Attached files

file filename
EX-32 - AEI INCOME & GROWTH FUND 25 LLCex32-25.htm
EX-31.2 - AEI INCOME & GROWTH FUND 25 LLCex31-225.htm
EX-31.1 - AEI INCOME & GROWTH FUND 25 LLCex31-125.htm
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, 2015

Commission File Number:  000-50609

AEI INCOME & GROWTH FUND 25 LLC
(Exact name of registrant as specified in its charter)

State of Delaware
 
75-3074973
(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 INCOME & GROWTH FUND 25 LLC

INDEX


   
Page
Part I – Financial Information
 
       
 
Item 1.
Financial Statements:
 
       
   
Balance Sheets as of September 30, 2015 and December 31, 2014
3
       
   
Statements for the Periods ended September 30, 2015 and 2014:
 
         
     
Income
4
         
     
Cash Flows
5
         
     
Changes in Members' Equity
6
         
   
Notes to Financial Statements
7 - 13
       
 
Item 2.
Management's Discussion and Analysis of Financial
 
     
Condition and Results of Operations
14 - 20
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
       
 
Item 4.
Controls and Procedures
21
       
Part II – Other Information
 
       
 
Item 1.
Legal Proceedings
21
       
 
Item 1A.
Risk Factors
21
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22
       
 
Item 3.
Defaults Upon Senior Securities
22
       
 
Item 4.
Mine Safety Disclosures
22
       
 
Item 5.
Other Information
22
       
 
Item 6.
Exhibits
22
       
Signatures
23

 
 
Page 2 of 23

 
AEI INCOME & GROWTH FUND 25 LLC
BALANCE SHEETS

ASSETS

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(unaudited)
       
Current Assets:
           
Cash
  $ 2,004,516     $ 4,182,911  
                 
Real Estate Investments:
               
Land
    9,330,921       8,280,921  
Buildings
    20,225,531       18,740,891  
Acquired Intangible Lease Assets
    2,327,904       1,405,652  
Real Estate Held For Investment, at cost
    31,884,356       28,427,464  
Accumulated Depreciation and Amortization
    (6,210,698 )     (5,495,528 )
Real Estate Held for Investment, Net
    25,673,658       22,931,936  
Real Estate Held for Sale
    650,000       1,776,343  
Total Real Estate Investments
    26,323,658       24,708,279  
Total Assets
  $ 28,328,174     $ 28,891,190  

LIABILITIES AND MEMBERS’ EQUITY

Current Liabilities:
           
Payable to AEI Fund Management, Inc.
  $ 106,105     $ 134,238  
Distributions Payable
    544,949       542,448  
Unearned Rent
    59,549       15,485  
Total Current Liabilities
    710,603       692,171  
                 
Long-term Liabilities:
               
Acquired Below-Market Lease Intangibles, Net
    90,104       100,241  
                 
Members’ Equity:
               
Managing Members
    4,122       13,000  
Limited Members – 50,000 Units authorized;
   40,922 and 41,122 Units issued and outstanding
   as of 9/30/15 and 12/31/14, respectively
    27,523,345       28,085,778  
Total Members’ Equity
    27,527,467       28,098,778  
Total Liabilities and Members’ Equity
  $ 28,328,174     $ 28,891,190  

The accompanying Notes to Financial Statements are an integral part of these statements.
 
Page 3 of 23

AEI INCOME & GROWTH FUND 25 LLC
STATEMENTS OF INCOME
(unaudited)

   
Three Months Ended September 30
   
Nine Months Ended September 30
 
   
2015
   
2014
   
2015
   
2014
 
                         
Rental Income
  $ 635,476     $ 579,863     $ 1,843,926     $ 1,687,256  
                                 
Expenses:
                               
LLC Administration – Affiliates
    86,733       82,561       271,009       245,639  
LLC Administration and Property
   Management – Unrelated Parties
    18,656       16,078       79,311       56,023  
Property Acquisition
    815       51,940       139,639       51,940  
Depreciation and Amortization
    239,009       215,924       679,576       623,040  
Total Expenses
    345,213       366,503       1,169,535       976,642  
                                 
