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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24095
CNL INCOME FUND XVIII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3295394
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801-3336
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No X Aggregate market value of
the voting stock held by nonaffiliates of the registrant: The registrant
registered an offering of 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 $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund XVIII, Ltd. (the "Registrant" or the "Partnership") is
a limited partnership which was organized pursuant to the laws of the State of
Florida on February 10, 1995. 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 September 20, 1996, the
Partnership offered for sale up to $35,000,000 of limited partnership interests
(the "Units") (3,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
August 11, 1995. The offering terminated on February 6, 1998, at which date the
maximum offering proceeds of $35,000,000 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, family-style and casual dining
restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership
from its offering of Units, after deduction of organizational and offering
expenses, totalled $30,810,000 and were used to acquire 24 Properties (which
included one Property owned by a joint venture in which the Partnership is a
co-venturer) and to pay acquisition fees and certain acquisition expenses.
As of December 31, 2000, the Partnership owned 22 Properties directly
and three Properties indirectly through joint venture or tenancy in common
arrangements. In January 2001, the Partnership sold a portion of its interest in
TGIF Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., a Florida limited
partnership and an affiliate of the General Partners, for approximately
$500,000. The Partnership used the net sales proceeds to pay liabilities of the
Partnership and to meet the Partnership's working capital needs. During 2001,
the Partnership sold its Properties in Timonium, Maryland and Henderson, Nevada
and reinvested the majority of these net sales proceeds in a Property in Denver,
Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida
limited partnership and an affiliate of the General Partners. In addition, in
December 2001, the Partnership sold its Property in Santa Rosa, California. In
January 2002 the Partnership reinvested a portion of the net sales proceeds from
the sale of the Property in Santa Rosa, California in a Property in Houston,
Texas and in a Property in Austin, Texas, as tenants-in-common, with CNL Income
Fund X, Ltd., a Florida limited partnership and an affiliate of the General
Partners. During 2002, the Partnership sold its two Properties in San Antonio,
Texas and its Property in Raleigh, North Carolina and reinvested the majority of
the net sales proceeds from the sale of the two San Antonio Properties in
another Property in San Antonio, Texas. In June 2003, the Partnership sold its
Property in Destin, Florida and used the proceeds to pay liabilities of the
Partnership, including distributions.
As of December 31, 2003, the Partnership owned 17 Properties directly
and five Properties indirectly through joint venture or tenancy in common
arrangements. The 17 Properties include one Property consisting of land only. In
general, the Partnership leases the Properties on a triple-net basis with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income taxes. Certain lessees 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.
Leases
The leases of the Properties provide for initial terms ranging from 15
to 20 years (the average being 19 years) and expire between 2012 and 2020. The
leases are generally on a triple-net basis, with the lessee responsible for all
repairs and maintenance, property taxes, insurance and utilities. The leases
provide for minimum base annual rental payments (payable in equal monthly
installments) ranging from approximately $58,400 to $259,900. The majority of
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, the majority of the leases provide that, commencing in
specified lease years (generally the sixth lease year), the annual base rent
required under the terms of the lease will increase.
Generally, the leases provide for two to five successive five-year
renewal options subject to the same terms and conditions as the initial lease.
Lessees of 19 of the Partnership's 22 Properties also have been granted options
to purchase the Properties after a specified portion of the lease term has
elapsed. The option purchase price is equal to the Partnership's original cost
of the Property (including acquisition costs), plus a specified percentage of
the Property's fair market value at the time the purchase option is exercised,
whichever is greater. Fair market value will be determined through an appraisal
by an independent appraisal firm.
The leases generally provide that, in the event the Partnership wishes
to sell the Properties, the Partnership first must offer the lessees the right
to purchase the Properties on the same terms and conditions, and for the same
price, as any offer which the Partnership has received for the sale of the
Properties.
In October 2003, Chevy's, Inc., a tenant of one of the Partnership's
Properties, filed for Chapter 11 bankruptcy protection. The rental revenues from
this lease represented more than 10% of the Partnership's total rental revenues,
as described below. As of March 12, 2004, Chevy's, Inc. had neither rejected nor
affirmed the lease related to this Property. The lost revenues that would result
if the lease were to be rejected would have a material adverse effect on the
results of operations of the Partnership if the Partnership were not able to
re-lease or sell the Property in a timely manner.
Effective September 2003, the lease for the Property in Stow, Ohio was
amended to provide a rent deferral for two years equal to 50% of monthly rent.
Interest only payments are due in quarterly installments at a rate of seven
percent per annum for the first 12 months and at a rate of ten percent per annum
for the next 12 months, at which time, all accrued and unpaid interest and
principal amounts are due. All other lease terms remained unchanged. As of March
12, 2004, the Partnership has continued to receive the reduced rental payments
relating to the Property. The General Partners do not believe that the rent
deferrals will have a material adverse effect on the results of operations of
the Partnership.
In February 2004, American Hospitality Concepts, Inc., the parent
company of Ground Round, Inc., filed for Chapter 11 bankruptcy protection.
Ground Round, Inc. leases one Property from the Partnership. As of March 12,
2004, Ground Round, Inc. had neither rejected nor affirmed the lease related to
this Property. The lost revenues that would result if the lease were to be
rejected would have an adverse effect on the results of operations of the
Partnership if the Partnership is not able to re-lease or sell the Property in a
timely manner.
In March 2004, the Partnership entered into an agreement to provide
temporary and partial rent relief to a tenant who is experiencing liquidity
difficulties. The Partnership anticipates lowering rent over the next twelve
months on the one lease the tenant has with the Partnership will provide the
necessary relief to the tenant. Rental payment terms go back to the original
terms starting with the thirteenth month. The General Partners do not believe
that this temporary decline in cash flows will have a material adverse effect on
the operating results of the Partnership.
Major Tenants
During 2003, five lessees of the Partnership, (i) Golden Corral
Corporation, (ii) S&A Properties and Steak and Ale of Colorado, Inc. (under
common control of Metromedia Restaurant Group, hereinafter referred to as
"Metromedia"), (iii) Jack in the Box Inc., and Jack in the Box Eastern Division
L.P. (affiliated under common control of Jack in the Box Inc.) (hereinafter
referred to as "Jack in the Box Inc."), (iv) Carrols Corporation and Texas Taco
Cabana, LP (which are affiliated entities under common control) (hereinafter
referred to as Carrols Corp.), and (v) Chevy's, Inc., each contributed more than
ten percent of total rental revenues (including the Partnership's share of total
rental revenues from joint ventures and Properties held as tenants-in-common
with affiliates). As of December 31, 2003, Golden Corral Corporation was the
lessee relating to three leases, Metromedia was the lessee relating to two
leases, Carrols Corp. was the lessee relating to five leases, Jack in the Box
Inc. was the lessee relating to three leases, and Chevy's Inc. was the lessee
relating to one lease. It is anticipated that based on the minimum rental
payments required by the leases, these five lessees will each continue to
contribute more than ten percent of total rental revenues (including the
Partnership's share of total rental revenues from joint ventures and Properties
held as tenants-in-common with affiliates) in 2004. In addition, four Restaurant
Chains, Golden Corral Buffet and Grill ("Golden Corral"), Bennigan's, Jack in
the Box, and Chevy's, each accounted for more than ten percent of total rental
revenues (including the Partnership's share of total rental revenues from joint
ventures and Properties held as tenants-in-common with affiliates) during 2003.
In 2004, it is anticipated that these four Restaurant Chains will each
contribute more than ten percent of total rental revenues (including the
Partnership's share of total rental revenues from joint ventures and Properties
held as tenants-in-common with affiliates) to which the Partnership is entitled
under the terms of the leases. Any failure of such lessees or Restaurant Chains
will materially adversely affect the Partnership's operating results if the
Partnership is not able to re-lease or sell the Properties in a timely manner.
As of December 31, 2003, no single tenant or group of affiliated tenants leased
Properties with an aggregate carrying value in excess of 20% of the total assets
of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
Columbus Joint Venture 1998 39.93 % CNL Income Fund XII, Ltd. CNL Columbus, OH
Income Fund XVI, Ltd.
CNL Portsmouth Joint 1999 57.20 % CNL Income Fund XI, Ltd. Portsmouth, VA
Venture
TGIF Pittsburgh Joint 2000 19.78% CNL Income Fund VII, Ltd. CNL Homestead, PA
Venture Income Fund XV, Ltd. CNL
Income Fund XVI, Ltd.
CNL Income Fund VIII, Ltd., 2001 80.70% CNL Income Fund VIII, Ltd. Denver, CO
and CNL Income Fund
XVIII, Ltd., Tenants in
Common
CNL Income Fund X, Ltd., and 2002 18.35% CNL Income Fund X, Ltd. Austin, TX
CNL Income Fund XVIII,
Ltd., Tenants in Common
Each of the joint ventures or tenancies in common was formed to hold
one Property. Each CNL Income Fund is an affiliate of the General Partners and
is a limited partnership organized pursuant to the laws of the state of Florida.
The Partnership shares management control equally with the affiliates of the
General Partners.
The joint venture and tenancy in common arrangements provide for the
Partnership and its partners to share in all costs and benefits in proportion to
each partner's percentage interest in the entity or the Property. The
Partnership and its partners are also jointly and severally liable for all
debts, obligations and other liabilities of the joint venture or tenancy in
common. Net cash flow from operations is distributed to each joint venture or
tenancy in common partner in accordance with its respective percentage interest
in the entity or the Property.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer 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 its joint venture partner to dissolve the joint
venture. Any liquidation proceeds, after paying joint venture debts and
liabilities and funding reserves for contingent liabilities, will be distributed
first to the joint venture partners with positive capital account balances in
proportion to such balances until such balances equal zero, and thereafter in
proportion to each joint venture partner's percentage interest in the joint
venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partner, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
RAI Restaurants, Inc. (the "Advisor"), an affiliate of the General
Partners, provides certain services relating to management of the Partnership
and its Properties pursuant to a management agreement with the Partnership.
Under this agreement, the Advisor is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices, and providing
information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor an
annual fee of one 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, but not in
excess of competitive fees for comparable services.
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.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
Competition
The fast-food, family-style and casual dining restaurant business is
characterized by intense competition. The restaurants on the Partnership's
Properties compete with independently owned restaurants, restaurants which are
part of local or regional chains, and restaurants in other well-known national
chains, including those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM perform certain services for the
Partnership. In addition, the General Partners have available to them the
resources and expertise of the officers and employees of CNL Financial Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 2003, the Partnership owned 22 Properties. Of the 22
Properties, 17 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and two are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement.
Description of Properties
Land. As of December 31, 2003, the Partnership's Property sites ranged
from approximately 24,400 to 148,500 square feet depending upon building size
and local demographic factors. Sites purchased by the Partnership are in
locations zoned for commercial use which have been reviewed for traffic patterns
and volume.
The following table lists the Properties owned by the Partnership,
either directly or indirectly though joint venture or tenancy in common
arrangements as of December 31, 2003 by state.
State Number of Properties
Arizona 1
California 1
Colorado 1
Florida 1
Illinois 1
Kentucky 1
Minnesota 1
New York 1
North Carolina 2
Ohio 2
Pennsylvania 1
Tennessee 1
Texas 7
Virginia 1
--------------
TOTAL PROPERTIES 22
==============
Buildings. Each of the Properties includes a building that is one of a
Restaurant Chain's approved designs. The buildings generally are rectangular and
constructed from various combinations of stucco, steel, wood, brick and tile.
Building sizes range from approximately 2,100 to 9,700 square feet. All
buildings on Properties acquired by the Partnership are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 2003, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using a depreciable life of 40 years
for federal income tax purposes.
