AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP - FORM 10-Q

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EX-31.2 - AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP	ex31-220.htm
EX-31.1 - AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP	ex31-120.htm
EX-32 - AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP	ex32-20.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2014

Commission File Number: 000-23778

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

State of Minnesota		41-1729121
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30 East 7th Street, Suite 1300 St. Paul, Minnesota 55101		(651) 227-7333
(Address of principal executive offices)		(Registrant’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 for 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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer	o Accelerated filer
o Non-accelerated filer	x Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

INDEX

				Page
Part I – Financial Information

	Item 1.	Financial Statements:

		Balance Sheet as of September 30, 2014 and December 31, 2013		3

		Statements for the Periods ended September 30, 2014 and 2013:

			Income	4

			Cash Flows	5

			Changes in Partners’ Capital	6

		Notes to Financial Statements		7 - 12

	Item 2.	Management's Discussion and Analysis of Financial
			Condition and Results of Operations	13 - 18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19

	Item 4.	Controls and Procedures		19

Part II – Other Information

	Item 1.	Legal Proceedings		19

	Item 1A.	Risk Factors		19

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20

	Item 3.	Defaults Upon Senior Securities		20

	Item 4.	Mine Safety Disclosures		20

	Item 5.	Other Information		20

	Item 6.	Exhibits		20

Signatures				21

Page 2 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

BALANCE SHEET

ASSETS

	September 30,			December 31,
	2014			2013
	(unaudited)
Current Assets:
Cash	$	4,444,766		$	2,414,005

Real Estate Held for Investment:
Land		3,788,830			3,788,830
Buildings and Equipment		8,149,958			8,149,958
Acquired Intangible Lease Assets		703,997			703,997
Real Estate Investments, at cost		12,642,785			12,642,785
Accumulated Depreciation and Amortization		(2,741,070	)		(2,489,448	)
Real Estate Held for Investment, Net		9,901,715			10,153,337
Real Estate Held for Sale		0			1,653,573
Total Real Estate		9,901,715			11,806,910
Total Assets	$	14,346,481		$	14,220,915

LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
Payable to AEI Fund Management, Inc.	$	68,813	$	74,979
Distributions Payable		297,469		299,700
Unearned Rent		50,450		13,474
Total Current Liabilities		416,732		388,153
Long-term Liabilities:
Acquired Below-Market Lease Intangibles, Net		67,850		71,978

Partners’ Capital:
General Partners		6,939		5,133
Limited Partners – 24,000 Units authorized; 21,155 and 21,367 Units issued and outstanding as of 9/30/14 and 12/31/13, respectively		13,854,960		13,755,651
Total Partners' Capital		13,861,899		13,760,784
Total Liabilities and Partners' Capital	$	14,346,481	$	14,220,915

The accompanying Notes to Financial Statements are an integral part of this statement.

Page 3 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

STATEMENT OF INCOME

(unaudited)

	Three Months Ended September 30				Nine Months Ended September 30
	2014		2013		2014		2013

Rental Income	$	298,963	$	298,963	$	896,888	$	896,888

Expenses:
Partnership Administration – Affiliates		56,343		55,431		177,326		169,120
Partnership Administration and Property Management – Unrelated Parties		13,550		12,419		58,370		50,685
Depreciation and Amortization		76,700		76,702		230,100		230,100
Total Expenses		146,593		144,552		465,796		449,905

Operating Income		152,370		154,411		431,092		446,983

Other Income:
Interest Income		2,966		1,079		6,738		1,534

Income from Continuing Operations		155,336		155,490		437,830		448,517

Income from Discontinued Operations		208,078		205,923		723,753		306,334

Net Income	$	363,414	$	361,413	$	1,161,583	$	754,851

Net Income Allocated:
General Partners	$	4,429	$	6,560	$	12,411	$	10,494
Limited Partners		358,985		354,853		1,149,172		744,357
Total	$	363,414	$	361,413	$	1,161,583	$	754,851

Income per Limited Partnership Unit:
Continuing Operations	$	7.27	$	7.17	$	20.42	$	20.66
Discontinued Operations		9.70		9.36		33.72		13.97
Total – Basic and Diluted	$	16.97	$	16.53	$	54.14	$	34.63

Weighted Average Units Outstanding – Basic and Diluted		21,155		21,465		21,226		21,496

The accompanying Notes to Financial Statements are an integral part of this statement.