Operating Income
    290,263       213,360       674,391       710,614  
                                 
Other Income:
                               
Gain on Sale of Real Estate
    0       0       424,001       0  
Interest Income
    1,295       2,908       7,300       4,972  
Total Other Income
    1,295       2,908       431,301       4,972  
                                 
Income from Continuing Operations
    291,558       216,268       1,105,692       715,586  
                                 
Income from Discontinued Operations
    122,248       195,149       85,086       1,373,278  
                                 
Net Income
  $ 413,806     $ 411,417     $ 1,190,778     $ 2,088,864  
                                 
Net Income Allocated:
                               
Managing Members
  $ 16,310     $ 16,625     $ 38,934     $ 56,141  
Limited Members
    397,496       394,792       1,151,844       2,032,723  
Total
  $ 413,806     $ 411,417     $ 1,190,778     $ 2,088,864  
                                 
Income per LLC Unit:
                               
Continuing Operations
  $ 6.81     $ 5.08     $ 26.09     $ 16.81  
Discontinued Operations
    2.90       4.49       2.01       32.41  
Total – Basic and Diluted
  $ 9.71     $ 9.57     $ 28.10     $ 49.22  
                                 
Weighted Average Units Outstanding –
      Basic and Diluted
    40,922       41,267       40,989       41,302  
                                 
The accompanying Notes to Financial Statements are an integral part of these statements.
 
Page 4 of 23

 
AEI INCOME & GROWTH FUND 25 LLC
STATEMENTS OF CASH FLOWS
(unaudited)

   
Nine Months Ended September 30
 
   
2015
   
2014
 
Cash Flows from Operating Activities:
           
Net Income
  $ 1,190,778     $ 2,088,864  
                 
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
               
Depreciation and Amortization
    705,033       648,842  
Gain on Sale of Real Estate
    (424,001 )     (1,544 )
Income from Equity Method Investment Held for Sale
    0       (1,376,982 )
Increase (Decrease) in Payable to
   AEI Fund Management, Inc.
    (28,133 )     31,272  
Increase (Decrease) in Unearned Rent
    44,064       46,119  
Total Adjustments
    296,963       (652,293 )
Net Cash Provided By (Used For)
   Operating Activities
    1,487,741       1,436,571  
                 
Cash Flows from Investing Activities:
               
Investments in Real Estate
    (3,456,892 )     (2,334,000 )
Proceeds from Sale of Real Estate
    1,550,344       551,544  
Cash Paid for Equity Method Investment Held for Sale
    0       (27,380 )
Distributions from Equity Method Investment Held for Sale
    0       4,770,000  
Net Cash Provided By (Used For)
   Investing Activities
    (1,906,548 )     2,960,164  
                 
Cash Flows from Financing Activities:
               
Distributions Paid to Members
    (1,627,137 )     (1,631,312 )
Repurchase of LLC Units
    (132,451 )     (67,325 )
Net Cash Provided By (Used For)
   Financing Activities
    (1,759,588 )     (1,698,637 )
                 
Net Increase (Decrease) in Cash
    (2,178,395 )     2,698,098  
                 
Cash, beginning of period
    4,182,911       1,632,418  
                 
Cash, end of period
  $ 2,004,516     $ 4,330,516  
                 
Supplemental Disclosure of Non-Cash Investing Activities:
               
Contribution of Real Estate (at carrying value)
   in Exchange for Equity Method Investment
  $ 0     $ 3,395,625  
                 
The accompanying Notes to Financial Statements are an integral part of these statements.
 