As of December 31, 2003, the aggregate cost of the Properties owned by
the Partnership and joint ventures (including the Properties held as
tenants-in-common) for federal income tax purposes was $20,136,177 and
$7,337,654, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly though joint venture or tenancy in common
arrangements as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 2
Bennigan's 2
Burger King 1
Chevy's Fresh Mex 1
Golden Corral 3
Ground Round 1
IHOP 1
Jack in the Box 3
NI's International Buffet 1
Taco Bell 1
Taco Cabana 3
T.G.I. Friday's 1
Wendy's 1
Other 1
--------------
TOTAL PROPERTIES 22
==============
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of
Restaurant Chains. The leases are generally on a long-term "triple net" basis,
meaning that the tenant is responsible for repairs, maintenance, property taxes,
utilities and insurance.
The following is a schedule of the average rent per Property and
occupancy rate for each of the years ended December 31:
2003 2002 2001 2000 1999
------------- ------------- --------------- -------------- -------------
Rental Revenues (1)(2) $ 2,498,961 $ 2,653,429 $ 2,564,402 $ 2,888,408 $ 3,141,240
Properties (2) 21 22 19 20 23
Average rent per
property $ 118,998 $ 120,610 $ 134,969 $ 144,420 $ 136,576
Occupancy rate 95% 96% 83% 80% 96%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
(2) Excludes Properties that were vacant at December 31, and did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2003 for the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2003 -- $ -- --
2004 -- -- --
2005 -- -- --
2006 -- -- --
2007 -- -- --
2008 -- -- --
2009 -- -- --
2010 -- -- --
2011 -- -- --
2012 4 762,097 28.70%
Thereafter 17 1,892,852 71.30%
---------- ------------- -------------
Total (1) 21 $ 2,654,949 100.00%
========== ============= =============
(1) Excludes one Property which was vacant at December 31, 2003.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants, as of December 31, 2003 (See Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Description of Leases.
Golden Corral Corporation leases three Golden Corral restaurants. The
initial term of each lease is 15 years (expiring in 2012) and the average
minimum base annual rent is approximately $164,400 (ranging from approximately
$156,700 to $178,200).
Metromedia leases two Bennigan's restaurants. The initial term of one
lease is 18 years (expiring in 2019) and the initial term of the other lease is
20 years (expiring in 2018). The average minimum base annual rent is
approximately $218,400 (ranging from approximately $200,200 to $236,600).
Carrols Corp. leases one Burger King restaurant and three Taco Cabana
restaurants. The initial term of each lease is 20 years (expiring between 2016
and 2020) and the average minimum base annual rent is approximately $101,800
(ranging from approximately $92,100 to $114,000).
Jack in the Box Inc. leases three Jack in the Box restaurants. The
initial term of each lease is 18 years (expiring in 2015) and the average
minimum base annual rent is approximately $122,100 (ranging from approximately
$84,100 to $142,800).
Chevy's, Inc. leases one Chevy's restaurant. The initial term of the
lease is 15 years (expiring in 2012) and the minimum base annual rent is
approximately $243,600. In October 2003, Chevy's, Inc. filed for bankruptcy, as
described above.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of
the Partnership, nor any of their respective Properties is party to, or subject
to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 12, 2004, there were 1,553 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. During 2003, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. The
price paid for any Unit transferred pursuant to the Plan through December 31,
2003 range from $8.57 to $9.50 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 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002(1)
--------------------------------------- ---------------------------------------------
High Low Average High Low Average
---------- ----------- ------------- ------------- ---------- --------------
First Quarter $ 7.50 $ 7.50 $ 7.50 $ 6.57 $ 6.00 $ 6.36
Second Quarter 7.44 7.15 7.30 (2 ) (2 ) (2)
Third Quarter 7.78 7.78 7.78 6.43 6.43 6.43
Fourth Quarter (2 ) (2 ) (2 ) 7.90 6.56 7.17
(1) A total of 11,050 and 5,986 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2003 and 2002,
respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the Plan.
The capital contribution per Unit was $10. 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, 2003 and 2002, the Partnership
declared cash distributions of $2,800,000 to the Limited Partners. Distributions
of $700,000 were declared at the close of each of the Partnership's calendar
quarters during 2003 and 2002, to the Limited Partners. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive such distributions on this basis. No amounts distributed to the Limited
Partners for the years ended December 31, 2003 and 2002, are required to be or
have been treated by the Partnership as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. No distributions have been made to the General Partners to date.
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. If the General Partners do not elect to
make additional capital contributions or loans to the Partnership, the
Partnership may consider lowering the distribution rate.
(b) Not applicable.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the financial statements and related notes in Item 8. hereof.
2003 2002 2001 2000 1999
------------- ------------- -------------- --------------- -------------
Year Ended December 31:
Continuing Operations (5):
Revenues $2,148,332 $2,124,730 $2,319,468 $ 2,465,290 $2,745,279
Equity earnings of
unconsolidated joint
ventures 308,312 308,632 197,013 112,863 61,656
Income from continuing
operations (1) (2) 1,844,417 600,465 1,454,872 1,115,165 2,191,377
Discontinued Operations (5):
Revenues 82,119 164,302 164,802 442,972 385,436
Income (loss) from and gain
on disposal of
discontinued
operations (3) (4) 349,813 (223,395 ) (286,107 ) 2,032 323,979
Net income 2,194,230 377,070 1,168,765 1,117,197 2,515,356
Income (loss) per unit:
Continuing operations $ 0.53 $ 0.17 $ 0.42 $ 0.32 $ 0.63
Discontinued operations 0.10 (0.06 ) (0.09 ) -- 0.09
------------- ------------- -------------- --------------- -------------
$ 0.63 $ 0.11 $ 0.33 $ 0.32 $ 0.72
============= ============= ============== =============== =============
Cash distributions declared $2,800,000 $2,800,000 $2,800,000 $ 2,800,000 $2,799,998
Cash distributions declared
per unit: 0.80 0.80 0.80 0.80 0.80
At December 31:
Total assets $24,472,487 $25,021,532 $27,511,695 $ 29,112,352 $30,866,006
Total partners' capital 23,641,117 24,246,887 26,669,817 28,301,052 29,983,855
(1) Income from continuing operations includes $1,052,735, $321,239, and
$635,615, for the years ended December 31, 2002, 2001, and 2000,
respectively, from provisions for write-down of assets.
(2) Income from continuing operations includes gain on sale of assets of
$429,072 and $46,300 for the years ended December 31, 2001 and 1999,
respectively, and a loss on sale of assets of $25,694 for the year
ended December 31, 2002. Income from continuing operations includes a
termination refund to the tenant of $84,873 for the year ended December
31, 2000.
(3) Income (loss) from and gain on disposal of discontinued operations
includes provisions for write-down of assets of $322,472, $387,138, and
$357,563 for the years ended December 31, 2002, 2001, and 2000,
respectively.
(4) Income (loss) from and gain on disposal of discontinued operations
includes gain on sale of $273,876 for the year ended December 31, 2003.
(5) Certain items in the prior years' financial data have been reclassified
to conform to the 2003 presentation. This reclassification had no
effect on net income. The results of operations relating to Properties
that were identified for sale as of December 31, 2001 but sold
subsequently are reported as continuing operations. The results of
operations relating to Properties that were either identified for sale
and disposed of subsequent to January 1, 2002 or were classified as
held for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on February 10, 1995, to acquire for
cash, either directly or through joint venture of tenancy in common
arrangements, both newly constructed and existing restaurant Properties, as well
as land upon which restaurants were to be constructed, which are leased
primarily to operators of Restaurant Chains. The leases are generally triple-net
leases, with the lessees generally responsible for all repairs and maintenance,
property taxes, insurance and utilities. The leases of the Properties provide
for minimum base annual rental payments (payable in monthly installments)
ranging from approximately $58,400 to $259,900. The majority of the leases
provide for percentage rent based on sales in excess of a specified amount. In
addition, the majority of the leases provide that, commencing in specified lease
years (generally the sixth lease year), the annual base rent required under the
terms of the lease will increase. As of December 31, 2003, the Partnership owned
17 Properties directly and five Properties indirectly through joint venture or
tenancy in common arrangements. As of December 31, 2002, the Partnership owned
18 Properties directly and five Properties indirectly through joint venture or
tenancy in common arrangements. As of December 31, 2001, the Partnership owned
19 Properties directly and four Properties indirectly through joint venture or
tenancy in common arrangements.
Capital Resources
Cash from operating activities was $2,275,423, $2,080,057, and
$1,684,911, for the years ended December 31, 2003, 2002, and 2001, respectively.
The increase in cash from operating activities during the year ended December
31, 2003, as compared to the previous year, was a result of changes in the
Partnership's working capital, such as the timing of transactions relating to
the collection of rents and the payment of expenses, and changes in income and
expenses, such as changes in rental revenues and changes in operating and
Property related expenses. The increase in cash from operating activities during
the year ended December 31, 2002, as compared to the previous year, was a result
of changes in income and expenses, such as changes in rental revenues and
changes in operating and Property related expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
In January 2001, the Partnership sold a portion of its interest in TGIF
Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., for approximately
$500,000. Because the Partnership sold 50% of its interest in TGIF Pittsburgh
Joint Venture at its then current carrying value, no gain or loss was
recognized. The Partnership has a remaining investment of approximately $501,500
in TGIF Pittsburgh Joint Venture representing a 19.78% interest in this joint
venture. The Partnership used the net sales proceeds to pay liabilities of the
Partnership and to meet the Partnership's working capital needs.
During 2001, the Partnership sold its Properties in Timonium, Maryland;
Henderson, Nevada; and Santa Rosa, California, each to a third party. The
Partnership received total net sales proceeds of approximately $3,791,400,
resulting in a net gain of approximately $429,100. In July 2001, the Partnership
reinvested the net sales proceeds from the sale of the Timonium and Henderson
Properties in a Property in Denver, Colorado, as tenants-in-common, with CNL
Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the
General Partners. The Partnership contributed approximately $1,766,400 for an
80.7% interest in the profits and losses of the Property. In January 2002, the
Partnership reinvested a portion of the net sales proceeds from the sale of the
Santa Rosa Property in a Property in Houston, Texas at an approximate cost of
$1,194,100 and reinvested approximately $205,700 of the remaining net sales
proceeds in a Property in Austin, Texas, as tenants-in-common with CNL Income
Fund X, Ltd., a Florida limited partnership and an affiliate of the General
Partners. The Partnership contributed approximately $205,700 for an 18.35%
interest in the profits and losses of the Property. The Partnership acquired the
Properties in Austin and Houston, Texas from CNL Funding 2001-A, LP, a Delaware
limited partnership and an affiliate of the General Partners. CNL Funding
2001-A, LP had purchased and temporarily held title to the Properties in order
to facilitate the acquisition of the Properties by the Partnership. The purchase
prices paid by the Partnership represented the costs incurred by CNL Funding
2001-A, LP to acquire the Properties.
During 2002, the Partnership sold its On the Border Property in San
Antonio, Texas and its Boston Market Properties in San Antonio, Texas and
Raleigh, North Carolina, each to a third party. As of December 31, 2001, the
Partnership had identified the On the Border Property for sale. The Partnership
received total net sales proceeds of approximately $1,565,725, resulting in a
loss on sale of assets of approximately $25,700 relating to the On the Border
Property in San Antonio, Texas. No gain or loss on disposal of discontinued
operations was recorded relating to the sale of the Property in Raleigh, North
Carolina because the Partnership had recorded provisions for write-down of
assets relating to this Property in previous years. In June 2002, the
Partnership reinvested the net sales proceeds from the sale of the Properties in
San Antonio, Texas in a Property in Houston, Texas at an approximate cost of
$896,500. The Partnership acquired this Property from CNL Funding 2001-A, LP.