Page 4 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30
	2014			2013
Cash Flows from Operating Activities:
Net Income	$	1,161,583		$	754,851

Adjustments to Reconcile Net Income To Net Cash Provided by Operating Activities:
Depreciation and Amortization		247,494			307,689
Real Estate Impairment		0			322,868
Gain on Sale of Real Estate		(694,807	)		(504,826	)
(Increase) Decrease in Receivables		0			1,843
Increase (Decrease) in Payable to AEI Fund Management, Inc.		(6,166	)		(22,474	)
Increase (Decrease) in Unearned Rent		36,976			62,669
Total Adjustments		(416,503	)		167,769
Net Cash Provided By Operating Activities		745,080			922,620

Cash Flows from Investing Activities:
Proceeds from Sale of Real Estate		2,348,380			1,869,225

Cash Flows from Financing Activities:
Distributions Paid to Partners		(894,642	)		(899,096	)
Redemption Payments		(168,057	)		(79,194	)
Net Cash Used For Financing Activities		(1,062,699	)		(978,290	)

Net Increase (Decrease) in Cash		2,030,761			1,813,555

Cash, beginning of period		2,414,005			458,643

Cash, end of period	$	4,444,766		$	2,272,198

The accompanying Notes to Financial Statements are an integral part of this statement.

Page 5 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

(unaudited)

	General Partners			Limited Partners			Total			Limited Partnership Units Outstanding

Balance, December 31, 2012	$	4,274		$	14,301,104		$	14,305,378			21,559.91

Distributions Declared		(8,990	)		(890,114	)		(899,104	)

Redemption Payments		(792	)		(78,402	)		(79,194	)		(95.13	)

Net Income		10,494			744,357			754,851

Balance, September 30, 2013	$	4,986		$	14,076,945		$	14,081,931			21,464.78


Balance, December 31, 2013	$	5,133		$	13,755,651		$	13,760,784			21,367.42

Distributions Declared		(8,925	)		(883,486	)		(892,411	)

Redemption Payments		(1,680	)		(166,377	)		(168,057	)		(212.56	)

Net Income		12,411			1,149,172			1,161,583

Balance, September 30, 2014	$	6,939		$	13,854,960		$	13,861,899			21,154.86

The accompanying Notes to Financial Statements are an integral part of this statement.

Page 6 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(unaudited)

(1) The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.

(2) Organization –

AEI Net Lease Income & Growth Fund XX Limited Partnership (“Partnership”) was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management XX, Inc. (“AFM”), the Managing General Partner. Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Partnership.

The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer. The Partnership commenced operations on June 30, 1993 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 19, 1995, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively.

During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. Distributions to Limited Partners will be made pro rata by Units.

Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 12% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow; (ii) any remaining balance will be distributed 90% to the Limited Partners and 10% to the General Partners. Distributions to the Limited Partners will be made pro rata by Units.

Page 7 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(2) Organization – (Continued)

For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year. Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed. Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners.

For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 12% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Partners and 10% to the General Partners. Losses will be allocated 98% to the Limited Partners and 2% to the General Partners.

The General Partners are not required to currently fund a deficit capital balance. Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions.

