,503
------------------ ------------------ ---------------
$ 2,215,570 $ 3,221,515 $ 2,545,690
================== ================== ===============
Net Income Per Limited Partner Unit $ 0.074 $ 0.107 $ 0.084
================== ================== ===============
Weighted Average Number of
Limited Partner Units Outstanding 30,000,000 30,000,000 30,000,000
================== ================== ===============
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2001, 2000, and 1999
General Partners Limited Partners
--------------------------------------- -------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ----------------- ---------------- ---------------- -----------------
Balance, December 31, 1998 $ 1,000 $ 204,744 $ 30,000,000 $ (22,877,623 ) $ 20,425,675
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- 25,187 -- -- 2,520,503
------------------ ----------------- ---------------- ---------------- -----------------
Balance, December 31, 1999 1,000 229,931 30,000,000 (25,577,623 ) 22,946,178
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- -- -- -- 3,221,515
------------------ ----------------- ---------------- ---------------- -----------------
Balance, December 31, 2000 1,000 229,931 30,000,000 (28,277,623 ) 26,167,693
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) --
Net income -- -- -- -- 2,215,570
------------------ ----------------- ---------------- ---------------- -----------------
Balance, December 31, 2001 $ 1,000 $ 229,931 $ 30,000,000 $ (30,977,623 ) $ 28,383,263
================== ================= ================ ================ =================
See accompanying notes to financial statements.
- ----------------
Syndication
Costs Total
-------------- --------------
$ (3,440,000 ) $24,313,796
-- (2,700,000 )
-- 2,545,690
-------------- --------------
(3,440,000 ) 24,159,486
-- (2,700,000 )
-- 3,221,515
-------------- --------------
(3,440,000 ) 24,681,001
-- (2,700,000 )
-- 2,215,570
-------------- --------------
$ (3,440,000 ) $24,196,571
============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
---------------- ------------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 2,085,791 $ 2,266,898 $ 2,369,760
Distributions from unconsolidated joint ventures 726,627 508,532 348,952
Cash paid for expenses (448,740 ) (303,954 ) (217,856 )
Interest received 115,585 148,533 178,637
----------------- ------------------- ------------------
Net cash provided by operating
activities 2,479,263 2,620,009 2,679,493
----------------- ------------------- ------------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating leases (1,495,699 ) -- --
Proceeds from sale of assets 1,094,282 4,122,336 1,059,954
Investment in certificate of deposit 100,000 (100,000 ) --
Investment in joint ventures (1,769,135 ) (2,361,644 ) (1,196,927 )
Liquidating distribution from joint venture -- 461,208 --
Decrease (increase) in restricted cash 1,503,682 (1,503,682 ) --
Collections on mortgage notes receivable 1,101,865 10,279 245,733
----------------- ------------------- ------------------
Net cash provided by investing activities 534,995 628,497 108,760
----------------- ------------------- ------------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,700,000 ) (2,700,000 ) (2,700,000 )
Distributions to holders of minority interest (20,920 ) (19,829 ) (19,730 )
----------------- ------------------- ------------------
Net cash used in financing activities (2,720,920 ) (2,719,829 ) (2,719,730 )
----------------- ------------------- ------------------
Net Increase in Cash and Cash Equivalents 293,338 528,677 68,523
Cash and Cash Equivalents at Beginning of Year 1,454,025 925,348 856,825
----------------- ------------------- ------------------
Cash and Cash Equivalents at End of Year $ 1,747,363 $ 1,454,025 $ 925,348
================= =================== ==================
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2001 2000 1999
----------------- --------------- --------------
Reconciliation of Net Income to Net Cash Provided
by Operating Activities:
Net Income $ 2,215,570 $3,221,515 $2,545,690
----------------- --------------- --------------
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation 246,735 262,897 293,799
Minority interest in income of
consolidated joint venture 18,342 18,682 18,640
Gain on sale of assets (382,122 ) (878,347 ) (189,826 )
Provision for loss on assets 279,862 -- --
Equity in earnings of unconsolidated joint
ventures, net of distributions 9,531 53,738 (81,045 )
Decrease (increase) in receivables 12,254 (13,707 ) 5,834
Increase in due from related parties (11,712 ) (1,256 ) --
Decrease (increase) in interest receivable 18,335 (13,064 ) 2,050
Decrease (increase) in other assets 10,635 (12,888 ) (10,104 )
Decrease in net investment in direct
financing leases 95,360 100,821 92,237
Decrease (increase) in accrued rental
income 14,159 (59,795 ) (81,057 )
Increase (decrease) in accounts payable (19,109 ) (65,479 ) 88,175
Increase (decrease) in due to related
parties (45,978 ) 8,684 34,020
Increase (decrease) in rents paid in
advance and deposits 17,401 (1,792 ) (38,920 )
----------------- --------------- --------------
Total adjustments 263,693 (601,506 ) 133,803
----------------- --------------- --------------
Net Cash Provided by Operating Activities $ 2,479,263 $2,620,009 $2,679,493
================= =============== ==============
Supplemental Schedule of Non-Cash Financing Activities:
Promissory note accepted in exchange for
sale of land and building $ 103,581 $ -- $ --
================= =============== ==============
Distributions declared and unpaid at
December 31 $ 675,000 $ 675,000 $ 675,000
================= =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund VII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
generally on a triple-net basis, whereby the tenant is generally
responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the
operating methods. Such methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset) (Note 4). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Partnership's net
investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce
a constant periodic rent over the lease term commencing on the
date the property is placed in service.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. Whenever a tenant defaults
under the terms of its lease, or events or changes in
circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership
either reserves or reverses the cumulative accrued rental
income balance.
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 fair value. Although the general partners have made
their best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near term which
could adversely affect the general partners' estimate of net cash flows
expected to be generated from its properties and the need for asset
impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible,
the corresponding receivable and allowance for doubtful accounts are
decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 83.3%
interest in San Antonio #849 Joint Venture using the consolidation
method. Minority interest represents the minority joint venture
partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
-------------------------------------------
The Partnership's investments in CNL Restaurant Investments II, Des
Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, Duluth
Joint Venture, and TGIF Pittsburgh Joint Venture, CNL VII & XVII
Lincoln Joint Venture and CNL VII, XV Columbus Joint Venture and a
property in Smithfield, North Carolina, a property in Miami, Florida, a
property in Montgomery, Alabama, and a property in Colorado Springs,
Colorado, for which each of the four properties is held as
tenants-in-common with affiliates of the general partners, are
accounted for using the equity method since each joint venture
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 and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not experienced
any losses in such accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment. See "Income Taxes"
footnote for a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes.
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
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 2001 presentation.
These reclassification had no effect on total partners' capital or net
income.