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 costs incurred by CNL
Funding 2001-A, LP to acquire the Property.
During 2003, the Partnership sold its Property in Destin, Florida, to a
third party and received net sales proceeds of approximately $1,742,800,
resulting in a gain on disposal of discontinued operations of approximately
$273,900. In connection with the sale, the Partnership incurred a deferred,
subordinated real estate disposition fee of $54,000 which is payable to an
affiliate of the Partnership. Payment of the real estate disposition fee is
subordinated to the receipt by the Limited Partners of their aggregate 8%
Return, plus their invested capital contributions. The Partnership used a
portion of these net sales proceeds to pay liabilities of the Partnership,
including distributions to the Limited Partners.
In 2001, the Partnership entered into a promissory note with the
corporate General Partner for a loan in the amount of $75,000 in connection with
the operations of the Partnership. The loan was uncollateralized, non-interest
bearing and due on demand. As of December 31, 2001, the Partnership had repaid
the loan in full to the corporate General Partner. During the year ended
December 31, 2002, the Partnership entered into three promissory notes with the
corporate General Partner for loans in connection with the operations of the
Partnership. The loans totaled $875,000, were uncollateralized, non-interest
bearing and due on demand. As of December 31, 2002, the Partnership had repaid
these loans in full to the corporate General Partner. During the year ended
December 31, 2003, the Partnership entered into two promissory notes with the
corporate General Partner for loans in connection with the operations of the
Partnership. The loans totaled $650,000, were uncollateralized, non-interest
bearing and due on demand. As of December 31, 2003, the Partnership repaid the
loans in full to the corporate General Partner.
None of the Properties owned or to be acquired by the Partnership, or
the joint ventures in which the Partnership owns an interest, is or may be
encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners or under arrangements that
would make the Limited Partners liable to creditors of the Partnership. The
General Partners further have represented that they will use their reasonable
efforts to structure any borrowing so that it will not constitute "acquisition
indebtedness" for federal income tax purposes and also will limit the
Partnership's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its Properties. Affiliates of the General Partners from
time to time incur certain expenses on behalf of the Partnership for which the
Partnership reimburses the affiliates without interest.
At December 31, 2003, the Partnership had $1,647,730 in cash and cash
equivalents, as compared to $429,481 at December 31, 2002. At December 31, 2003,
these funds were held in demand deposit accounts at commercial banks. The
increase in cash was primarily a result of the Partnership holding sales
proceeds at December 31, 2003, relating to the sale of the Property in Destin,
Florida. As of December 31, 2003, the average interest rate earned on the rental
income deposited in demand deposit accounts at commercial banks was less than
one percent annually. The funds remaining at December 31, 2003, after the
payment of distributions and other liabilities will be used to meet the
Partnership's working capital needs.
In February 2004, American Hospitality Concepts, Inc., the parent
company of Ground Round, Inc., filed for Chapter 11 bankruptcy protection.
Ground Round, Inc. leases one Property from the Partnership. As of March 12,
2004, Ground Round, Inc. had neither rejected nor affirmed the lease related to
this Property. The lost revenues that would result if the lease were to be
rejected would have an adverse effect on the results of operations of the
Partnership if the Partnership is not able to re-lease or sell the Property in a
timely manner.
In March 2004, the Partnership entered into an agreement to provide
temporary and partial rent relief to a tenant who is experiencing liquidity
difficulties. The Partnership anticipates lowering rent over the next twelve
months on the one lease the tenant has with the Partnership will provide the
necessary relief to the tenant. Rental payment terms go back to the original
terms starting with the thirteenth month. The General Partners do not believe
that this temporary decline in cash flows will have a material adverse effect on
the operating results of the Partnership.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them generally 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 generate net cash
flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The General Partners have the right, but not the obligation, to make
additional capital contributions or loans if they deem it appropriate in
connection with the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because all of the leases for the Partnership's Properties
are generally on a triple-net basis, it is not anticipated that a permanent
reserve for maintenance and repairs is necessary 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 to cause the Partnership to maintain reserves if, in
their discretion, they determine such reserves are required to meet the
Partnership's working capital needs.
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 on current and anticipated future cash from operations,
loans from the corporate General Partner, and for the year ended December 31,
2003, the net sales proceeds from the sale of the Property in Destin, Florida,
the Partnership declared distributions to the Limited Partners of $2,800,000,
for each the years ended December 31, 2003, 2002, and 2001. This represents
distributions of $0.80 per Unit, for each of the years ended December 31, 2003,
2002, and 2001. No distributions were made to the General Partners for the years
ended December 31, 2003, 2002, and 2001. No amounts distributed or to be
distributed to the Limited Partners for the years ended December 31, 2003, 2002,
and 2001, are required to be or have been treated by the Partnership as a return
of capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis, although some Limited Partners, in accordance with their
election, receive monthly distributions, for an annual fee. If the General
Partners do not elect to make additional capital contributions or loans to the
Partnership, the Partnership may consider lowering the distribution rate.
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 accounts as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income during the years ended December 31,
2003, 2002, and 2001.
As of December 31, 2003 and 2002, the Partnership owed $10,833 and
$17,762, respectively, to related parties for operating expenses and accounting
and administrative services and management fees. As of March 12, 2004, the
Partnership had reimbursed the affiliates for these amounts. In addition, during
the year ended December 31, 2003, the Partnership incurred $54,000 in a real
estate disposition fee due to an affiliate, as a result of services provided in
connection with the sale of the Property in Destin, Florida, as described above.
The payment of this fee is deferred until the Limited Partners have received
their aggregate 8% Preferred Return plus their adjusted capital contributions.
Other liabilities, including distributions payable, were $766,537 at December
31, 2003, as compared to $756,883 at December 31, 2002. The General Partners
believe that the Partnership has sufficient cash on hand to meet its current
working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for using either the direct financing or the
operating 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.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted 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 requires the consent of all
partners on all key decisions affecting the operations of the underlying
Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the
decision to sell or commits to a plan to sell a Property within one year, its
operating results are reported as discontinued operations.
Results of Operations
Comparison of year ended December 31, 2003 to year ended December 31, 2002
Rental revenues from continuing operations were $2,116,081 for the year
ended December 31, 2003 as compared to $2,119,722 for the same period of 2002.
Rental revenues from continuing operations were slightly lower during the year
ended December 31, 2003, as compared to the same period of 2002, because the
Partnership stopped recording rental revenues relating to the Property in Stow,
Ohio when the tenant experienced financial difficulties during 2002. During
2003, the Partnership began receiving partial payments of past due rents and
recognized these amounts as revenue. In September 2003, the lease for this
Property was amended to provide a rent deferral for two years equal to 50% of
monthly rent. Interest only payments are due in quarterly installments at a rate
of seven percent per annum for the first 12 months and at a rate of ten percent
per annum for the next 12 months, at which time, all accrued and unpaid interest
and principal amounts are due. All other lease terms remained unchanged. As of
March 12, 2004, the Partnership has continued to receive the reduced rental
payments relating to the Property. The decrease in rental revenues from
continuing operations was partially offset by the rental revenues from a
Property acquired in June 2002.
During the years ended December 31, 2003 and 2002, the Partnership did
not record rental revenues relating to the Property in Minnetonka, Minnesota
because the tenant rejected the lease in 1998 in connection with the tenant's
bankruptcy proceedings. The lost revenues resulting from this Property will
continue to have an adverse effect on the cash from operations and results of
operations of the Partnership until the Partnership is able to resolve the
outstanding issues relating to the Property in Minnetonka, Minnesota.
The Partnership earned $13,600 in contingent rental income during the
year ended December 31, 2003 based on reported gross sales of the restaurants
with leases that require the payment of contingent rental income. No such
amounts were earned during the year ended December 31, 2002.
The Partnership earned $308,312 in income attributable to net income
earned by unconsolidated joint ventures during the year ended December 31, 2003,
as compared to $308,632 during the same period of 2002. These amounts remained
constant, because there were no changes in the leased Property portfolio owned
by the joint ventures and the tenancies in common.
During 2003, five lessees of the Partnership, Golden Corral
Corporation, Metromedia, Jack in the Box Inc., Carrols Corp., and Chevy's, Inc.,
each contributed more than ten percent of total rental revenues (including the
Partnership's share of total rental revenues from joint ventures and Properties
held as tenants-in-common with affiliates). As of December 31, 2003, Golden
Corral Corporation was the lessee relating to three leases, Metromedia was the
lessee relating to two leases, Carrols Corp. was the lessee relating to five
leases, Jack in the Box Inc. was the lessee relating to three leases, and
Chevy's Inc. was the lessee relating to one lease. It is anticipated that based
on the minimum rental payments required by the leases, these five lessees will
each continue to contribute more than ten percent of total rental revenues
(including the Partnership's share of total rental revenues from joint ventures
and Properties held as tenants-in-common with affiliates) in 2004. In addition,
four Restaurant Chains, Golden Corral, Bennigan's, Jack in the Box, and Chevy's,
each accounted for more than ten percent of total rental revenues (including the
Partnership's share of total rental revenues from joint ventures and Properties
held as tenants-in-common with affiliates) during 2003. In 2004, it is
anticipated that these four Restaurant Chains will each contribute more than ten
percent of total rental revenues (including the Partnership's share of total
rental revenues from joint ventures and Properties held as tenants-in-common
with affiliates) to which the Partnership is entitled under the terms of the
leases. Any failure of such lessees or Restaurant Chains will materially
adversely affect the Partnership's operating results if the Partnership is not
able to re-lease or sell the Properties in a timely manner.
During the year ended December 31, 2003, the Partnership earned $18,651
in interest and other income, as compared to $5,008 during the same period of
2002. Interest and other income was higher during 2003 because the Partnership
collected and recognized as income approximately $5,000 relating to a
right-of-way taking for a parcel of land on the San Antonio, Texas Property.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $612,227 for the year ended December
31, 2003 as compared to $1,807,203 for the same period of 2002. Operating
expenses were higher during 2002 because the Partnership recorded a provision
for write-down of assets of approximately $1,052,700 relating to the Property in
Stow, Ohio. The provision represented the difference between the net carrying
value of the Property and its estimated fair value. Operating expenses were
lower during 2003, due to a decrease in property related expenses resulting from
the sale of vacant Properties. During 2002, the Partnership incurred certain
operating expenses relating to the On the Border Property in San Antonio, Texas
because the Partnership owned the building and leased the land. In 2000, the
tenant of this Property vacated the Property and ceased restaurant operations.
In accordance with an agreement executed in conjunction with the execution of
the initial lease, the ground lessor, the tenant, and the Partnership agreed
that the Partnership would be provided certain rights to help protect its
interest in the building in the event of a default by the tenant under the terms
of the initial lease. As a result of the default by the tenant, and in order to
preserve its interest in the building, during the year ended December 31, 2002,
the Partnership incurred approximately $46,200 in rent expense relating to the
ground lease of the Property. In addition, during 2003 and 2002, the Partnership
incurred property related expenses such as insurance, repairs and maintenance,
legal fees and real estate taxes resulting from the vacant Properties. During
2002, the Partnership sold three of its vacant Properties and did not incur
additional expenses relating to these Properties once they were sold. The
Partnership will continue to incur these expenses relating to the Property in
Minnetonka, Minnesota until the Partnership is able to resolve the outstanding
issues relating to the Property.
In addition, operating expenses were lower during the year ended
December 31, 2003 due to a decrease in the costs incurred for administrative
expenses for servicing the Partnership and its Properties. The decrease was
partially offset by an increase in depreciation expense related to the
acquisition of a Property in June 2002.