 
Page 5 of 23

 
AEI INCOME & GROWTH FUND 25 LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(unaudited)


   
Managing Members
   
Limited Members
   
Total
   
Limited Member Units Outstanding
 
                         
Balance, December 31, 2013
  $ 2,355     $ 28,212,231     $ 28,214,586       41,370.98  
                                 
Distributions Declared
    (43,630 )     (1,585,807 )     (1,629,437 )        
                                 
Repurchase of LLC Units
    (2,020 )     (65,305 )     (67,325 )     (104.12 )
                                 
Net Income
    56,141       2,032,723       2,088,864          
                                 
Balance, September 30, 2014
  $ 12,846     $ 28,593,842     $ 28,606,688       41,266.86  
                                 
                                 
Balance, December 31, 2014
  $ 13,000     $ 28,085,778     $ 28,098,778       41,121.89  
                                 
Distributions Declared
    (43,839 )     (1,585,799 )     (1,629,638 )        
                                 
Repurchase of LLC Units
    (3,973 )     (128,478 )     (132,451 )     (199.52 )
                                 
Net Income
    38,934       1,151,844       1,190,778          
                                 
Balance, September 30, 2015
  $ 4,122     $ 27,523,345     $ 27,527,467       40,922.37  
                                 



 










The accompanying Notes to Financial Statements are an integral part of these statements.
 
 
Page 6 of 23

 
AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(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 (US GAAP) 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 Income & Growth Fund 25 LLC (“Company”), a Limited Liability Company, was formed on June 24, 2002 to acquire and lease commercial properties to operating tenants.  The Company's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing Member.  Robert P. Johnson, the President and sole director of AFM, serves as the Special Managing Member.  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 Company.

The terms of the offering called for a subscription price of $1,000 per LLC Unit, payable on acceptance of the offer.  The Company commenced operations on September 11, 2003 when minimum subscriptions of 1,500 LLC Units ($1,500,000) were accepted.  The offering terminated May 12, 2005, when the extended offering period expired.  The Company received subscriptions for 42,434.763 Units.  Under the terms of the Operating Agreement, the Limited Members and Managing Members contributed funds of $42,434,763 and $1,000, respectively.  The Company shall continue until December 31, 2053, unless dissolved, terminated and liquidated prior to that date.

During operations, any Net Cash Flow, as defined, which the Managing Members determine to distribute will be distributed 97% to the Limited Members and 3% to the Managing Members.  Distributions to Limited Members will be made pro rata by Units.
 
 
Page 7 of 23

 

AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

(2)  Organization – (Continued)

Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the Managing Members determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Members and 1% to the Managing Members until the Limited Members receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 7% 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 Members and 10% to the Managing Members.  Distributions to the Limited Members will be made pro rata by Units.

For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated 97% to the Limited Members and 3% to the Managing Members.  Net losses from operations will be allocated 99% to the Limited Members and 1% to the Managing Members.

For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Operating Agreement as follows: (i) first, to those Members with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Members and 1% to the Managing Members until the aggregate balance in the Limited Members' capital accounts equals the sum of the Limited Members' Adjusted Capital Contributions plus an amount equal to 7% 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 Members and 10% to the Managing Members.  Losses will be allocated 99% to the Limited Members and 1% to the Managing Members.

The Managing Members are not required to currently fund a deficit capital balance.  Upon liquidation of the Company or withdrawal by a Managing Member, the Managing Members will contribute to the Company an amount equal to the lesser of the deficit balances in their capital accounts or 1.01% of the total capital contributions of the Limited Members over the amount previously contributed by the Managing Members.

(3)  Real Estate Investments –

On August 12, 2014, the Company purchased a Premier Diagnostic Imaging center in Terre Haute, Indiana for $2,334,000.  The Company allocated $290,697 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles, and allocated $104,746 to Acquired Below-Market Lease Intangibles.  The Company incurred $56,376 of acquisition expenses related to the purchase that were expensed.  The property is leased to Terre Haute Regional Hospital, L.P. under a Lease Agreement with a remaining primary term of 7.8 years (as of the date of purchase) and annual rent of $178,550.
 