Staff Accounting Bulletin No. 101 ("SAB 101") - In December 1999, the
Securities and Exchange Commission released SAB 101, which provides the
staff's view in applying generally accepted accounting principles to
selected revenue recognition issues. SAB 101 requires the Partnership
to defer recognition of certain percentage rental income until certain
defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material
impact on the Partnership's results of operations.
Statements of Financial Accounting Standard No. 141 ("FAS 141") and
Statement of Financial Accounting Standard No. 142 ("FAS 142") - In
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" (FAS
141) and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" (FAS 142). The Partnership has reviewed
both statements and has determined that both FAS 141 and FAS 142 do not
apply to the Partnership as of December 31, 2001.
Statement of Financial Accounting Standard No. 144 ("FAS 144") - In
October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). 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
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
-------------------------------------------
the date it is tested for recoverability. An impairment loss is
recognized when the carrying amount of a long-lived asset exceeds its
fair value. If an impairment is recognized, the adjusted carrying
amount of a long-lived asset is its new cost basis. The adoption of FAS
144 did not have any effect on the partnership's recording of
impairment losses as this Statement retained the fundamental provisions
of FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of."
2. Leases:
------
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style
restaurants. The leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for
Leases." The leases generally are classified as operating leases;
however, some leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are
operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant
generally pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage
for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two 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 VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
2001 2000
----------------- -----------------
Land $ 6,756,854 $ 6,850,655
Buildings 6,714,927 6,671,945
----------------- -----------------
13,471,781 13,522,600
Less accumulated depreciation (2,138,362 ) (2,225,560 )
----------------- -----------------
$ 11,333,419 $ 11,297,040
================= =================
In June 2000, the Partnership sold its property in Pueblo, Colorado, to
an unrelated third party and received net sales proceeds of $1,005,000,
resulting in a gain of $97,056. In August 2000, the Partnership
reinvested the majority of the net sales proceeds in an additional
Property in Colorado Springs, Colorado as tenants-in-common with CNL
Income Fund XII, Ltd., a Florida limited partnership and an affiliate
of the general partners (see Note 5).
In September 2000, the Partnership sold its property in Brunswick,
Georgia, its property in Lake City, Florida, and three properties in
Jacksonville, Florida, for which the land and building of one of the
properties was classified as a direct financing lease (see Note 4) to
unrelated third parties for a total of approximately $2,404,800 and
received net sales proceeds of approximately $2,392,300, resulting in a
total gain of $619,495.
In addition, in December 2000, the Partnership sold its property in
Friendswood, Texas for which the building was classified as a direct
financing lease (see Note 4) to the tenant in accordance with the
purchase option under the lease agreement for $725,000 resulting in a
gain of $160,649.
In January 2001, the Partnership reinvested the net sales proceeds
received from the 2000 sales of three of its properties, (two in
Jacksonville, Florida and one in Lake City, Florida), in a Property in
Baton Rouge, Louisiana at an approximate cost of $1,495,700 (see Note
11).
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
In addition, in November 2001, the Partnership sold its properties in
Daytona Beach and Gainesville, Florida and received net sales proceeds
of $499,813 resulting in a gain of $184,894. In connection with the
sales of the properties, the Partnership received $396,232 in cash and
accepted a promissory note in the amount of $103,581 (see Note 7).
During the year ended December 31, 2001, the Partnership established a
provision for write-down of assets in the amount of $279,862, relating
to the property in Saddlebrook, Florida. The tenant vacated the
property and ceased restaurant operations. The provision represented
the difference between the net carrying value of the property at
September 30, 2001 and the anticipated sales price for the property. In
addition, in December 2001, the Partnership sold its property in
Saddlebrook, Florida and received net sales proceeds of $698,050
resulting in a gain of $74,232.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2001:
2002 $ 1,501,360
2003 1,481,956
2004 1,480,939
2005 1,178,653
2006 973,102
Thereafter 5,531,881
---------------------
$ 12,147,891
=====================
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease payments due
during the initial lease terms. In addition, this table does not
include any amounts for future contingent rentals which may be received
on the leases based on a percentage of the tenant's gross sales.
CNL INCOME FUND VII, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
4. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
2001 2000
----------------- -----------------
Minimum lease payments receivable $ 3,625,871 $ 4,028,512
Estimated residual values 768,233 768,233
Less unearned income (1,941,140 ) (2,248,421 )
----------------- -----------------
Net investment in direct financing leases $ 2,452,964 $ 2,548,324
================= =================
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2001:
2002 $ 402,342
2003 402,342
2004 402,342
2005 402,342
2006 402,342
Thereafter 1,614,161
-------------------
$ 3,625,871
===================
The above table does not include future minimum lease payments for
renewal periods or for contingent rental payments that may become due
in future periods (see Note 3).
During 2000, the Partnership sold two of its properties for which land
and buildings were classified as direct financing leases. In connection
with the sale, the gross investment (minimum lease payments receivable
and the estimated residual value) and unearned income relating to the
assets classified as a direct financing lease, were removed from the
accounts (see Note 3).
5. Investment in Joint Ventures:
----------------------------
The Partnership has an 18% interest, a 4.79% interest , and a 79%
interest in the profits and losses of CNL Restaurant Investments II,
Des Moines Real Estate Joint Venture, and CNL Mansfield Joint Venture,
respectively. The remaining interests in these joint
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
5. Investment in Joint Ventures - Continued:
----------------------------------------
ventures are held by affiliates of the Partnership which have the same
general partners. The Partnership also has a 53% interest in a property
in Smithfield, North Carolina, with an affiliate of the general
partners, as tenants-in-common, a 35.64% interest in a property in
Miami, Florida, with an affiliate of the general partners, as
tenants-in-common and a 71% interest in a property in Montgomery,
Alabama, with an affiliate of the general partners, as
tenants-in-common. Amounts relating to its investment are included in
investment in joint ventures.
In December 1999, the Partnership entered into a joint venture
arrangement, Duluth Joint Venture, with CNL Income Fund V, Ltd., CNL
Income Fund XIV, Ltd., and CNL Income Fund XV, Ltd., each a Florida
limited partnership and affiliate of the general partners, to construct
and hold one restaurant property in Duluth, Georgia. As of December 31,
2000, the Partnership contributed approximately $969,299 to purchase
land and pay for construction costs relating to the joint venture. In
October 2000, the Partnership acquired an additional 45% interest in
Duluth Joint Venture, from CNL Income Fund V, Ltd. and CNL Income Fund
XV, Ltd. for an aggregate purchase price of approximately $610,000 As
of December 31, 2001, the Partnership owned a 56% interest in the
profits and losses of the joint venture.