As a result of the sale of the On the Border Property in San Antonio,
Texas, the Partnership recognized a loss of approximately $25,700, during the
year ended December 31, 2002. Because this Property was identified for sale
prior to the January 2002 implementation of Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", the results of operations relating to this Property were included as
Income from Continuing Operations in the accompanying financial statements.
During the year ended December 31, 2002, the Partnership identified for
sale two Properties that were classified as Discontinued Operations in the
accompanying financial statements. Both Properties were vacant prior to 2002. In
March 2003, the Partnership identified for sale its Property in Destin, Florida.
The Partnership recognized a net rental loss (property related expenses and
provision for write-down of assets in excess of rental revenues) of $223,395
during the year ended December 31, 2002, relating to these Properties. The net
rental loss was primarily the result of the Partnership recording a provision
for write-down of assets of approximately $322,500 in anticipation of the August
2002 sale of the Property in Raleigh, North Carolina. The tenant of this
Property terminated its lease and vacated the Property in 2000. The provision
represented the difference between the net carrying value of the Property and
its estimated fair value. The Partnership sold the Boston Market Property in San
Antonio, Texas in May 2002. Because the Partnership had recorded provisions for
write-down of assets in previous years, no gain or loss was recorded during 2002
relating to the sale of this Property. In June 2003, the Partnership sold the
Property in Destin, Florida and recorded a gain on disposal of discontinued
operations of approximately $273,900. The Partnership recognized net rental
income (rental revenues less property related expenses) of $75,937 during the
year ended December 31, 2003, relating to this Property.
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Rental revenues from continuing operations were $2,119,722 for the year
ended December 31, 2002 as compared to $2,301,212 for the same period of 2001.
Rental revenues from continuing operations were lower during 2002 partially
because the Partnership sold two Properties during 2001. In July 2001, the
Partnership reinvested the net sales proceeds from one of the sales in a
Property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII,
Ltd. In January 2002, the Partnership reinvested a portion of the net sales
proceeds from the other sale in a Property in Austin, Texas, as
tenants-in-common, with CNL Income Fund X, Ltd. Rental revenues from continuing
operations are expected to remain at reduced amounts while equity in earnings of
joint ventures is expected to increase because the Partnership reinvested the
majority of these net sales proceeds in two Properties with affiliates of the
General Partners, as tenants-in-common.
The Partnership used the remaining net sales proceeds along with the
net sales proceeds from the 2002 sales of the Properties in San Antonio, Texas
to acquire two Properties in Texas, one in San Antonio and the other in Houston.
The decrease in rental revenues from continuing operations during 2002 was
partially offset by the rental revenues from the two Properties acquired during
2002.
Rental revenues from continuing operations remained at reduced amounts
during 2002 and 2001, because the Partnership stopped recording rental revenues
relating to the Property in Stow, Ohio and stopped recording rental revenues
relating to the Property in Minnetonka, Minnesota, as described above.
The Partnership earned $308,632 in income attributable to net income
earned by unconsolidated joint ventures during the year ended December 31, 2002,
as compared to $197,013 for the same period of 2001. Net income earned by
unconsolidated joint ventures was higher during 2002 because in July 2001 and
January 2002, the Partnership reinvested the majority of the net sales proceeds
from the 2001 sales of the Properties in Henderson, Nevada and Santa Rosa,
California, in a Property in Denver, Colorado and a Property in Austin, Texas,
respectively, each with an affiliate of the General Partners, as
tenants-in-common.
During the year ended December 31, 2002, the Partnership earned $5,008
in interest and other income, as compared to $18,256 during the same period of
2001. Interest and other income was lower during 2002 because the Partnership
reinvested sales proceeds during 2002 that had been held in interest bearing
bank accounts in 2001.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $1,807,203 for the year ended December
31, 2002 as compared to $1,490,681 for the same period of 2001. Operating
expenses were higher during 2002 because the Partnership recorded a provision
for write-down of assets of approximately $1,052,700 relating to the Property in
Stow, Ohio. The provision represented the difference between the net carrying
value of the Property and its estimated fair value.
The increase in operating expenses during 2002 was partially offset by
lower Property expenses as a result of fewer vacant Properties. During 2001, the
Partnership incurred approximately $85,400 pursuant to a judgment entered
against the Partnership in a lawsuit relating to the Property in Minnetonka,
Minnesota. The General Partners appealed the judgment but lost and are
considering their options. In addition, during 2001, the Partnership incurred
property expenses such as insurance, repairs and maintenance, legal fees and
real estate taxes relating to other vacant Properties. Between June 2001 and May
2002, the Partnership sold three of the vacant Properties and did not incur any
additional expenses relating to these Properties after the sales occurred.
However, the Partnership will continue to incur these expenses relating to the
vacant Property in Minnetonka, Minnesota until the outstanding legal issues are
resolved.
During 2002 and 2001, the Partnership incurred certain operating
expenses relating to the On the Border Property in San Antonio, as described
above. During 2002 and 2001, the Partnership incurred approximately $46,200 and
$135,900, respectively, in rent expense relating to the ground lease of the
Property. In addition, during 2001, the Partnership recorded a provision for
write-down of assets of approximately $321,200 relating to this Property. The
provision represented the difference between the net carrying value of the
Property and its estimated fair value. In May 2002, the Partnership sold this
Property, and recorded an additional loss of approximately $25,700. This
Property had been identified for sale as of December 31, 2001.
The increase in operating expenses during 2002 was also partially
offset by a decrease in the costs incurred for administrative expenses for
servicing the Partnership and its Properties and a decrease in state tax
expenses.
During 2001, the Partnership recognized total gains of approximately
$429,100 as a result of the sales of three Properties. During 2002, the
Partnership recognized a loss of approximately $25,700 relating to the sale of
the On the Border Property in San Antonio, Texas. Because this Property was
identified for sale prior to the January 2002 implementation of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", the results of operations relating to this
Property were included as Income from Continuing Operations in the accompanying
financial statements.
During the year ended December 31, 2002, the Partnership identified for
sale two Properties that were classified as Discontinued Operations in the
accompanying financial statements. Both Properties were vacant prior to 2002. In
addition, in March 2003, the Partnership identified for sale its Property in
Destin, Florida. The Partnership recognized a net rental loss (Property related
expenses and provision for write-down of assets in excess of rental revenues) of
$223,395 and $286,107 during the years ended December 31, 2002 and 2001,
respectively, relating to these Properties. The net rental loss during 2002 was
primarily the result of the Partnership recording a provision for write-down of
assets of approximately $322,500 in anticipation of the August 2002 sale of the
Property in Raleigh, North Carolina. The tenant of this Property terminated its
lease and vacated the Property in 2000. The net rental loss during 2001 was
primarily the result of the Partnership recording a provision for write-down of
assets of approximately $387,100 relating to the Boston Market Property in San
Antonio, Texas. The tenant of this Property filed for bankruptcy and rejected
the lease related to this Property in 2000. The provisions represented the
difference between the net carrying value of each Property and its estimated
fair value. The Partnership sold the Boston Market Property in San Antonio,
Texas in May 2002. Because the Partnership had recorded provisions for
write-down of assets in previous years, no gain or loss was recorded during 2002
relating to the sale of this Property. In June 2003, the Partnership sold the
Property in Destin, Florida, as described above.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases are on a triple-net basis and contain
provisions that management believes will mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based on certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Inflation, overall, has had a minimal effect on the results of operations of the
Partnership. Continued inflation may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND XVIII, 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 25-37
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XVIII, 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 XVIII, Ltd. (a Florida
limited partnership) at December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedules listed in the index appearing under item 15(a)(2) present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
------------------- ------------------
ASSETS
Real estate properties with operating leases, net $ 17,105,426 $ 17,453,524
Net investment in direct financing leases 2,025,517 2,064,258
Real estate held for sale -- 1,420,626
Investment in joint ventures 3,163,278 3,185,337
Cash and cash equivalents 1,647,730 429,481
Receivables, less allowance for doubtful accounts of
$260,198 and $104,228, respectively 18,003 945
Accrued rental income 502,127 456,857
Other assets 10,406 10,504
------------------- ------------------
$ 24,472,487 $ 25,021,532
=================== ==================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 4,941 $ 4,178
Real estate taxes payable 13,600 12,204
Distributions payable 700,000 700,000
Due to related parties 64,833 17,762
Rents paid in advance 43,687 35,840
Deferred rental income 4,309 4,661
------------------- ------------------
Total liabilities 831,370 774,645
Partners' capital 23,641,117 24,246,887
------------------- ------------------
$ 24,472,487 $ 25,021,532
=================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
------------------ --------------- ---------------
Revenues:
Rental income from operating leases $ 1,932,547 $ 1,899,302 $ 1,902,763
Earned income from direct financing leases 183,534 220,420 398,449
Contingent rental income 13,600 -- --
Interest and other income 18,651 5,008 18,256
------------------ --------------- ---------------
2,148,332 2,124,730 2,319,468
------------------ --------------- ---------------
Expenses:
General operating and administrative 174,183 205,786 271,529
Property related 52,744 171,374 520,560
Management fees to related party 25,335 25,379 24,943
State and other taxes 8,653 8,477 22,252
Depreciation and amortization 351,312 343,452 330,158
Provisions for write-down of assets -- 1,052,735 321,239
------------------ --------------- ---------------
612,227 1,807,203 1,490,681
------------------ --------------- ---------------
Income before gain (loss) on sale of assets
and equity in earnings of unconsolidated
joint ventures 1,536,105 317,527 828,787
Gain (loss) on sale of assets -- (25,694 ) 429,072
Equity in earnings of unconsolidated joint ventures 308,312 308,632 197,013
------------------ --------------- ---------------
Income from continuing operations 1,844,417 600,465 1,454,872
------------------ --------------- ---------------
Discontinued operations
Income (loss) from discontinued operations 75,937 (223,395 ) (286,107 )
Gain on disposal of discontinued operations 273,876 -- --
------------------ --------------- ---------------
349,813 (223,395 ) (286,107 )
------------------ --------------- ---------------
Net income $ 2,194,230 $ 377,070 $ 1,168,765
================== =============== ===============
Income (loss) per limited partner unit
Continuing operations $ 0.53 $ 0.17 $ 0.42
Discontinued operations 0.10 (0.06 ) (0.09 )
------------------ --------------- ---------------
$ 0.63 $ 0.11 $ 0.33
------------------ --------------- ---------------
Weighted average number of
limited partner units outstanding 3,500,000 3,500,000 3,500,000
================== =============== =================
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002 and 2001
General Partners Limited Partners
------------------------------------ -----------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
---------------- ----------------- ----------------- --------------- ---------------
Balance, December 31, 2000 $ 1,000 $ (6,319 ) $ 35,000,000 $ (9,626,493 ) $ 7,122,864
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,800,000 ) --
Net income -- -- -- -- 1,168,765
---------------- ----------------- ----------------- --------------- ---------------
Balance, December 31, 2001 1,000 (6,319 ) 35,000,000 (12,426,493 ) 8,291,629
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,800,000 ) --
Net income -- -- -- -- 377,070
---------------- ----------------- ----------------- --------------- ---------------
Balance, December 31, 2002 1,000 (6,319 ) 35,000,000 (15,226,493 ) 8,668,699
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,800,000 ) --
Net income -- -- -- -- 2,194,230
---------------- ----------------- ----------------- --------------- ---------------
Balance, December 31, 2003 $ 1,000 $ (6,319 ) $ 35,000,000 $ (18,026,493 ) $ 10,862,929
================ ================= ================= =============== ===============
See accompanying notes to financial statements.