In December 2008, the Managing General Partner mailed a Consent Statement (Proxy) seeking the consent of the Limited Partners to continue the Partnership for an additional 60 months or to initiate the final disposition, liquidation and distribution of all of the Partnership’s properties and assets. On January 9, 2009, the proposal to continue the Partnership was approved with a majority of Units voted in favor of the continuation proposal. In June 2014, the Managing General Partner mailed a Consent Statement (Proxy) seeking the consent of the Limited Partners to continue the Partnership for an additional 60 months or to initiate the final disposition, liquidation and distribution of all of the Partnership’s properties and assets within 24 to 36 months. Approval of either proposal requires the affirmative vote of holders of a majority of the outstanding units. On July 22, 2014, the votes were counted and neither proposal received the required majority vote. As a result, the Partnership will not liquidate and will continue in operation until the Limited Partners vote to authorize the sale of all of the Partnership's properties or December 31, 2043, as stated in the Limited Partnership Agreement. However, in approximately five years, the Managing General Partner expects to again submit the question to liquidate to a vote by the Limited Partners.

Page 8 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(3) Recently Adopted Accounting Standards -

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This topic amends the requirements for reporting discontinued operations. The disposal of a component must represent a strategic shift that will have a major effect on the Partnership’s operations and financial results in order to be reported as discontinued operations, and require certain additional interim and annual disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2014 with early adoption permitted. The Partnership has early adopted this standard effective January 1, 2014 and has applied the provisions prospectively. As a result, the Partnership anticipates that properties will not be considered discontinued operations when the properties are sold after January 1, 2014, with the exception of properties that were classified as Real Estate Held for Sale at December 31, 2013.

(4) Real Estate Held for Investment –

The Partnership owns a 40.1354% interest in a HomeTown Buffet restaurant in Albuquerque, New Mexico. The remaining interests in this property are owned by unrelated third parties, who own the property with the Partnership as tenants-in-common. On January 31, 2011, the lease term expired and the tenant returned possession of the property to the owners. The owners listed the property for lease or sale with a real estate broker in the Albuquerque area. While the property is vacant, the Partnership is responsible for its 40.1354% share of real estate taxes and other costs associated with maintaining the property.

Based on its long-lived asset valuation analysis, the Partnership determined the HomeTown Buffet restaurant was impaired. As a result, in the fourth quarter of 2013, a charge to continuing operations for real estate impairment of $61,002 was recognized, which was the difference between the carrying value at December 31, 2013 of $336,002 and the estimated fair value of $275,000. The charge was recorded against the cost of the land and building.

(5) Payable to AEI Fund Management, Inc. –

AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.

Page 9 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(6) Discontinued Operations –

During 2012, the Partnership decided to sell its 44% interest in the Champps Americana restaurant in Utica, Michigan and classified it as Real Estate Held for Sale. In February 2013, Champps Operating Corporation (“Champps’), the tenant of the property, approached the Partnership with a request to adjust the rent on the property to a market rental rate based on the restaurant’s performance and the current conditions in the market. In April 2013, after reviewing financial information for the restaurant and the tenant, and analyzing the local real estate market for the property, the Partnership and the property’s other co-owners entered into an agreement to reduce the annual rent for the property by 63% to $90,880. The Partnership’s share of this rent was $39,987. On December 15, 2013, Champps filed for Chapter 11 bankruptcy reorganization. In February 2014, Champps closed the restaurant, filed a motion with the bankruptcy court to reject the lease and returned possession of the property to the owners. The owners listed the property for sale or lease with a real estate broker in the Utica area. While the property was vacant, the Partnership was responsible for its 44% share of real estate taxes and other costs associated with maintaining the property.

Based on its long-lived asset valuation analysis, the Partnership determined the Champps property was impaired. As a result, in the fourth quarter of 2013, a charge to discontinued operations for real estate impairment of $85,000 was recognized, which was the difference between the carrying value at December 31, 2013 of $733,000 and the estimated fair value of $648,000. The charge was recorded against the cost of the land and building. In June 2014, the Partnership and the other co-owners of the Champps property entered into an agreement to sell the property to an unrelated third party. On August 25, 2014, the sale closed with the Partnership receiving net sales proceeds of $704,398, which resulted in a net gain of $56,398.