In June 1999, Halls Joint Venture, in which the Partnership owned a
51.1% interest, sold its property to the tenant in accordance with the
purchase option under the lease agreement for $891,915, resulting in a
gain to the joint venture of approximately $239,300. During 2000, the
Partnership and the joint venture partner liquidated Halls Joint
Venture and the Partnership received approximately $460,900,
representing its pro rata share of the liquidation proceeds. In June
2000, the Partnership reinvested approximately $195,107 of these
proceeds and approximately $240,000 from the payoff of a note
receivable related to the 1995 sale of a property in Jacksonville,
Florida, in a joint venture arrangement, TGIF Pittsburgh Joint Venture,
with CNL Income Fund XV, Ltd., CNL Income Fund XVI, Ltd., and CNL
Income Fund XVIII, Ltd., each of which is a Florida limited partnership
and an affiliate of the general partners to purchase and hold one
restaurant property. In January 2001, the Partnership acquired an
additional interest in TGIF Pittsburgh Joint Venture from CNL Income
Fund XVIII, Ltd., a Florida limited partnership and an affiliate of the
general partners, for an aggregate purchase price of approximately
$500,000. As of December 31, 2001, the Partnership owned a 36.88%
interest in the profits and losses of the joint venture.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
5. Investment in Joint Ventures - Continued:
----------------------------------------
In August 2000, the Partnership used the net sales proceeds from the
sale of the property in Pueblo, Colorado to acquire a property in
Colorado Springs, Colorado as tenants in common with CNL Income Fund
XII, Ltd., ("CNL XII") a Florida limited partnership and affiliate of
the general partners. In connection therewith, the Partnership and the
affiliate entered into an agreement whereby each co-tenant will share
in the profits and losses of the property in proportion to its
applicable percentage interest. The Partnership and CNL XII acquired
this property from CNL BB Corp., an affiliate of the general partners.
As of December 31, 2000, the Partnership owned a 43% interest in the
property in Colorado Springs, Colorado (see Note 11).
In April 2001, the Partnership used a portion of the net sales proceeds
from the sale of its property in Friendswood, Texas (see Note 3) and a
portion of the 2001 collection of the promissory note (see Note 8) to
enter into a joint venture arrangement, CNL VII & XVII Lincoln Joint
Venture, with CNL Income Fund XVII, Ltd., a Florida limited partnership
and an affiliate of the general partners, to hold one restaurant
property. The joint venture acquired this property from CNL BB Corp.,
an affiliate of the general partners (see Note 11). As of December 31,
2001, the Partnership owned a 14% interest in the profits and losses of
the joint venture.
In August 2001, the Partnership used the remaining portion of the 2001
collection of the promissory note (see Note 8) to enter into joint
venture arrangement, CNL VII, XV Columbus Joint Venture, with CNL
Income Fund XV, Ltd., a Florida limited partnership and affiliate of
the general partners, to construct one restaurant property in Columbus,
Georgia. As of December 31, 2001, the Partnership had contributed
approximately $1,025,500 to purchase land and pay for construction
costs relating to the joint venture. As of December 31, 2001, the
Partnership owned a 68.75% interest in the profits and losses of the
joint venture.
CNL Restaurant Investments II owns and leases six properties to an
operator of national fast-food or family-style restaurants, and Des
Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, Duluth
Joint Venture, TGIF Pittsburgh Joint Venture, CNL VII & XVII Lincoln
Joint Venture, and CNL VII, XV Columbus Joint Venture and the
Partnership and affiliates, as tenants in common in four separate
tenancy in common arrangements, each own and lease one property to an
operator of national fast-food or family-style restaurants.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
5. Investment in Joint Ventures - Continued:
----------------------------------------
The following presents the combined, condensed financial information
for the joint ventures and the properties held as tenants-in-common
with affiliates at December 31:
2001 2000
---------------- ----------------
Land and buildings on operating leases, net $18,806,455 $16,729,763
Net investment in direct financing lease 1,765,740 922,091
Cash 62,669 153,432
Receivables 241,628 8,444
Accrued rental income 398,419 236,243
Other assets 1,471 810
Liabilities 256,902 172,475
Partners' capital 21,019,480 17,878,308
Revenues 2,312,781 1,661,292
Net income 1,905,726 1,326,080
The Partnership recognized income totaling $717,096, $456,050, and
$429,997 for the years ended December 31, 2001, 2000, and 1999,
respectively, from these joint ventures and the four properties held as
tenants in common with affiliates.
6. Restricted Cash:
---------------
As of December 31, 2000, total net sales proceeds of $1,503,682 from
the sale of the Partnership's properties in Jacksonville and Lake City,
Florida and Brunswick, Georgia plus accrued interest of $247 were being
held in an interest bearing account pending the release of funds to
acquire additional properties. These funds were released by the escrow
agent in 2001 and were used to acquire a property in Baton Rouge,
Louisiana (see Note 3).
7. Note Receivable:
---------------
In connection with the sale of the property in Daytona Beach, Florida,
the Partnership accepted an uncollaterized promissory note in the
principal sum of $103,581. The promissory note bears interest at a rate
of 12.34% per annum, and is being collected in 35 monthly, interest
only installments of $1,065, with a balloon payment of principal and
outstanding interest due in November 2004.
CNL INCOME FUND VII, LTD. (A
Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
8. Mortgage Notes Receivable:
-------------------------
In connection with the sale of its property in Florence, South Carolina
during 1995, the Partnership accepted a promissory note in the
principal sum of $1,160,000, collateralized by a mortgage on the
property. The promissory note bore interest at a rate of 10.25% per
annum and was being collected in 59 equal monthly installments of
$10,395, including interest. As a result of this sale being accounted
for using the installment sales method for financial reporting purposes
as required by Statement of Financial Accounting Standards No. 66,
"Accounting for Sales of Real Estate," the Partnership recognized a
gain of $122,996, $1,147, and $1,135 for the years ended December 31,
2001, 2000, and 1999, respectively. In February 2001, the Partnership
received a balloon payment of $1,115,301 which included the outstanding
principal balance and $14,419 of accrued interest.
9. Allocations and Distributions:
-----------------------------
From inception through December 31, 1999, all net income and net losses
of the Partnership, excluding gains and losses from the sale of
properties, were allocated 99 percent 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 percent to the
limited partners and one percent to the general partners; provided,
however, that the one percent of net cash flow to be distributed to the
general partners was subordinated to receipt by the limited partners of
an aggregate, ten percent, cumulative, noncompounded annual return on
their adjusted capital contributions (the "10% Preferred Return").
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 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 percent 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 not in liquidation of the
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
9. Allocations and Distributions - Continued:
-----------------------------------------
Partnership was, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and
thereafter, 95 percent to the limited partners and five percent to the
general partners.
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 percent to
the limited partners and five percent to the general partners.