- --------------------
Syndication
Costs Total
--------------- -------------
$ (4,190,000 ) $28,301,052
-- (2,800,000 )
-- 1,168,765
--------------- -------------
(4,190,000 ) 26,669,817
-- (2,800,000 )
-- 377,070
--------------- -------------
(4,190,000 ) 24,246,887
-- (2,800,000 )
-- 2,194,230
--------------- -------------
$ (4,190,000 ) $23,641,117
=============== =============
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
--------------- ---------------- ---------------
Cash Flows from Operating Activities:
Net income $ 2,194,230 $ 377,070 $ 1,168,765
--------------- ---------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 353,774 379,016 376,679
Amortization of investment in direct
financing leases 38,741 29,296 41,450
Amortization 3,216 3,221 3,220
Equity in earnings of unconsolidated joint
ventures net of distributions 18,843 46,210 6,425
Provision for write-down of assets -- 1,375,207 708,377
Loss (gain) on sale of assets (273,876 ) 25,694 (429,072 )
Decrease (increase) in receivables (17,058 ) 9,699 (11,003 )
Increase in accrued rental income (45,270 ) (104,347 ) (218,691 )
Decrease in other assets 98 6,225 6,983
Increase (decrease) in accounts payable
and accrued expenses and real
estate taxes payable 2,159 (88,803 ) 61,038
Decrease in due to related parties (6,929 ) (2,511 ) (32,908 )
Increase in rents paid in advance 7,847 24,399 3,967
Decrease in deferred rental income (352 ) (318 ) (319 )
--------------- ---------------- ---------------
Total adjustments 81,193 1,702,988 516,146
--------------- ---------------- ---------------
Net cash provided by operating activities 2,275,423 2,080,058 1,684,911
--------------- ---------------- ---------------
Cash Flows from Investing Activities:
Decrease (increase) in restricted cash -- 1,663,401 (1,663,401 )
Additions to real estate properties with
operating leases -- (2,090,604 ) --
Proceeds from sale of assets 1,742,826 1,565,681 4,291,443
Investment in joint ventures -- (215,191 ) (1,766,420 )
--------------- ---------------- ---------------
Net cash provided by investing activities 1,742,826 923,287 861,622
--------------- ---------------- ---------------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general partner 650,000 875,000 75,000
Repayment of loans from corporate general partner (650,000 ) (875,000 ) (75,000 )
Distributions to limited partners (2,800,000 ) (2,800,000 ) (2,800,000 )
--------------- ---------------- ---------------
Net cash used in financing activities (2,800,000 ) (2,800,000 ) (2,800,000 )
--------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,218,249 203,345 (253,467 )
Cash and cash equivalents at beginning of year 429,481 226,136 479,603
--------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 1,647,730 $ 429,481 $ 226,136
=============== ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
--------------- ---------------- ---------------
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fee incurred
and unpaid at the end of year $ 54,000 $ -- $ --
=============== ================ ===============
Distributions declared and unpaid at December 31 $ 700,000 $ 700,000 $ 700,000
=============== ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Organization and Nature of Business - CNL Income Fund XVIII, 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, family-style and casual dining 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 real estate properties at cost, including acquisition
and closing costs. Real estate properties are leased to 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. During
the years ended December 31, 2003, 2002, and 2001, tenants paid, or are
expected to pay, directly to real estate taxing authorities
approximately $367,900, $382,200, and $364,000, respectively, in
estimated real estate taxes in accordance with the terms of their
leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using the operating or
the direct financing methods.
Operating method - Real estate property 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 (including rental payments, if
any, required during the construction of a property) vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the lease
term commencing on the date the property is placed in service.
Direct financing method - Leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset). Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on the Partnership's net investment in
the leases. For the leases classified as direct financing
leases, the building portions of the property leases are
accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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. In contrast, deferred rental income represents the
aggregate amount of scheduled rental payments to date (including rental
payments due during construction and prior to the property being placed
in service) in excess of income recognized on a straight-line basis
over the lease term commencing on the date the property is placed in
service.
The leases have initial terms of 15 to 20 years and the majority of the
leases provide for minimum and contingent rentals. The lease options
generally allow the tenants to renew the leases for two to five
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.
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 or deferred 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 the fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is made to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership's investments in
Columbus Joint Venture, CNL Portsmouth Joint Venture and TGIF
Pittsburgh Joint Venture and the properties in Denver, Colorado and
Austin, Texas, for which each property is held as tenants-in-common,
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.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks may exceed federally insured levels;
however, the Partnership has not experienced any losses in such
accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
Rents Paid in Advance - Rents paid in advance by lessees for future
periods are deferred upon receipt and are recognized as revenues during
the period in which the rental income is earned. Rents paid in advance
include "interim rent" payments required to be paid under the terms of
certain leases for construction properties equal to a pre-determined
rate times the amount funded by the Partnership during the period
commencing with the effective date of the lease to the date minimum
annual rent becomes payable. Once minimum annual rent becomes payable,
the "interim rent" payments are amortized and recorded as income either
(i) over the lease term so as to produce a constant periodic rate of
return for leases accounted for using the direct financing method, or
(ii) over the lease term using the straight-line method for leases
accounted for using the operating method, whichever is applicable.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2003 presentation.
These reclassifications had no effect on total partners' capital, net
income or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. The assessment is based on the
carrying amount of the asset at the date it is tested for
recoverability. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds its estimated fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The General Partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
-------------------- ------------------
Land $ 8,681,837 $ 8,681,837
Buildings 10,360,737 10,360,737
-------------------- ------------------
19,042,574 19,042,574
Less accumulated depreciation (1,937,148 ) (1,589,050 )
-------------------- ------------------
$ 17,105,426 $ 17,453,524
==================== ==================
In January 2002, the Partnership reinvested a portion of the sales
proceeds from the 2001 sale of the property in Santa Rosa, California
in a property in Austin, Texas, with CNL Income Fund X, Ltd., an
affiliate of the general partners. The remaining net sales proceeds
from the Santa Rosa property were used in January 2002 to acquire a
property in Houston, Texas at an approximate cost of $1,194,100. The
Partnership acquired these two properties from CNL Funding 2001-A, LP,
an affiliate of the general partners.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases - Continued
In May 2002, the Partnership sold the On the Border property in San
Antonio, Texas to a third party and received net sales proceeds of
approximately $470,300, resulting in a loss of approximately $25,700.
The Partnership has recorded provisions for write-down of assets
relating to this property in previous years. As of December 31, 2001,
the Partnership had identified this property for sale. In June 2002,
the Partnership reinvested the net sales proceeds from this sale, along
with the proceeds from the sale of the Boston Market property in San
Antonio, Texas, in another property in San Antonio, Texas, at an
approximate cost of $896,500. The Partnership acquired this property
from CNL Funding 2001-A, LP.
During the year ended December 31, 2002, the Partnership recorded a
provision for write-down of assets of approximately $428,200 relating
to the property in Stow, Ohio. The provision represented the difference
between the net carrying value of the property and its estimated fair
value.
The following is a schedule of the future minimum lease payments to be
received on the noncancellable operating leases at December 31, 2003:
2004 $ 1,937,147
2005 1,937,147
2006 1,937,147
2007 1,983,520
2008 2,034,538
Thereafter 13,943,364
----------------
$ 23,772,863
================
3. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct
financing leases at December 31:
2003 2002
----------------- -----------------
Minimum lease payments
receivable $ 3,838,016 $ 4,152,883
Estimated residual values 1,054,369 1,054,369
Less unearned income (2,866,868 ) (3,142,994 )
----------------- -----------------
Net investment in direct
financing leases $ 2,025,517 $ 2,064,258
================= =================
During the year ended December 31, 2002, the Partnership recorded a
provision for write-down of assets of approximately $624,600 relating
to the property in Stow, Ohio. The provision represented the difference
between the net carrying value of the property and its estimated fair
value.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Net Investment in Direct Financing Leases - Continued
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2003:
2004 $ 314,868
2005 314,868
2006 314,868
2007 321,472
2008 330,717
Thereafter 2,241,223
----------------
$ 3,838,016
================
4. Investment in Joint Ventures
The Partnership has a 39.93%, a 57.2%, and a 19.78% interest in the
profits and losses of Columbus Joint Venture, CNL Portsmouth Joint
Venture, and TGIF Pittsburgh Joint Venture, respectively. In addition,
the Partnership has an 80.7% interest in a property in Denver,
Colorado, as tenants-in-common. The remaining interests in these joint
ventures and the property held as tenants in common are held by
affiliates of the Partnership which have the same general partners.
In January 2002, the Partnership reinvested a portion of the net sales
proceeds from the 2001 sale of the property in Santa Rosa, California,
in a property in Austin, Texas, as tenants-in-common, with CNL Income
Fund X, Ltd., an affiliate of the general partners. The Partnership
acquired this property from CNL Funding 2001-A, LP. The Partnership and
CNL Income Fund X, Ltd. entered into an agreement whereby each
co-venturer will share in the profits and losses of the property in
proportion to its applicable percentage interest in the property. The
Partnership contributed approximately $205,700 for an 18.35% interest
in this property.
As of December 31, 2003, Columbus Joint Venture, CNL Portsmouth Joint
Venture, and TGIF Pittsburgh Joint Venture each owned one property. In
addition, as of December 31, 2003, the Partnership had entered into two
separate tenancy-in-common arrangements, in each case with an affiliate
of the general partners, each of which owned one property. The
following presents the combined, condensed financial information for
these joint ventures and tenancy in common arrangements at:
December 31, December 31,
2003 2002
--------------- ----------------
Real estate properties with
operating leases, net $ 6,595,118 $ 6,729,458
Net investment in direct financing
lease 303,930 308,883
Cash 25,780 5,795
Accrued rental income 298,005 212,472
Other assets -- 122
Liabilities 30,627 11,583
Partners' Capital 7,192,206 7,245,147
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
Year Ended December 31,
2003 2002 2001
--------------- --------------- -----------------
Revenues $ 829,433 $ 827,363 $ 580,528
Expenses (138,791 ) (138,076 ) (95,310 )
--------------- --------------- -----------------
Net Income $ 690,642 $ 689,287 $ 485,218
=============== =============== =================
The Partnership recognized income of $308,312, $308,632, and $197,013
during the years ended December 31, 2003, 2002 and 2001, respectively,
from these joint ventures and tenancy in common arrangements.
5. Receivables
During the year ended December 31, 2003, the Partnership accepted a
promissory note from the former tenant of the property in Stow, Ohio,
in the amount of $224,623 representing real estate taxes to be
reimbursed to the Partnership and past due rental and other amounts,
which had been included in receivables for financial statement purposes
and for which the Partnership had established an allowance for doubtful
accounts in previous years. Interest only payments are due in quarterly
installments at a rate of seven percent per annum for the first 12
months and at a rate of ten percent per annum for the next 12 months,
at which time, all accrued and unpaid interest and principal amounts
are due. Due to the uncertainty of collection of the note, the
Partnership established an allowance for doubtful accounts. As of
December 31, 2003, the balance in the allowance for doubtful accounts
relating to this promissory note was $218,520, including accrued
interest of $1,398, which is equal to the total balance.
6. Allocations and Distributions
From inception through December 31, 1999, generally, distributions of
net cash flow, as defined in the limited partnership agreement of the
Partnership, were made 95% to the limited partners and five percent to
the general partners. However, for any particular year, the five
percent of net cash flow to be distributed to the general partners was
subordinated to receipt by the limited partners in that year of an
eight percent noncumulative, noncompounded return on their aggregate
invested capital contributions (the "Limited Partners' 8% Return").