In September 2013, the Partnership decided to sell the Royal Buffet restaurant in Colorado Springs, Colorado and classified it as Real Estate Held for Sale. Based on its long-lived asset valuation analysis, the Partnership determined the Royal Buffet restaurant was impaired. As a result, in the third quarter of 2013, a charge to discontinued operations for real estate impairment of $322,868 was recognized, which was the difference between the carrying value at September 30, 2013 of $642,868 and the estimated fair value of $320,000. The charge was recorded against the cost of the land and building. On December 20, 2013, the Partnership sold the property to an unrelated third party. The Partnership received net sale proceeds of $339,514, which resulted in a net gain of $19,514.

On August 2, 2013, the Partnership sold its 40% interest in the Scott & White Clinic in College Station, Texas to an unrelated third party. The Partnership received net sale proceeds of $1,869,225 which resulted in a net gain of $504,826. At the time of sale, the cost and related accumulated depreciation was $1,470,224 and $105,825, respectively.

Page 10 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(6) Discontinued Operations – (Continued)

During the first nine months of 2014, the Partnership sold its 45% interest in the Applebee’s restaurant in Sandusky, Ohio, in eight separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,643,982, which resulted in a net gain of $638,409. The cost and related accumulated depreciation of the interests sold was $1,276,943 and $271,370, respectively. At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $1,005,573.

During the first nine months of 2014 and 2013, the Partnership distributed net sale proceeds of $346,197 and $97,716, respectively. The Limited Partners received distributions of $342,735 and $96,739 and the General Partners received distributions of $3,462 and $977 for the periods, respectively. The Limited Partners’ distributions represented $16.19 and $4.50 per Unit for the periods, respectively.

The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations:

		Three Months Ended September 30				Nine Months Ended September 30
		2014		2013		2014		2013

Rental Income	$	287	$	46,732	$	51,179	$	214,053
Property Management Expenses		(7,905)		(9,215)		(22,233)		(29,482)
Depreciation		0		(13,552)		0		(60,195)
Real Estate Impairment		0		(322,868)		0		(322,868)
Gain on Disposal of Real Estate		215,696		504,826		694,807		504,826
Income from Discontinued Operations	$	208,078	$	205,923	$	723,753	$	306,334

		Three Months Ended September 30				Nine Months Ended September 30
		2014		2013		2014		2013
Cash Flows from Discontinued Operations:
Operating Activities	$	(7,618)	$	37,517	$	28,946	$	184,571
Investing Activities	$	1,117,159	$	1,869,225	$	2,348,380	$	1,869,225

Page 11 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Continued)

(7) Fair Value Measurements –

Fair value, as defined by United States Generally Accepted Accounting Principles (“US GAAP”), is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. US GAAP establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. US GAAP requires the utilization of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1 inputs, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.

At September 30, 2014 and December 31, 2013, the Partnership had no financial assets or liabilities measured at fair value on a recurring basis or nonrecurring basis that would require disclosure under this pronouncement. The Partnership had the following nonfinancial assets measured on a nonrecurring basis that were recorded at fair value during 2014 and 2013.

The Champps restaurant in Utica, Michigan, with a carrying amount of $733,000 at December 31, 2013, was written down to its estimated fair value of $648,000 after completing our long-lived asset valuation analysis. The resulting impairment charge of $85,000 was included in earnings for the fourth quarter of 2013. The fair value of the property was based upon comparable sales of similar properties, which are considered Level 2 inputs in the valuation hierarchy. The property was sold on August 25, 2014.

The Royal Buffet restaurant in Colorado Springs, Colorado, with a carrying amount of $642,868 at September 30, 2013, was written down to its estimated fair value of $320,000 after completing our long-lived asset valuation analysis. The resulting impairment charge of $322,868 was included in earnings for the third quarter of 2013. The fair value of the property was based upon comparable sales of similar properties, which are considered Level 2 inputs in the valuation hierarchy. The property was sold on December 20, 2013.