Effective January 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 partners in
succeeding years. Accordingly, the general partners were not allocated
any net income and did not receive any distribution during the years
ended December 31, 2001 and 2000.
During each of the years ended December 31, 2001, 2000, and 1999, the
Partnership declared distributions to the limited partners of
$2,700,000. No distributions have been made to the general partners to
date.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
10. 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:
2001 2000 1999
------------- ------------- ------------
Net income for financial reporting purposes $ 2,215,570 $3,221,515 $ 2,545,690
Depreciation for tax reporting purposes in excess
of depreciation for financial reporting
purposes (14,382 ) (19,345 ) (19,957 )
Gain on sale of assets for financial reporting
purposes less than (in excess) of gain for
tax 109,317 (832,083 ) (188,377 )
reporting purposes
Provision for loss on assets 279,862 -- --
Direct financing leases recorded as operating
leases for tax reporting purposes 95,360 100,821 92,237
Equity in earnings of unconsolidated joint ventures
for tax reporting purposes in excess of (less
than) equity in earnings of
unconsolidated joint ventures
for financial reporting purposes (59,325 ) (6,585 ) 54,093
Accrued rental income 14,159 (59,795 ) (81,057 )
Rents paid in advance 17,901 (1,792 ) (48,027 )
Minority interest in timing differences of
unconsolidated joint venture (728 ) 981 981
Allowance for doubtful accounts (504 ) (16,175 ) (12,174 )
Capitalization (Deduction) of transaction costs
for tax reporting purposes -- (179,206 ) 160,425
------------- ------------- ------------
Net income for federal income tax purposes $ 2,657,230 $2,208,336 $ 2,503,834
============= ============= ============
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
11. 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 (the "Advisor") is a wholly owned subsidiary
of CNL Financial Group, Inc. until it merged with CNL American
Properties Fund, Inc. ("APF"). CNL Fund Advisors, Inc., a majority
owned subsidiary of CNL Financial Group, Inc. until it merged with and
into APF effective September 1, 1999, served as the Partnership's
advisor until it assigned its rights and obligations under a management
agreement with the Partnership to the Advisor effective July 1, 2000.
The individual general partners are stockholders and directors of APF.
In connection therewith, the Partnership has agreed to pay the Advisor
an annual, noncumulative, subordinated management fee of one percent of
the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues
from joint ventures and the properties held as tenants-in-common with
affiliates, but not in excess of competitive fees for comparable
services. These fees will be incurred and will be payable only after
the limited partners receive their 10% Preferred Return. Due to the
fact that these fees are noncumulative, if the limited partners have
not received their 10% Preferred Return in any particular year, no
management fee will be due or payable for such year. As a result of
such threshold, no management fees were incurred during the years ended
December 31, 2001, 2000, and 1999.
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 sale. However, if
the net sales proceeds are reinvested in a replacement property, no
such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are
distributed. The payment of the real estate disposition fee is
subordinated to the receipt by the limited partners of their aggregate
10% Preferred Return, plus their adjusted capital contributions. No
deferred, subordinated real estate disposition fees were incurred for
the years ended December 31, 2001, 2000, and 1999.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
11. Related Party Transactions:
--------------------------
During the years ended December 31, 2001, 2000, and 1999, the
Partnership's advisor and its affiliate provided accounting and
administrative services to the Partnership on a day-to-day basis
including services during 2000 and 1999 relating to the proposed and
terminated merger. The Partnership incurred $170,123, $91,926 and
$102,417 for the years ended December 31, 2001, 2000, and 1999,
respectively, for such services.
During 2000, the Partnership and CNL XII, as tenants in common,
acquired an interest in a Bennigan's property in Colorado Springs,
Colorado from CNL BB Corp., an affiliate of the general partners, for a
purchase price of $2,226,134. CNL BB Corp. had purchased and
temporarily held title to this property in order to facilitate the
acquisition of the property by the Partnership. The purchase price paid
by the Partnership represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
In January 2001, the Partnership acquired a property located in Baton
Rouge, Louisiana from CNL Funding 2001-A, LP, for a purchase price of
approximately $1,495,700 (see Note 3). CNL Fund 2001-A, LP is a
Delaware limited partnership and an affiliate of the general partners.
CNL Funding 2001-A, LP had purchased and temporarily held title to the
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the
cost incurred by CNL Funding 2001-A, LP to acquire and carry the
property, including closing costs.
In April 2001, the Partnership and CNL Income Fund XVII, Ltd. through a
joint venture arrangement, CNL VII & XVII Lincoln Joint Venture,
acquired a Golden Corral property from CNL BB Corp., an affiliate of
the general partners, for a total purchase price of $1,740,374. CNL
Income Fund XVII, Ltd. is a Florida limited partnership and an
affiliate of the general partners. CNL BB Corp. had purchased and
temporarily held title to this property in order to facilitate the
acquisition of the property by the joint venture. The purchase price
paid by the joint venture represented the costs incurred by CNL BB
Corp. to acquire and carry the property, including closing costs.
The amounts due to related parties totaled $21,837 and $67,815 at
December 31, 2001 and 2000, respectively.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
12. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental, earned and mortgage
interest income from individual lessees, or affiliated groups of
lessees, each representing more than 10% of the Partnership's total
rental, earned and mortgage interest income (including the
Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the four properties held as
tenants-in-common with affiliates of the general partners) for each of
the years ended December 31:
2001 2000 1999
------------- ------------- -------------
Golden Corral Corporation $ 763,975 $ 732,948 $ 712,877
Jack in the Box Inc. 349,985 N/A N/A
Restaurant Management
Services, Inc. N/A 328,244 456,440
Waving Leaves, Inc. 283,072 289,268 295,176
In addition, the following schedule presents total rental, earned and
mortgage interest income from individual restaurant chains, each
representing more than 10% of the Partnership's total rental, earned
and mortgage interest income (including the Partnership's share of
total rental and earned income from the unconsolidated joint ventures
and the four properties held as tenants-in-common with affiliates) for
each of the years ended December 31:
2001 2000 1999
------------- -------------- -------------
Golden Corral Family
Steakhouse Restaurants $763,975 $ 732,948 $ 712,877
Hardees 426,841 544,275 443,819
Jack in the Box 349,985 N/A N/A
Burger King 305,348 313,857 380,586
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains could significantly impact the results of operations
of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
12. Concentration of Credit Risk:
----------------------------
The information denoted by N/A indicates that for each period
presented, the tenant or restaurant chain did not represent more than
10% of the Partnership's total rental and earned income.