From the inception through December 31, 1999, generally, net income
(determined without regard to any depreciation and amortization
deductions and gains and losses from the sale of properties) was
allocated between the limited partners and the general partners first,
in an amount not to exceed the net cash flow distributed to the
partners attributable to such year in the same proportions as such net
cash flow is distributed; and thereafter, 99% to the limited partners
and one percent to the general partners. All deductions for
depreciation and amortization were allocated 99% to the limited
partners and one percent to the general partners.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
6. Allocations and Distributions - Continued
Net sales proceeds from the sale of a property not in liquidation of
the Partnership generally were distributed first to the limited
partners in an amount sufficient to provide them with the return of
their invested capital contributions, plus their cumulative Limited
Partners' 8% Return. The general partners then received a return of
their capital contributions and, to the extent previously subordinated
and unpaid, a five percent interest in all net cash flow distributions.
Any remaining net sales proceeds were distributed 95% to the limited
partners and five percent to the general partners. Any gain from the
sale of a property not in liquidation of the Partnership was, in
general, allocated in the same manner as net sales proceeds are
distributable. Any loss was allocated first, on a pro rata basis to the
partners with positive balances in their capital accounts; and
thereafter, 95% 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 the partners with positive capital account balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and (v) thereafter, any funds remaining
shall then be distributed 95% to the limited partners and five percent
to the general partners.
Effective January 1, 2000, the general partners waived their right to
receive future distributions from the Partnership, including both
distributions of operating cash flow and distributions of liquidation
proceeds, to the extent that the cumulative amount of such
distributions would exceed the balance in the general partners' capital
account as of December 31, 1999. Accordingly, for years commencing
January 1, 2000 and after, the Partnership's net income will be
allocated entirely among the limited partners. However, if losses are
allocated to the general partners in a year, an amount of income equal
to the sum of such losses may be allocated to the general partner in
succeeding years. Accordingly, the general partners were not allocated
any net income during the years ended December 31, 2003, 2002, and
2001.
During each of the years ended December 31, 2003, 2002, and 2001, the
Partnership declared distributions to the limited partners of
$2,800,000. No distributions have been made to the general partners to
date.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
7. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
2003 2002 2001
-------------- -------------- ---------------
Net income for financial reporting purposes $ 2,194,230 $ 377,070 $ 1,168,765
Effect of timing differences relating to
depreciation 44,244 39,094 (2,398 )
Effect of timing differences relating to
amortization (2,748 ) (2,744 ) (5,249 )
Effect of timing differences relating to equity
in earnings of unconsolidated joint venture (12,152 ) (28,678 ) (20,397 )
Provision for write-down of assets -- 1,375,207 708,377
Direct financing leases recorded as operating
leases for tax reporting purposes 38,741 29,295 41,450
Effect of timing differences relating to
provision for doubtful accounts 155,970 29,027 (48,792 )
Effect of timing differences relating to
gains/losses on sales of real estate
properties (36,309 ) (1,373,802 ) (742,359 )
Accrued rental income (37,914 ) (96,988 ) (169,007 )
Legal settlement charge on appeal -- (85,410 ) 85,410
Deferred rental income (7,708 ) (7,677 ) (50,166 )
Rents paid in advance 7,847 24,399 3,967
Other (316 ) -- 165
-------------- -------------- ---------------
Net income for federal income tax purposes $ 2,343,885 $ 278,793 $ 969,766
============== ============== ===============
8. Discontinued Operations
During 2002, the Partnership identified and sold the Boston Market
properties in San Antonio, Texas and Raleigh, North Carolina and
received net sales proceeds of approximately $1,095,400. No gain or
loss was recorded on the sales because the Partnership had recorded a
provision for write-down of assets of approximately $322,500 during
prior quarters of 2002 for the property in Raleigh, North Carolina. The
Partnership had also recorded provisions for write-down of assets in
previous years, including approximately $387,100 during the year ended
December 31, 2001, relating to the property in San Antonio, Texas. In
addition, during 2003, the Partnership identified and sold its property
in Destin, Florida and received net sales proceeds of approximately
$1,742,800, resulting in a gain on disposal of discontinued operations
of approximately $273,900. The financial results for these properties
are reflected as Discontinued Operations in the accompanying financial
statements.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Discontinued Operations - Continued
The operating results of the discontinued operations for these
properties are as follows:
Year Ended December 31,
2003 2002 2001
--------------- ------------- ---------------
Rental revenues $ 82,119 $ 164,302 $ 164,802
Expenses (6,182 ) (65,225 ) (63,771 )
Provision for write-down of assets -- (322,472 ) (387,138 )
--------------- ------------- ---------------
Income (loss) from discontinued
operations $ 75,937 $ (223,395 ) $ (286,107 )
=============== ============= ===============
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Holdings, Inc. The other individual
general partner, Robert A. Bourne, serves as President and Treasurer of
CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings,
Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL Restaurant
Properties, Inc. (formerly CNL American Properties Fund, Inc.) served
as the Partnership's advisor until January 1, 2002, when it assigned
its rights and obligations under a management agreement to RAI
Restaurants, Inc. (the "Advisor"). The Advisor is a wholly owned
subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP"). The
individual general partners are stockholders and directors of CNL-RP.
The Advisor provides services pursuant to a management agreement with
the Partnership. In connection therewith, the Partnership agreed to pay
the Advisor an annual 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.
Any portion of the management fee not paid is deferred without
interest. For the years ended December 31, 2003, 2002, and 2001, the
Partnership incurred $25,335, $25,379, and $24,943, respectively, for
such management fees.
The Advisor is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of 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 receipt by the limited
partners of their aggregate Limited Partners' 8% Return, plus their
invested capital contributions. During the year ended December 31,
2003, the Partnership incurred a deferred, subordinated real estate
disposition fee of $54,000 as a result of the Partnership's sale of the
property in Destin, Florida.
During the years ended December 31, 2003, 2002, and 2001, the
Partnership's affiliates provided various accounting and administrative
services to the Partnership, including services related to accounting;
financial, tax and regulatory compliance and reporting; lease and loan
compliance; limited partners distributions and reporting; due diligence
and marketing; and investor relations (including administrative
services in connection with selling units of limited partnership
interest). For the years ended December 31, 2003, 2002, and 2001, the
Partnership incurred $105,377, $142,170, and $207,702, respectively,
for such services.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
9. Related Party Transactions - Continued
During 2002, the Partnership acquired a property in Houston, Texas, and
a property in San Antonio, Texas from CNL Funding 2001-A, LP. In
addition, in January 2002, the Partnership and CNL Income Fund X, Ltd,
as tenants-in-common, acquired a property in Austin, Texas, from CNL
Funding 2001-A, LP. CNL Funding 2001-A, LP is an affiliate of the
general partners. CNL Funding 2001-A, LP had purchased and temporarily
held title to the properties in order to facilitate the acquisition of
the properties by the Partnership. The purchase price paid by the
Partnership represented the costs incurred by CNL Funding 2001-A, LP to
acquire the properties.
The amounts due to related parties at December 31, 2003 and 2002
totaled $64,833 and $17,762, respectively.
10. Concentration of Credit Risk
The following schedule presents total rental revenues (including the
Partnership's share of total rental revenues from joint ventures and
properties held with affiliates as tenants-in common) from individual
lessees, each representing more than ten percent of total rental
revenues for each of the years ended December 31:
2003 2002 2001
---------------- ---------------- ---------------
Golden Corral Corporation $ 587,773 $ 657,612 $ 657,612
Metromedia Restaurant
Group (S&A Properties
Corporation and Steak
and Ale of Colorado,
Inc.) 450,924 450,090 332,616
Jack in the Box Inc. 384,779 385,436 492,127
Carrols Corp. and Texas Taco
Cabana, LP (under common
control of Carrols Corp.) 325,990 N/A N/A
Chevy's, Inc. 261,885 268,786 N/A
IHOP Properties, Inc. N/A N/A 280,171
In addition, the following schedule presents total rental revenues
(including the Partnership's share of total rental revenues from joint
ventures and properties held with affiliates as tenants-in-common) from
individual restaurant chains, each representing more than ten percent
of total rental revenues for each of the years ended December 31:
2003 2002 2001
---------------- ---------------- ---------------
Golden Corral Buffet and Grill $ 587,773 $ 657,612 $ 657,612
Bennigan's 450,924 450,090 332,616
Jack in the Box 384,779 385,436 492,127
Chevy's 261,885 268,786 N/A
IHOP N/A N/A 280,171
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Concentration of Credit Risk - Continued
In October 2003, Chevy's, Inc., a tenant of the Partnership, filed for
Chapter 11 bankruptcy protection. Chevy's, Inc. leases one property
from the Partnership. As of March 12, 2004, Chevy's, Inc. had neither
rejected nor affirmed the lease related to this property.
The information denoted by N/A indicates that for each period
presented, the tenant or chain did not represent more than ten percent
of the Partnership's total rental revenues.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains will significantly impact the operating results of
the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
11. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2003 and
2002.
2003 Quarter First Second Third Fourth Year
--------------------------------- ------------ -------------- ------------ ------------- -------------
Continuing Operations (1):
Revenues $ 527,398 $ 528,604 $ 540,939 $ 551,391 $2,148,332
Equity in earnings of
unconsolidated joint
ventures 77,726 77,586 75,560 77,440 308,312
Income from
continuing operations 434,004 462,391 467,912 480,110 1,844,417
Discontinued Operations (1):
Revenues 41,075 41,044 -- -- 82,119
Income from and gain on
disposal of discontinued
operations 35,237 314,576 -- -- 349,813
Net income 469,241 776,967 467,912 480,110 2,194,230
Income per limited partner unit:
Continuing operations $ 0.12 $ 0.13 $ 0.13 $ 0.15 $ 0.53
Discontinued operations 0.01 0.09 -- -- 0.10
------------ -------------- ------------ ------------- -------------
$ 0.13 $ 0.22 $ 0.13 $ 0.15 $ 0.63
============ ============== ============ ============= =============
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
11. Selected Quarterly Financial Data - Continued
2002 Quarter First Second Third Fourth Year
--------------------------------- ------------ -------------- ------------ ------------- -------------
Continuing Operations (1):
Revenues $ 548,278 $ 517,584 $ 546,635 $ 512,233 $2,124,730
Equity in earnings of
unconsolidated joint
ventures 77,766 78,055 77,652 75,159 308,632
Income (loss) from
continuing operations (2) 399,977 401,081 465,849 (666,442 ) 600,465
Discontinued Operations (1):
Revenues 41,075 41,075 41,076 41,076 164,302
Income (loss) from
discontinued operations 25,480 (305,518 ) 25,214 31,429 (223,395 )
Net income (loss) 425,457 95,563 491,063 (635,013 ) 377,070
Income (loss) per limited partner
unit:
Continuing operations $ 0.11 $ 0.12 $ 0.13 $ (0.19 ) $ 0.17
Discontinued operations 0.01 (0.09 ) 0.01 0.01 (0.06 )
------------ -------------- ------------ ------------- -------------
$ 0.12 $ 0.03 $ 0.14 $ (0.18 ) $ 0.11
============ ============== ============ ============= =============
(1) Certain items in the quarterly financial data have been reclassified to
conform to the 2003 presentation. This reclassification had no effect
on net income. The results of operations relating to properties that
were identified for sale as of December 31, 2001 but sold subsequently
are reported as continuing operations. The results of operations
relating to properties that were either identified for sale and
disposed of subsequent to January 1, 2002 or were classified as held
for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
(2) In December 2002, the Partnership recorded a provision for write-down
of assets of approximately $1,052,700 relating to the property in Stow,
Ohio. The tenant of this property experienced financial difficulties
and during the fourth quarter of 2002 stopped paying rents. The
provision represented the difference between the net carrying value of
the property at December 31, 2002 and its estimated fair value.