The HomeTown Buffet restaurant in Albuquerque, New Mexico, with a carrying amount of $336,002 at December 31, 2013, was written down to its estimated fair value of $275,000 after completing our long-lived asset valuation analysis. The resulting impairment charge of $61,002 was included in earnings for the fourth quarter of 2013. The fair value of the property was based upon comparable sales of similar properties, which are considered Level 2 inputs in the valuation hierarchy.

Page 12 of 21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS.

This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward-looking statements, should be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following:

—

Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate;

—

the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for the Partners;

—

resolution by the General Partners of conflicts with which they may be confronted;

—

the success of the General Partners of locating properties with favorable risk return characteristics;

—

the effect of tenant defaults; and

—

the condition of the industries in which the tenants of properties owned by the Partnership operate.

Application of Critical Accounting Policies

The Partnership’s financial statements have been prepared in accordance with United States generally accepted accounting principles (US GAAP). Preparing the financial statements requires management to use judgment in the application of these accounting policies, including making estimates and assumptions. These judgments will affect the reported amounts of the Partnership’s assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and will affect the reported amounts of revenue and expenses during the reporting periods. It is possible that the carrying amount of the Partnership’s assets and liabilities, or the results of reported operations, will be affected if management’s estimates or assumptions prove inaccurate.

Management of the Partnership evaluates the following accounting estimates on an ongoing basis, and has discussed the development and selection of these estimates and the management discussion and analysis disclosures regarding them with managing partner of the Partnership.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Partnership records them in the financial statements at cost. The purchase price is allocated to tangible assets, consisting of land and building, and to identified intangible assets and liabilities, which may include the value of above market and below market leases and the value of in-place leases. The allocation of the purchase price is based upon the fair value of each component of the property. Although independent appraisals may be used to assist in the determination of fair value, in many cases these values will be based upon management’s assessment of each property, the selling prices of comparable properties and the discounted value of cash flows from the asset.

Page 13 of 21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods. The above market and below market lease values will be capitalized as intangible lease assets or liabilities. Above market lease values will be amortized as an adjustment of rental income over the remaining terms of the respective leases. Below market leases will be amortized as an adjustment of rental income over the remaining term of the respective leases, including any bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.

The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management’s consideration of current market costs to execute a similar lease. These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

The determination of the fair values of the assets and liabilities acquired will require the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount and capitalization rates, interest rates and other variables. If management’s estimates or assumptions prove inaccurate, the result would be an inaccurate allocation of purchase price, which could impact the amount of reported net income.

Carrying Value of Properties

Properties are carried at original cost, less accumulated depreciation and amortization. The Partnership tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value. Changes in these assumptions or analysis may cause material changes in the carrying value of the properties.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

Allocation of Expenses

AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs. They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage. The Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement.

Results of Operations

For the nine months ended September 30, 2014 and 2013, the Partnership recognized rental income from continuing operations of $896,888 for both periods. Based on the scheduled rent for the properties as of October 31, 2014, the Partnership expects to recognize rental income from continuing operations of approximately $1,247,000 and $1,196,000 in 2014 and 2015, respectively.

For the nine months ended September 30, 2014 and 2013, the Partnership incurred Partnership administration expenses from affiliated parties of $177,326 and $169,120, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $58,370 and $50,685, respectively. These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs.

For the nine months ended September 30, 2014 and 2013, the Partnership recognized interest income of $6,738 and $1,534, respectively. In 2014, interest income increased primarily due to the Partnership having more money invested in a money market account due to property sales.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

Prior to January 1, 2014, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership included the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassified the prior periods’ operating results of the property to discontinued operations. For the nine months ended September 30, 2014, the Partnership recognized income from discontinued operations of $723,753, representing rental income less property management expenses of $28,946 and gain on disposal of real estate of $694,807. For the nine months ended September 30, 2013, the Partnership recognized income from discontinued operations of $306,334, representing rental income less property management expenses and depreciation of $124,376 and gain on disposal of real estate of $504,826, which were partially offset by a real estate impairment of $322,868.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

On August 2, 2013, the Partnership sold its 40% interest in the Scott & White Clinic in College Station, Texas to an unrelated third party. The Partnership received net sale proceeds of $1,869,225, which resulted in a net gain of $504,826. At the time of sale, the cost and related accumulated depreciation was $1,470,224 and $105,825, respectively.