13. Selected Quarterly Financial Data:
---------------------------------
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2001 and
2000:
2001 Quarter First Second Third Fourth Year
----------------------- --------------- ---------------- ----------------- --------------- -------------
Revenues (1) $ 698,038 $ 667,914 $ 651,780 $ 724,836 $ 2,742,568
Net income 610,040 223,679 538,628 843,223 2,215,570
Net income per
limited partner
unit 0.020 0.008 0.018 0.028 0.074
2000 Quarter First Second Third Fourth Year
----------------------- --------------- ---------------- ----------------- --------------- -------------
Revenues (1) $ 717,803 $ 679,982 $ 701,529 $742,787 $ 2,842,101
Net income 537,436 631,366 1,202,585 850,128 3,221,515
Net income per
limited partner
unit 0.018 0.021 0.040 0.028 0.107
(1) Revenues include equity in earnings of unconsolidated joint
ventures and minority interest in income of the consolidated
joint venture.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., CNL Financial Group, Inc.
and their affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 55. 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 American Properties Fund,
Inc. ("APF"), a public, unlisted real estate investment trust, since 1994. Mr.
Seneff served as Chief Executive Officer of APF from 1994 through August 1999,
and has served as Co-Chief Executive Officer of APF since December 2000. Mr.
Seneff served as Chairman of the Board and Chief Executive Officer of CNL Fund
Advisors, Inc., formerly the Partnership's advisor, until it merged with a
wholly-owned subsidiary of APF in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. 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 its formation in 1980. CNL Financial Group, Inc. 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.
Mr. Seneff also serves as a Director, Chairman of the Board and Chief Executive
Officer of CNL Hospitality Properties, Inc., a public, unlisted real estate
investment trust, as well as, CNL Hospitality Corp., its advisor. In addition,
he serves as a Director, Chairman of the Board and Chief Executive Officer of
CNL Retirement Properties, Inc., a public, unlisted real estate investment trust
and its advisor, CNL Retirement Corp. Since 1992, Mr. Seneff has also served as
a Director, Chairman of the Board and Chief Executive Officer of Commercial Net
Lease Realty, Inc., a public real estate investment trust that is listed on the
New York Stock Exchange. Mr. Seneff has also served as a Director, Chairman of
the Board and Chief Executive Officer of CNL Securities Corp. since 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff formerly
served as a Director of First Union National Bank of Florida, N.A., and
currently serves as the Chairman of the Board of CNL 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 more
than $60 billion of retirement funds. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 54. 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 is
Director of the Board of Directors of APF. Mr. Bourne served as President of APF
from 1994 through February 1999. He also served as Treasurer from February 1999
through August 1999 and from May 1994 through December 1994. He also served in
various executive positions with CNL Fund Advisors, Inc. prior to its merger
with a wholly-owned subsidiary of APF 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.; Director, Vice Chairman of
the Board, President and Treasurer of CNL Hospitality Properties, Inc., a
public, unlisted real estate investment trust; as well as, Director, Vice
Chairman of the Board, President and Treasurer of CNL Hospitality Corp., its
advisor. In addition, Mr. Bourne serves as Director, Vice Chairman of the Board,
President and Treasurer of CNL Retirement Properties, Inc., a public, unlisted
real estate investment trust; as well as, a Director, Vice Chairman of the
Board, President and Treasurer of its advisor, CNL Retirement Corp. Mr. Bourne
also serves as a Director of CNL Bank. He has 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., a public real estate investment trust
listed on the New York Stock Exchange. Mr. Bourne also 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., a registered investment advisor for pension plans. 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 46. Mr. McWilliams has served as Co-Chief
Executive Officer of APF since December 2000 and previously served as Chief
Executive Officer from September 1999 through December 2000. Prior to the
acquisition of CNL Fund Advisors, Inc., Mr. McWilliams served as President of
APF from February 1999 until September 1999. From February 1998 to February
1999, he served as Executive Vice President of APF. Mr. McWilliams joined CNL
Financial Group, Inc. in April 1997 and served as an Executive Vice President
from October 1997 until September 1999. In addition, Mr. McWilliams served as
President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc. from April
1997 until the acquisition of such entities by wholly-owned subsidiaries of APF
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 38. Mr. Shackelford was promoted to
Executive Vice President of APF in June 2000. He served as Senior Vice President
from September 1999 until his promotion in June 2000. Mr. Shackelford has served
as Chief Financial Officer since January 1997 and has served as Secretary and
Treasurer of APF 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.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 15, 2002, 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 15, 2002, 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.
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, 2001, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2001
------------------------- --------------------- -----------------------
Reimbursement to affiliates for Operating expenses are reimbursed Accounting and administrative
operating expenses at the lower of cost or 90% of the services: $170,123
prevailing rate at which
comparable services could have
been obtained in the same
geographic area. 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 manage-ment fee to One percent of the sum of gross $ - 0 -
affiliates operating revenues from Properties
wholly owned by the Partnership
plus the Partnership's allocable
share of gross revenues of joint
ventures in which the Partnership
is a co-venturer and the
Properties owned with affiliates
as tenants-in-common, subordinated
to certain minimum returns to the
Limited Partners. The management
fee will not exceed competitive
fees for comparable services. Due
to the fact that these fees are
non-cumulative, if the Limited
Partners have not received their
10% Preferred Return in any
particular year, no management
fees will be due or payable for
such year.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2001
------------------------- --------------------- -----------------------
Deferred, subordinated real estate A deferred, subordinated real $ - 0 -
disposition fee payable to affiliates estate disposition fee, payable
upon sale of one or more
Properties, in an amount equal to
the lesser of (i) one-half of a
competitive real estate
commission, or (ii) three percent
of the sales price of such
Property or Properties. Payment of
such fee shall be made only if
affiliates of the General Partners
provide a substantial amount of
services in connection with the
sale of a Property or Properties
and shall be subordinated to
certain minimum returns to the
Limited Partners. However, if the
net sales proceeds are reinvested
in a replacement Property, no such
real estate disposition fee will
be incurred until such replacement
Property is sold and the net sales
proceeds are distributed.
General Partners' deferred, A deferred, subordinated share $ - 0 -
sub-ordinated share of Partnership net equal to one percent of Partnership
cash flow 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 net equal to five percent of
sales proceeds from a sale or sales not Partnership distributions of such
in liquidation of the Partnership net sales proceeds, subordinated to
certain minimum returns to the
Limited Partners.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2001
------------------------- --------------------- -----------------------
General Partners' share of Partnership Distributions of net sales proceeds $ - 0 -
net sales proceeds from a sale or sales from a sale or sales of
in liquidation of the Partnership substantially all of the
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.
The Partnership entered into a joint venture arrangement with CNL Income Fund
XVII, Ltd., an affiliate of the general partners to acquire a Golden Corral
property from CNL BB Corp., an affiliate of the general partners, for a purchase
price of $1,740,374. CNL BB Corp. had purchased and temporarily held title to
this property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represents the costs
incurred by CNL BB Corp. to acquire and carry the property, including closing
costs.