12. Subsequent Event
In February 2004, American Hospitality Concepts, Inc., the parent
company of Ground Round, Inc., filed for Chapter 11 bankruptcy
protection. Ground Round, Inc. leases one property from the
Partnership. As of March 12, 2004, Ground Round, Inc. had neither
rejected nor affirmed the lease related to this property.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The General Partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART III
Item 10. Director and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL-RP, CCM, CNL Financial Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. Since 1971, Mr. Seneff has been active in
the acquisition, development, and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has
served as Director and Chairman of the Board of CNL-RP, a public, unlisted real
estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer
of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from
December 2000 through September 2003. Mr. Seneff served as Chairman of the Board
and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, from its inception in 1990 until it merged with a
wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors,
Inc., formerly CNL Institutional Advisors, Inc., is a registered investment
advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent
company of CNL Financial Group, Inc., a diversified real estate company, and has
served as a Director, Chairman of the Board and Chief Executive Officer of CNL
Financial Group, Inc. since 1973. CNL Financial Group, Inc. is and is the parent
company, either directly or indirectly through subsidiaries, of CNL Real Estate
Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL
Securities Corp., all of which are engaged in the business of real estate
finance. Mr. Seneff also serves as a Director and Chairman of the Board of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from
its inception in 1997 until 2003 and served as Co-Chief Executive Officer from
February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board
of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since
its inception in 1997. Mr. Seneff also served as Chief Executive Officer from
its inception in 1997 through February 2003, and currently serves as Co-Chief
Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and
Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief
Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement
Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real
estate investment trust. Mr. Seneff has also served as Director and Chairman of
the Board of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, since 1992 and served as
Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through
February 2004. Mr. Seneff has served as a Director, Chairman of the Board, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff has
served as Chairman of the Board and Chief Executive Officer of CNL Commercial
Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of
CNLBank, an independent, state-chartered commercial bank. Mr. Seneff previously
served on the Florida State Commission on Ethics and is a former member and past
Chairman of the State of Florida Investment Advisory Council, which recommends
to the Florida Board of Administration investments for various Florida employee
retirement funds. The Florida Board of Administration, Florida's principal
investment advisory and money management agency, oversees the investment of the
Florida state retirement plan. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 56. Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne has
served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr.
Bourne also served as President of CNL-RP from 1994 through February 1999 and
served as Treasurer from February 1999 through August 1999 and from May 1994
through December 1994. Mr. Bourne served in various executive positions with CNL
Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP
including, President from 1994 through September 1997, and Director from 1994
through August 1999. Mr. Bourne serves as President and Treasurer of CNL
Financial Group, Inc. Mr. Bourne serves as Director, Vice Chairman of the Board
and Treasurer and from 1997 until June 2002 served as President of CNL
Hospitality Properties, Inc. and as Director, President and Treasurer of CNL
Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL
Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement
Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also served as
a Director since 1992, Vice Chairman of the Board since February 1996, Secretary
and Treasurer from February 1996 through 1997, and President from July 1992
through February 1996, of Commercial Net Lease Realty, Inc. Mr. Bourne serves as
Director, President and Treasurer for various affiliates of CNL Financial Group,
Inc. including, CNL Investment Company, CNL Securities Corp. and CNL
Institutional Advisors, Inc. Mr. Bourne began his career as a certified public
accountant employed by Coopers & Lybrand, Certified Public Accountants, from
1971 through 1978, where he attained the position of Tax Manager in 1975. Mr.
Bourne graduated from Florida State University in 1970 where he received a B.A.
in Accounting, with honors.
Curtis B. McWilliams, age 48. Mr. McWilliams has served as President of
CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September
2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from
December 2000 through September 2003 and served as Chief Executive Officer from
September 1999 through December 2000. Mr. McWilliams also served as President
and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned
subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from
February 1999 until September 1999 and as Executive Vice President of CNL-RP
from 1997 through February 1999. Mr. McWilliams served as an Executive Vice
President of CNL Financial Group, Inc. from the time he joined the company in
April 1997 until September 1999. Mr. McWilliams served as President of CNL Fund
Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the
business of real estate financing, from April 1997 until the acquisition of such
entities by wholly owned subsidiaries of CNL-RP in September 1999. From
September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch
& Co. The majority of his career at Merrill Lynch & Co. was in the Investment
Banking division where he served as a Managing Director. Mr. McWilliams received
a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master
of Business Administration degree with a concentration in finance from the
University of Chicago in 1983.
Steven D. Shackelford, age 40. Mr. Shackelford was promoted to
Executive Vice President and Chief Operating Officer of CNL-RP in September
2003. Mr. Shackelford has also served as Chief Financial Officer since January
1997. He served as Senior Vice President of CNL-RP from January 1997 through
July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has
also served as Secretary and Treasurer of CNL-RP since September 1999. He also
served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996
to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse LLP where he was responsible
for advising foreign clients seeking to raise capital and a public listing in
the United States. From August 1992 to March 1995, he was a manager in the
Paris, France office of Price Waterhouse, serving several multi-national
clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor
of Arts degree in Accounting, with honors, and a Master of Business
Administration degree from Florida State University and is a certified public
accountant.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it
was formed in July 2003 to provide strategic advisory services to the General
Partners. He has served in various consulting capacities to CNL Hospitality Corp
and other CNL affiliates since January 2003. Since November 2001 he has been an
independent consultant working for a variety of operating and investment
companies in the hospitality industry. Until October 2001, Mr. Arasi was
President & Chief Executive Officer, and a member of the Board of Directors of
Lodgian, Inc., a New York Stock Exchange traded company, one of the largest
independent hotel owner/operators in North America, with hotel properties under
most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by
Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997
through November 2000, Mr. Arasi was a member of the Management Committee and
held several top operating positions with Bass Hotels & Resorts, one of the
leading international owners, operators and franchisors of hotels, most recently
serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly
President of Tishman Hotel Corporation, Vice President of Salomon Brothers,
Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton,
Westin and HVS International. Mr. Arasi graduated from Cornell University in
January 1981, where he received a Bachelor's degree in Hotel and Restaurant
Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the
officers of the corporate General Partner, and persons who own more than ten
percent of a registered class of the Partnership's equity securities
(collectively, the "Reporting Persons"), to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are
required by SEC regulation to furnish the Partnership with copies of all Forms
3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such
forms the Partnership has received and written representations from certain
Reporting Persons that they were not required to file Forms 5 for the last
fiscal year, the General Partners believe that all Reporting Persons complied
with all filing requirements applicable to them with respect to transactions
during fiscal 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not
adopted a code of business conduct applicable exclusively to the Partnership.
However, employees of the General Partners or their affiliates, including the
individual General Partners, are bound by the Code of Business Conduct adopted
November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor
are bound by the similar Code of Business Conduct adopted by CNL Restaurant
Properties, Inc. Each of these codes of business conduct will be made available
to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does
not have an audit committee that is responsible for supervising the
Partnership's relationship with its independent auditors. For the Partnership,
this role is performed by the General Partners. Based on his previous service as
the principal financial officer of companies with businesses similar to that of
the Partnership, Robert A. Bourne, one of the General Partners, has the
requisite experience to be considered an "audit committee financial expert" as
defined in the rules under the Securities Exchange Act of 1934, if the
Partnership had an audit committee. As a General Partner, Mr. Bourne is not
independent of the Partnership.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
As of March 12, 2004, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 12, 2004, the beneficial
ownership interests of the General Partners in the Registrant.
Amount and Nature of
Title of Class Name of Partner Beneficial Ownership Percent of Class
- --------------------------------- ------------------------- -------------------------- -----------------
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
---------------
100%
===============
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 2003, exclusive of any distributions to which the General
Partners or their affiliates may be entitled in the event they purchase Units.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
Reimbursement to affiliates for Operating expenses are reimbursed at Accounting and
operating expenses the lower of cost or 90% of the administrative services:
prevailing rate at which comparable $105,377
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 management fee to One percent of the sum of gross $25,335
affiliates revenues (excluding noncash lease
accounting adjustments) 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. The
management fee, which will not exceed
competitive fees for comparable services
in the same geographic area, may or may
not be taken, in whole or in part as to
any year, in the sole discretion of the
affiliates. All or any portion of the
management fee not taken as to any fiscal
year shall be deferred without interest
and may be taken in such other fiscal
year as the affiliates shall determine.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
Deferred, subordinated real A deferred, subordinated real estate $54,000
estate disposition fee payable disposition fee, payable upon sale
to the affiliates 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 the Affiliates provides 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.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to five percent of Partnership
Partnership net cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to five percent of Partnership
Partnership net sales proceeds distributions of such net sales
from a sale or sales not in proceeds, subordinated to certain
liquidation of the Partnership minimum returns to the Limited
Partners.
General Partners' share of Distributions of net sales proceeds $-0-
Partnership net sales proceeds from a sale or sales of
from a sale or sales in substantially all of the
liquidation of the Partnership Partnership's assets will be
distributed in the following order or
priority: (i) first, to pay all debts and
liabilities of the Partnership and to
establish reserves; (ii) second, to
Partners with positive capital account
balances, determined after the allocation
of net income, net loss, gain and loss,
in proportion to such balances, up to
amounts sufficient to reduce such
balances to zero; and (iii) thereafter,
95% to the Limited Partners and 5% to the
General Partners.
Item 14. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the
Partnership for the audit and other services provided by the Partnership's
independent certified public accountants, PricewaterhouseCoopers LLP, for the
years ended December 31:
2003 2002
------------------- -------------------
Audit Fees (1) $ 14,012 $ 12,200
Tax Fees (2) 3,621 6,139
------------------- -------------------
Total $ 17,633 $ 18,339
=================== ===================
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002
consisted of the examination of the financial statements of the
Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the
General Partners. Due to its organization as a limited partnership, the
Partnership does not have an audit committee.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2003 and 2002
Statements of Income for the years ended December 31, 2003, 2002,
and 2001
Statements of Partners' Capital for the years ended December 31,
2003, 2002, and 2001
Statements of Cash Flows for the years ended December 31, 2003,
2002, and 2001
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002, and 2001
Schedule III - Real Estate and Accumulated Depreciation at December
31, 2003
Notes to Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2003
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
**3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11, No.
33-90998-01, incorporated herein by reference.)
**3.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March
21, 1996, and incorporated herein by reference.)
**4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-11, No. 33-90998-01 and
incorporated herein by reference.)
**4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March
21, 1996, and incorporated herein by reference.)
**4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS
Escrow and Transfer Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating
to the Distribution Reinvestment Plans (Filed as Exhibit 4.4
to the Registrant's Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**5.1 Opinion of Baker & Hostetler as to the legality of the
securities being registered by CNL Income Fund XVIII, Ltd.
(Filed as Exhibit 5.2 to Amendment No. Three to the
Registrant's Registration Statements on Form S-11, No.
33-90998, incorporated herein by reference.)
**8.1 Opinion of Baker & Hostetler regarding certain material tax
issues relating to CNL Income Fund XVIII, Ltd. (Filed as
Exhibit 8.1 to Amendment No. Three to the Registrant's
Registration Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**8.2 Opinion of Baker & Hostetler regarding certain material
issues relating to the Distribution Reinvestment Plan of CNL
Income Fund XVIII, Ltd. (Filed as Exhibit 8.4 to Amendment
No. Three to the Registrant's Registration Statement on Form
S-11, No. 33-90998, incorporated herein by reference.)
**8.3 Amended Opinion of Baker & Hostetler regarding certain
material issues relating to CNL Income Fund XVIII, Ltd.