Management believes inflation has not significantly affected income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.

Liquidity and Capital Resources

During the nine months ended September 30, 2014 and 2013, the Partnership's cash balances increased $2,030,761 and $1,813,555, respectively, as a result of cash generated from the sale of property, which was partially offset by cash used for distributions and redemption payments paid to the Partners in excess of cash generated from operating activities.

Net cash provided by operating activities decreased from $922,620 in 2013 to $745,080 in 2014 as a result of a decrease in total rental and interest income in 2014, an increase in Partnership administration and property management expenses in 2014 and net timing differences in the collection of payments from the tenants and the payment of expenses.

The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the nine months ended September 30, 2014 and 2013, the Partnership generated cash flow from the sale of real estate of $2,348,380 and $1,869,225, respectively.

The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners. The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first week after the end of each quarter. The Partnership attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Partners on a semi-annual basis.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)

For the nine months ended September 30, 2014 and 2013, the Partnership declared distributions of $892,411 and $899,104, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $883,486 and $890,114 and the General Partners received distributions of $8,925 and $8,990 for the periods, respectively.

As part of the distributions discussed above, the Partnership distributed net sale proceeds of $346,197 and $97,716 in 2014 and 2013, respectively. The Limited Partners received distributions of $342,735 and $96,739 and the General Partners received distributions of $3,462 and $977 for the periods, respectively. The Limited Partners’ distributions represented $16.19 and $4.50 per Unit for the periods, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.

On April 1, 2014, thirteen Limited Partners redeemed a total of 212.56 Partnership Units for $166,377 in accordance with the Partnership Agreement. On April 1, 2013, fourteen Limited Partners redeemed a total of 95.13 Partnership Units for $78,402. The Partnership acquired these Units using Net Cash Flow from operations. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $1,680 and $792 in 2014 and 2013, respectively.

The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.

Off-Balance Sheet Arrangements

As of September 30, 2014 and December 31, 2013, the Partnership had no material off-balance sheet arrangements that had or are reasonably likely to have current or future effects on its financial condition, results of operations, liquidity or capital resources.

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ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Disclosure Controls and Procedures.

Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing General Partner, in a manner that allows timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting.

During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject.

ITEM 1A. RISK FACTORS.

Not required for a smaller reporting company.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES & USE OF PROCEEDS.

(a) None.

(b) Not applicable.

(c) Pursuant to Section 7.7 of the Partnership Agreement, as amended, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during January or July of each year. The purchase price of the Units is equal to 90% of the net asset value per Unit, as of the first business day of January or July of each year, as determined by the Managing General Partner in accordance with the provisions of the Partnership Agreement. Units tendered to the Partnership during January and July are redeemed on April 1st and October 1st, respectively, of each year subject to the following limitations. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership. During the period covered by this report, the Partnership did not purchase any Units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

31.1	Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.

32	Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements 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.

Dated: November 12, 2014	AEI Net Lease Income & Growth Fund XX
	Limited Partnership
	By:	AEI Fund Management XX, Inc.
	Its:	Managing General Partner



	By:	/s/ ROBERT P JOHNSON
		Robert P. Johnson
		President
		(Principal Executive Officer)



	By:	/s/ PATRICK W KEENE
		Patrick W. Keene
		Chief Financial Officer
		(Principal Accounting Officer)

Page 21 of 21

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP - FORM 10-Q - November 12, 2014

Attached files

AEI NET LEASE INCOME & GROWTH FUND XX LIMITED PARTNERSHIP Reports