The Partnership acquired a Jack in the Box property from CNL Funding 2001-A, LP,
an affiliate of the general partners, for a purchase price of $1,495,700. CNL
Funding 2001-A, LP had purchased and temporarily held title to the property in
order to facilitate the acquisition of the property by the Partnership. The
purchase price paid by the Partnership represents the costs incurred by CNL
Funding 2001-A, LP to acquire and carry the property, including closing costs.
In addition, the Partnership acquired an additional 19.72% interest in TGIF
Pittsburgh Joint Venture from CNL Income Fund XVIII, Ltd., an affiliate of the
general partners, for an aggregate purchase price of approximately $500,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2001 and 2000
Statements of Income for the years ended December 31, 2001,
2000, and 1999
Statements of Partners' Capital for the years ended December
31, 2001, 2000, and 1999
Statements of Cash Flows for the years ended December 31,2001,
2000, and 1999
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2001, 2000 and 1999
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2001
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 2001
Schedule IV - Loans on Real Estate at December 31, 2001
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
3.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership
of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2
to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein
by reference.)
10.1 Management Agreement between CNL Income Fund VII,
Ltd. and CNL Investment Company (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995,
and incorporated herein by reference.)
10.3 Assignment of Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996,
and incorporated herein by reference.)
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.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 2001 through December 31, 2001.
(c) Not applicable.
(d) Other Financial Information
The Partnership is required to file audited financial information of
one of its tenants (Golden Corral Corporation) as a result of this
tenant leasing more than 20% of the Partnership's total assets for the
year ended December 31, 2001. Golden Corral Corporation is a
privately-held company and its financial information is not available
to the Partnership to include in this filing. The Partnership will file
this financial information under cover of a Form 10-K/A as soon as it
is available.
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 25th day of
March, 2002.
CNL INCOME FUND VII, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/Robert A. Bourne
-----------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/James M. Seneff, Jr.
----------------------
JAMES M. SENEFF, JR.
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 25, 2002
- ---------------------------------------- (Principal Financial and
Robert A. Bourne Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 25, 2002
- ---------------------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2001, 2000, and 1999
Additions Deductions
--------------------------------- -------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---------- ----------------- -------------- --------------- ---------------- ------------- ------------ ------------
1999 Allowance for
doubtful
accounts (a) $ 38,698 $ -- $ -- (b) $ 6,455 (c) $ 5,719 $ 26,524
============== =============== ================ ============= ============ ============
2000 Allowance for
doubtful
accounts (a) $ 26,524 $ -- $ 504 (b) $ -- (c) $ 16,679 $ 10,349
============== =============== ================ ============= ============ ============
2001 Allowance for
doubtful
accounts (a) $ 10,349 $ -- $ -- (b) $ 9,845 (c) $ 504 $ --
============== =============== ================ ============= ============ ============
(a) Deducted from receivables and accrued rental income on the
balance sheet.
(b) Reduction of rental, earned and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Costs Capitalized
Subsequent To
Initial Cost Acquisition
---------------------- -------------------
Encum- Buildings anImprove- Carrying
brances Land Improvements ments Costs
-------- ---------- ---------------------- ------
Properties the Partnership
has Invested in Under
Operating Leases:
Boston Market Restaurant:
Marietta, Georgia - $534,421 $507,133 - -
Burger King Restaurants:
Jefferson City, Tenn-ssee 216,633 546,967 - -
Sierra Vista, Arizon- 421,170 - - -
Checkers Drive-In Restaurant:
Winter Springs, Flor-da 397,536 - - -
Golden Corral Family
Steakhouse Restaurants:
Odessa, Texas - 502,364 815,831 - -
Midland, Texas - 481,748 857,185 - -
El Paso, Texas - 745,506 - 802,132 -
Harlingen, Texas- 503,799 - 890,878 -
Hardee's Restaurants:
Akron, Ohio - 198,086 - - -
Dalton, Ohio - 180,556 - - -
Minerva, Ohio - 143,775 - - -
Orrville, Ohio - 176,169 - - -
Seville, Ohio - 245,648 - - -
Clinton, Tennessee - 295,861 - - -
Jack in the Box Restaurant:
Baton Rouge, Lousian-a 562,533 933,167 - -
San Antonio, Texas - 525,720 - 381,591 -
KFC Restaurant:
Arcadia, Florida - 175,020 333,759 - -
Rally's Restaurant:
Toledo, Ohio - 281,880 196,608 47,002 -
Taco Bell Restaurant:
Detroit, Michigan - 168,429 - 402,674 -
---------- ----------- ---------- ------
$6,756,854 $4,190,650 $2,524,277 -
========== =========== ========== ======
Properties of Joint Venture
in Which the Partnership
has an 18% Interest and has
Invested in Under Operating
Leases:
Burger King Restaurants:
Columbus, Ohio - $345,696 $651,985 - -
San Antonio, Texas - 350,479 623,615 - -
Pontiac, Michigan - 277,192 982,200 - -
Raceland, Louisiana - 174,019 986,879 - -
New Castle, Indiana - 264,239 662,265 - -
Hastings, Minnesota - 155,553 657,159 - -
---------- ----------- ---------- ------
$1,567,178 $4,564,103 - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has a
4.79% Interest and has
Invested in Under an
Operating Lease:
Jack in the Box Restaurant:
Des Moines, Washingt-n $322,726 $791,658 - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has
a 79% Interest and has
Invested in Under an
Operating Lease:
Jack in the Box Restaurant:
Mansfield, Texas - $297,295 $482,914 - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has a
56% Interest and had
Invested in Under an
Operating Lease:
Roadhouse Grill Restaurant:
Duluth, Georgia - $1,078,469 - - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has
a 36.88% Interest and has
Invested in Under an
Operating Lease:
TGI Friday's Restaurant:
Homestead, Pennsylva-ia $1,036,297 $1,499,296 - -
========== =========== ========== ======
Property in which the
Partnership has a 43%
Interest as Tenants-in-
Common and has Invested
in Under an Operating Lease:
Bennigan's Restaurant:
Colorado Springs, Co-orado $947,120 $1,279,013 - -
========== =========== ========== ======
Property in Which the
Partnership has a 53%
Interest as Tenants-in-
Common and has Invested
in Under an Operating Lease:
Golden Corral Family
Steakhouse Restaurants:
Smithfield, Nor-h Carolin$264,272 1,155,018.00 - -
========== =========== ========== ======
Property in Which the
Partnership has a 35.64%
Interest as Tenants-in-
Common and has Invested
in Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Miami, Florida - $976,357 $974,016 - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has
a 14.00% Interest and has
Invested in Under an
Operating Lease:
Golden Corral Family
Steakhouse Restaurants:
Lincoln, Nebra-ka $485,390 $1,254,984 - -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has
a 68.75% Interest and has
Invested in Under an
Operating Lease:
Sonny's Bar-B-Q:
Columbus, Georgi- $392,880 $1,194,308 - -
========== =========== ========== ======
Property in Which the Partnership
has a 71% Interest as Tenants-
in-Common and has Invested
in Under an Operating Lease:
IHOP Restaurant:
Montgomery, Alabama - $584,126 - - -
========== =========== ========== ======
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Burger King Restaurant:
Sierra Vista, Arizon- - - $333,212 -
Hardee's Restaurants:
Akron, Ohio - - 540,215 - -
Dalton, Ohio - - 490,656 - -
Minerva, Ohio - - 436,663 - -
Orrville, Ohio - - 446,337 - -
Seville, Ohio - - 487,630 - -
Clinton, Tennessee - - 338,216 - -
- $2,739,717 $333,212 -
========== =========== ========== ======
Property of Joint Venture in
Which the Partnership has a 56%
and has Invested in Under a Direct
Financing Lease:
Roadhouse Grill Restaurant:
Duluth, Georgia - - - - $865,185
========== =========== ========== ======
Property in Which the Partnership has
a 71% Interest as Tenants-in-Common
and has Invested in Under a Direct
Financing Lease:
IHOP Restaurant:
Montgomery, Alabama - - $933,873 - -
========== =========== ========== ======
Net Cost Basis at Which Life on Which
Carried at Close of Period (c) Depreciation in
- ----------------------------------- Date Latest Income
Buildings and Accumulated ofCon- Date Statement is
Land Improvements Total DepreciatiostructiAcquired Computed
- ----------- ----------------------- -------------------------------------
$534,421 $507,133 $1,041,554 $87,386 1994 10/96 (b)
216,633 546,967 763,600 211,294 1988 01/90 (b)
421,170 (f) 421,170 - 1990 06/90 (d)
397,536 - 397,536 (g) - 07/94 (g)
502,364 815,831 1,318,195 319,776 1990 03/90 (b)
481,748 857,185 1,338,933 335,437 1990 04/90 (b)
745,506 802,132 1,547,638 301,733 1990 05/90 (b)
503,799 890,878 1,394,677 337,557 1990 06/90 (b)
198,086 (f) 198,086 - 1990 11/90 (d)
180,556 (f) 180,556 - 1990 11/90 (d)
143,775 (f) 143,775 - 1990 11/90 (d)
176,169 (f) 176,169 - 1990 11/90 (d)
245,648 (f) 245,648 - 1990 11/90 (d)
295,861 (f) 295,861 - 1992 09/92 (d)
562,533 933,167 1,495,700 31,106 2000 01/01 (b)
525,720 381,591 907,311 145,389 1990 05/90 (b)
175,020 333,759 508,779 126,889 1985 08/90 (b)
281,880 243,610 525,490 89,257 1990 01/91 (b)
168,429 402,674 571,103 152,538 1990 06/90 (b)
- ----------- ----------- ----------- ----------
$6,756,854 $6,714,927 $13,471,781 $2,138,362
=========== =========== =========== ==========
$345,696 $651,985 $997,681 $223,045 1986 09/91 (b)
350,479 623,615 974,094 213,339 1986 09/91 (b)
277,192 982,200 1,259,392 336,011 1987 09/91 (b)
174,019 986,879 1,160,898 337,612 1988 09/91 (b)
264,239 662,265 926,504 226,561 1988 09/91 (b)
155,553 657,159 812,712 224,815 1990 09/91 (b)
- ----------- ----------- ----------- ----------
$1,567,178 $4,564,103 $6,131,281 $1,561,383
=========== =========== =========== ==========
$322,726 $791,658 $1,114,384 $243,062 1992 10/92 (b)
=========== =========== =========== ==========
$297,295 $482,914 $780,209 $77,255 1997 02/97 (b)
=========== =========== =========== ==========
$1,078,469 (f) $1,078,469 - 1999 12/99 (d)
=========== =========== =========== ==========
$1,036,297 $1,499,296 $2,535,593 $79,265 2000 06/00 (b)
=========== =========== =========== ==========
$947,120 $1,279,013 $2,226,133 $60,399 2000 08/00 (b)
=========== =========== =========== ==========
264,272.00 1,155,018.001,419,290.00154,953.00 1996 12/97 (b)
=========== =========== =========== ==========
$976,357 $974,016 $1,950,373 $129,957 1995 12/97 (b)
=========== =========== =========== ==========
$485,390 $1,254,984 $1,740,374 $31,374 2001 04/01 (b)
=========== =========== =========== ==========
$392,880 $1,194,308 $1,587,188 $3,317 2001 12/01 (b)
=========== =========== =========== ==========
$584,126 (f) $584,126 - 1998 11/99 (d)
=========== ===========
- (f) (f) (d) 1990 06/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1992 09/92 (d)
- (f) (f) (d) 1999 12/99 (d)
(f) (f) (f) (d) 1998 11/99 (d)
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(a) Transactions in real estate and accumulated depreciation during 2001,
2000 and 1999, are summarized as follows:
Accumulated
Cost Depreciation
----------------------------------------------- ----------------- ----------------
Properties the Partnership has Invested
in Under Operating Leases:
Balance, December 31, 1998 $ 17,552,433 $ 2,473,926
Dispositions (965,646) (165,272 )
Depreciation expense -- 293,799
----------------- ----------------
Balance, December 31, 1999 16,586,787 2,602,453
Dispositions (3,064,187) (639,790 )
Depreciation expense -- 262,897
----------------- ----------------
Balance, December 31, 2000 13,522,600 2,225,560
Acquisitions 1,495,700 --
Dispositions (1,546,519) (333,933 )
Depreciation expense -- 246,735
----------------- ----------------
Balance, December 31, 2001 $ 13,471,781 $ 2,138,362
================= ================
Properties of Joint Venture in Which the Partnership has an 18%
Interest and has Invested in Under Operating Leases:
Balance, December 31, 1998 $ 6,131,281 $ 1,104,972
Depreciation expense -- 152,137
---------------- ---------------
Balance, December 31, 1999 6,131,281 1,257,109
Depreciation expense -- 152,137
---------------- ---------------
Balance, December 31, 2000 6,131,281 1,409,246
Depreciation expense -- 152,137
---------------- ---------------
Balance, December 31, 2001 $ 6,131,281 $ 1,561,383
================ ===============
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2001
Accumulated
Cost Depreciation
---------------- ---------------
Property of Joint Venture in Which the Partnership has a 4.79%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1998 $ 1,114,384 $ 163,895
Depreciation expense -- 26,389
---------------- ---------------
Balance, December 31, 1999 1,114,384 190,284
Depreciation expense -- 26,389
---------------- ---------------
Balance, December 31, 2000 1,114,384 216,673
Depreciation expense -- 26,389
---------------- ---------------
Balance, December 31, 2001 $ 1,114,384 $ 243,062
================ ===============
Property of Joint Venture in Which the Partnership has a 79%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1998 $ 780,209 $ 28,964
Depreciation expense -- 16,097
----------------- ----------------
Balance, December 31, 1999 780,209 45,061
Depreciation expense -- 16,097