(Filed as Exhibit 8.5 to Post-Effective Amendment No. Four to
the Registrant's Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**10.1 Management Agreement between CNL Income Fund XVIII, Ltd. and
CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on
March 20, 1997, and incorporated herein by reference.)
**10.2 Assignment of Management Agreement from CNL Fund Advisors,
Inc. to CNL APF Partners, LP. (Filed as Exhibit 10.2 to Form
10-Q filed with the Securities and Exchange Commission on
August 9, 2001, and incorporated herein by reference.)
**10.3 Assignment of Management Agreement from CNL APF Partners, LP
to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.3 to
Form 10-Q filed with the Securities and Exchange Commission
on August 13, 2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
31.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
32.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period October 1,
2003 through December 31, 2003.
**previously filed
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 22nd day of
March, 2004.
CNL INCOME FUND XVIII, 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 22, 2004
- ------------------------------------ (Principal Financial and Accounting
Robert A. Bourne (Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 22, 2004
- ------------------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001
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
- ---------- ----------------- -------------- --------------- ---------------- ------------- ------------ ------------
2001 Allowance for
doubtful
accounts (a) $ 123,993 $ -- $ 696 (b) $ 49,488 (c) $ -- $ 75,201
============== =============== ================ ============= ============ ============
2002 Allowance for
doubtful
accounts (a) $ 75,201 $ -- $ 104,228 (b) $ 75,201 (c) $ -- $ 104,228
============== =============== ================ ============= ============ ============
2003 Allowance for
doubtful
accounts (a) $ 104,228 $ -- $ 187,036 (b) $ -- (c) $ 31,066 $ 260,198
============== =============== ================ ============= ============ ============
(a) Deducted from receivables on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Costs Capitalized
Subsequent To Net Amount at Which
Initial Cost Acquisition Carried at Close of Period (c)
----------------------- --------------------- ---------------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
----------- --------- ------------ ----------- -------- ---------- ------------ ------------
Properties the Partnership
has Invested in Under
Operating Leases:
Arby's Restaurant:
Lexington, North Carolina- $210,977 - $426,982 - $210,977 $426,982 $637,959
Bennigan's Restaurant:
Sunrise, Florida - 1,147,704 925,086 - - 1,147,704 925,086 2,072,790
Boston Market Restaurants:
Minnetonka, Minnesota (i)- 574,766 - 25,792 (h) - 403,092 - 403,092
Burger King Restaurant:
Kinston, North Carolina - 262,498 663,421 - - 262,498 663,421 925,919
Chevy's Fresh Mex Restaurant:
Mesa, Arizona - 1,029,236 1,598,376 - - 1,029,236 1,598,376 2,627,612
Golden Corral Buffet
and Grill Restaurants:
Houston, Texas - 889,003 - 844,282 - 889,003 844,282 1,733,285
Galveston, Texas - 687,946 - 836,386 - 687,946 836,386 1,524,332
Elizabethtown, Kentuc-y 488,945 - 1,045,207 - 488,945 1,045,207 1,534,152
Ground Round Restaurant:
Rochester, New York - 525,891 582,882 - - 525,891 582,882 1,108,773
Jack in the Box Restaurants:
Centerville, Texas - 261,913 - 543,079 - 261,913 543,079 804,992
Echo Park, California - 674,648 - 659,359 - 674,648 659,359 1,334,007
Houston, Texas - 778,707 - 589,840 - 778,707 589,840 1,368,547
NI's Interational Buffet
Restaurant:
Stow, Ohio (l) - 489,799 - - - 222,131 (g) 222,131
Taco Cabana Restaurants:
Houston, Texas (n) - 524,910 669,154 - - 524,910 $669,154 1,194,064
San Antonio, Texas (n) - 352,699 543,841 - - 352,699 $543,841 896,540
Wendy's Restaurant:
Sparta, Tennessee - 221,537 - 432,842 - 221,537 432,842 654,379
------------- ------------ ----------- -------- ------------ ------------ -----------
$9,121,179 $4,982,760 $5,403,769 - $8,681,837 $10,360,737 $19,042,574
============= ============ =========== ======== ============ ============ ===========
Properties the Partnership
Invested in Under
Direct Financing Leases:
IHOP Restaurants:
Bridgeview, Illinois - 354,227 1,151,199 - - (f) (f) (f)
NI's Interational Buffet
Restaurant:
Stow, Ohio (l) - - 1,280,985 - - (f) (f) (f)
----------- ---------- ----------- -------- ------------
$354,227 $2,432,184 - - -
============= ============ =========== ======== ============
Life on Which
Depreciation in
Date Latest Income
Accumulated of Con- Date Statement is
Depreciation struction Acquired Computed
- ----------- ------- -------- -------------
$28,282 1997 07/97 (m)
170,870 1982 06/98 (b)
- 1997 04/97 (k)
155,000 1994 12/96 (b)
319,783 1994 12/97 (b)
189,942 1997 12/96 (b)
184,509 1997 01/97 (b)
215,850 1997 05/97 (b)
120,418 1981 10/97 (b)
121,265 1997 01/97 (b)
143,094 1997 01/97 (b)
123,304 1997 05/97 (b)
- 1997 04/97 (d)
44,613 1990 1/02 (b)
28,708 1994 6/02 (b)
91,510 1997 04/97 (b)
- - -------------
$1,937,148
= ===========
) (e) 1972 07/97 (e)
) (d) 1997 04/97 (d)
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation are summarized
below. The balances in 2003, 2002, and 2001 have been adjusted to
reflect the reclassification of properties accounted for as
discontinued operations.
Accumulated
Cost Depreciation
---------------- -------------------
Properties the Partnership has Invested in Under
Operating Leases:
Balance, December 31, 2000 $ 20,199,653 $ 1,092,859
Provision for write-down of assets (j) (321,239 ) --
Disposition (2,551,561 ) (132,780 )
Depreciation expense -- 326,938
---------------- -----------------
Balance, December 31, 2001 17,326,853 1,287,017
Acquisitions (n) 2,090,604 --
Reclassified from net investment in direct
financing lease (m) 426,982 --
Provision for write-down of assets (l) (267,668 ) --
Disposition (534,197 ) (38,198 )
Depreciation expense -- 340,231
---------------- -----------------
Balance, December 31, 2002 19,042,574 1,589,050
Depreciation expense -- 348,098
---------------- -----------------
Balance, December 31, 2003 $ 19,042,574 $ 1,937,148
================ =================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2003, the aggregate cost of the Partnership's wholly
owned Properties was $20,136,177 for federal income tax purposes. All
of the leases are treated as operating leases for federal income tax
purposes.
(d) For financial reporting purposes, the portion of the lease relating to
the building has been recorded as a direct financing leases. The cost
of the building has been included in net investment in direct financing
leases; therefore, depreciation is not applicable.
(e) For financial reporting purposes, the lease for the land and building
has been recorded as a direct financing lease. The cost of the land and
building has been included in net investment in direct financing
leases; therefore, depreciation is not applicable.
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(f) For financial reporting purposes, certain components of the lease
relating to land and building have been recorded as a direct financing
lease. Accordingly, costs relating to these components of this lease
are not shown.
(g) For financial reporting purposes, the portion of the lease relating to
the building has been recorded as a direct financing lease. Accordingly
costs relating to this component of this lease are not shown.
(h) Amount represents site improvements and is included in total land value
for this Property.
(i) For financial reporting purposes, the undepreciated cost of the
Property in Minnetonka, Minnesota, was written-down to its estimated
fair value due to an impairment in value. The Partnership recognized
the impairment by recording a provision for write-down of assets of
approximately $197,400 at December 31, 1998. The tenant of this
Property declared bankruptcy and rejected the lease relating to this
Property. The impairment represented the difference between the
Property's net carrying value and its estimated fair value. The cost of
the Property presented on this schedule is the net amount at which the
Property was carried, including the provision for write-down of assets.
(j) For financial reporting purposes, the undepreciated cost of the
Property in San Antonio, Texas, was written down to its estimated fair
value due to an impairment in value. The Partnership recognized the
impairment by recording a provision for write-down of assets of
approximately $299,800 at December 31, 2000. The tenant of this
Property vacated the Property and ceased restaurant operations,
resulting in a reclassification of the building portion of the lease to
an operating lease. The building was recorded at net book value and
depreciated over its remaining estimated life of approximately 27
years. During 2001, the Partnership recognized an additional provision
for write-down of assets of approximately $321,200. The total
impairment represented the difference between the Property's net
carrying value and its estimated fair value. The Property was sold in
during 2002.
(k) The tenant of this Property filed for bankruptcy and rejected the lease
relating to this Property prior to the building being constructed,
therefore, depreciation is not applicable.
(l) For financial reporting purposes, the undepreciated cost of the
Property in Stow, Ohio, was written-down to its estimated value due to
an impairment in value. The Partnership recognized the impairment by
recording a provision for write-down of assets of approximately
$892,200 at December 31, 2002. The impairment represented the
difference between the Property's net carrying value and its estimated
fair value. The cost of the Property presented on this schedule is the
net amount at which the Property was carried at December 31, 2003,
including the provision for write-down of assets.
(m) Effective May 2002, the lease for the Property in Lexington, North
Carolina was amended, resulting in the reclassification of the building
portion of the lease to an operating lease. The building was recorded
at the net book value and depreciated over its remaining estimated life
of approximately 25 years.
(n) During the year ended December 31, 2002, the Partnership purchased real
estate Properties from CNL Funding 2001-A, LP, an affiliate of the
General Partners, for an aggregate cost of approximately $2,090,600.
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
**3.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund XVIII, Ltd. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-11, No. 33-90998-01,
incorporated herein by reference.)
**3.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March 21,
1996, and incorporated herein by reference.)
**4.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund XVIII, Ltd. (Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-11, No. 33-90998-01 and
incorporated herein by reference.)
**4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March 21,
1996, and incorporated herein by reference.)
**4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS
Escrow and Transfer Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to
the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**5.1 Opinion of Baker & Hostetler as to the legality of the
securities being registered by CNL Income Fund XVIII, Ltd.
(Filed as Exhibit 5.2 to Amendment No. Three to the Registrant's
Registration Statements on Form S-11, No. 33-90998, incorporated
herein by reference.)
**8.1 Opinion of Baker & Hostetler regarding certain material tax
issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit
8.1 to Amendment No. Three to the Registrant's Registration
Statement on Form S-11, No. 33-90998, incorporated herein by
reference.)
**8.2 Opinion of Baker & Hostetler regarding certain material issues
relating to the Distribution Reinvestment Plan of CNL Income
Fund XVIII, Ltd. (Filed as Exhibit 8.4 to Amendment No. Three to
the Registrant's Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**8.3 Amended Opinion of Baker & Hostetler regarding certain material
issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit
8.5 to Post-Effective Amendment No. Four to the Registrant's
Registration Statement on Form S-11, No. 33-90998, incorporated
herein by reference.)
**10.1 Management Agreement between CNL Income Fund XVIII, Ltd. and CNL
Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed
with the Securities and Exchange Commission on March 20, 1997,
and incorporated herein by reference.)
**10.2 Assignment of Management Agreement from CNL Fund Advisors, Inc.
to CNL APF Partners, LP. (Filed as Exhibit 10.2 to Form 10-Q
filed with the Securities and Exchange Commission on August 9,
2001, and incorporated herein by reference.) **10.3 Assignment
of Management Agreement from CNL APF Partners, LP to CNL
Restaurants XVIII, Inc. (Included as Exhibit 10.3 to Form 10-Q
filed with the Securities and Exchange Commission on August 13,
2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
32.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
**previously filed
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2