----------------- ----------------
Balance, December 31, 2000 780,209 61,158
Depreciation expense -- 16,097
----------------- ----------------
Balance, December 31, 2001 $ 780,209 $ 77,255
================= ================
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2001
Accumulated
Cost Depreciation
------------------ -----------------
Property of Joint Venture in Which the Partnership has a
36.88% Interest and has Invested in Under an Operating
Lease:
Balance, December 31, 1999 $ -- $ --
Acquisition 2,535,593 --
Depreciation expense -- 29,288
------------------ -----------------
Balance, December 31, 2000 2,535,593 29,288
Depreciation expense -- 49,977
------------------ -----------------
Balance, December 31, 2001 $ 2,535,593 $ 79,265
================== =================
Property of Joint Venture in Which the Partnership has a
53% Interest as Tenants-in-Common and has Invested in
Under an Operating Lease:
Balance, December 31, 1998 $ 1,419,290 $ 39,450
Depreciation expense -- 38,501
---------------- ----------------
Balance, December 31, 1999 1,419,290 77,951
Depreciation expense -- 38,501
---------------- ----------------
Balance, December 31, 2000 1,419,290 116,452
Depreciation expense -- 38,501
---------------- ----------------
Balance, December 31, 2001 $ 1,419,290 $ 154,953
================ ================
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2001
Accumulated
Cost Depreciation
------------------ -----------------
Property in Which the Partnership has a 35.64% Interest as
Tenants-in-Common and has Invested in Under an Operating
Lease:
Balance December 31, 1998 $ 1,950,373 $ 32,556
Depreciation expense -- 32,467
------------------ -----------------
Balance December 31, 1999 1,950,373 65,023
Depreciation expense -- 32,467
------------------ -----------------
Balance December 31, 2000 1,950,373 97,490
Depreciation expense -- 32,467
------------------ -----------------
Balance, December 31, 2001 $ 1,950,373 $ 129,957
================== =================
Property of Joint Venture in Which the Partnership has a 56%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1998 $ -- $ --
Acquisition 1,083,153 --
Depreciation expense -- --
------------------ -----------------
Balance, December 31, 1999 1,083,153 --
Acquisition 860,501 --
Depreciation expense -- 7,210
------------------ -----------------
Balance, December 31, 2000 1,943,654 7,210
Reclassified to capital lease (865,185 ) (7,210 )
Depreciation expense (d) -- --
------------------ -----------------
Balance, December 31, 2001 $ 1,078,469 $ --
================== =================
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2001
Accumulated
Cost Depreciation
------------------ -----------------
Property of Joint Venture in Which the Partnership has a
14% Interest and has Invested in Under an Operating Lease:
Balance, December 31, 2000 $ -- $ --
Acquisition 1,740,374 --
Depreciation expense -- 31,374
------------------ -----------------
Balance, December 31, 2001 $ 1,740,374 $ 31,374
================== =================
Property of Joint Venture in Which the Partnership has
a 68.75% Interest and has Invested in Under an Operating
Lease:
Balance December 31, 2000 $ -- $ --
Acquisition 1,587,188 --
Depreciation expense -- 3,317
------------------ -----------------
Balance, December 31, 2001 $ 1,587,188 $ 3,317
================== =================
Property in Which the Partnership has a 71% Interest as
Tenants-in Common and has Invested in Under an Operating
Lease:
Balance, December 31, 1998 $ -- $ --
Acquisition 584,126 --
Depreciation expense (d) -- --
------------------ -----------------
Balance December 31, 1999 584,126 --
Depreciation expense (d) -- --
------------------ -----------------
Balance December 31, 2000 584,126 --
Depreciation expense (d) -- --
------------------ -----------------
Balance, December 31, 2001 $ 584,126 $ --
================== =================
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2001
Accumulated
Cost Depreciation
------------------ -----------------
Property in Which the Partnership has a 43% Interest as
Tenants-in-Common and has Invested in Under an Operating
Lease:
Balance December 31, 1999 $ -- $ --
Acquisition 2,226,133 --
Depreciation expense -- 17,765
------------------ -----------------
Balance December 31, 2000 2,226,133 17,765
Depreciation expense -- 42,634
------------------ -----------------
Balance, December 31, 2001 $ 2,226,133 $ 60,399
================== =================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2001, the aggregate cost of the Properties owned by
the Partnership and its consolidated joint venture, and the
unconsolidated joint ventures (including the Properties held as
tenants-in-common) for federal income tax purposes was $16,104,595 and
$22,942,477, respectively. All of the leases are treated as operating
leases for federal income tax purposes.
(d) The portion of the lease relating to the building has been recorded as
a direct financing lease. The cost of the building has been included in
the net investment in direct financing leases; therefore, depreciation
is not applicable.
(e) The lease for the land and building has been recorded as a direct
financing lease. The cost of the land and building has been included in
net investment in direct financing leases; therefore, depreciation is
not applicable.
(f) Certain components of the lease relating to land and building have been
recorded as a direct financing lease. Accordingly, costs relating to
these components of this lease are not shown.
(g) The building portion of this Property is owned by the tenant;
therefore, depreciation is not applicable.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - LOANS ON REAL ESTATE
December 31, 2001
Principal
Amount of
Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages(2) or Interest
- ------------------ --------- ----------------- ----------- ---------- ------------- -------------- -------------
Church's-
Daytona Beach,
Florida 12.34% November 2004 (1) $ -- $ 103,581 $ 103,581 $ --
---------- ------------- -------------- -------------
Total $ -- $ 103,581 $ 103,581 $ --
========== ============= ============== =============
(1) Monthly payments of interest only at an annual rate of 12.34%, with a
balloon payment at maturity of $103,581.
(2) The tax carrying value of the note is approximately $103,581.
(3) The changes in the carrying amounts are summarized as follows:
2001 2000 1999
------------------ --------------- ---------------
Balance at beginning of period $ 994,593 $ 994,408 $ 1,241,056
New promissory note 103,581 -- --
Interest earned 9,243 113,379 127,054
Collection of principal and interest (1,125,696 ) (114,341 ) (374,837 )
Recognition of deferred gain on sale
of land and building 122,996 1,147 1,135
------------------ --------------- ---------------
Balance at end of period $ 104,717 $ 994,593 $ 994,408
================== =============== ===============