 
Page 8 of 23

 

AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

(3)  Real Estate Investments – (Continued)

In the fourth quarter of 2014, the Company decided to sell the Advance Auto store in Brownsville, Texas.  In February 2015, the Company entered into an agreement to sell the property to an unrelated third party.  On April 20, 2015, the sale closed with the Company receiving net proceeds of $1,550,344, which resulted in a net gain of $424,001.  At the time of sale, the cost and related accumulated depreciation was $1,585,269 and $458,926, respectively.  At December 31, 2014, the property was classified as Real Estate Held for Sale with a carrying value of $1,126,343.

On June 9, 2015, the Company purchased a Fresenius Medical Center in Gretna, Louisiana for $3,456,892.  The Company allocated $922,252 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles of $405,185 and above-market lease intangibles of $517,067. The Company incurred $139,639 of acquisition expenses related to the purchase that were expensed.  The property is leased to Bio-Medical Application of Louisiana, a subsidiary of Fresenius Medical Care Holdings, Inc., under a Lease Agreement with a remaining primary term of 15.0 years and annual rent of $224,698.

For the nine months ended September 30, 2015 and 2014, the value of in-place lease intangibles amortized to expense was $94,100 and $62,304, the decrease to rental income for above-market leases was $35,594 and $26,928, and the increase to rental income for below-market leases was $10,137 and $1,126, respectively.  For lease intangibles not held for sale as of September 30, 2015, the weighted average remaining life is 105 months for in-place lease intangibles, 142 months for above-market leases and 80 months for below-market leases.  The estimated amortization expense is $143,575, the estimated decrease to rental income for above-market leases is $70,566 and the estimated increase to rental income for below-market leases is $13,516 for each of the next five succeeding years.
 
 
Page 9 of 23

 

AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

(4) Equity Method Investment Held for Sale –

In the fourth quarter of 2013, the Company decided to sell its 45% interest in the CarMax Auto Superstore in Lithia Springs, Georgia.  The remaining interests in the property were owned by three affiliated entities, AEI Income & Growth Fund XXI Limited Partnership, AEI Income & Growth Fund 24 LLC and AEI Private Net Lease Millennium Fund Limited Partnership.  On March 7, 2014, to facilitate the sale of the property, the Company and affiliated entities contributed their respective interests in the property via a limited liability company to CM Lithia Springs DST (“CMLS”), a Delaware statutory trust (“DST”) in exchange for Class B ownership interests in CMLS.  In addition, a small amount of cash was contributed for working capital.  A DST is a recognized mechanism for selling property to investors who are looking for replacement real estate to complete like-kind exchanges under Section 1031 of the Internal Revenue Code.  As investors purchased Class A ownership interests in CMLS, the proceeds received were used to redeem, on a one-for-one basis, the Class B ownership interests of the Company and affiliated entities.  From March 13, 2014 to July 25, 2014, CMLS sold 100% of its Class A ownership interests to investors and redeemed 100% of the Class B ownership interests from the Company and affiliated entities.  As of December 31, 2014, the Partnership had no ongoing interest in CMLS.

The investment in CMLS was recorded using the equity method of accounting in the accompanying financial statements.  Under the equity method, the investment in CMLS was stated at cost and adjusted for the Company’s share of net income or losses and reduced by proceeds received from the sale of the Class B ownership interests of CMLS as well as distributions from net rental income.  During 2014, the investment balance consisted of the following:

Activity Through September 30, 2014:
           
Real Estate Contributed (at carrying value)
   
$
3,395,625
   
Cash Contributed
     
27,380
   
Net Income – Rental Activity
     
74,150
   
Net Income – Gain on Sale of Real Estate
     
1,302,832
   
Distributions from Net Rental Income
     
(74,150)
   
Proceeds from Sale of Class B Interests
     
(4,695,850)
   
Equity Method Investments at September 30, 2014
     
29,987
   
Activity After September 30, 2014:
           
Net Income – Rental Activity
     
21
   
Net Income – Gain on Sale of Real Estate
     
25,975
   
Distributions from Net Rental Income
     
(21)
   
Proceeds from Sale of Class B Interests
     
(55,962)
   
Equity Method Investments at December 31, 2014
   
$
0
   
             
 
 
Page 10 of 23

 

AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

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

AEI Fund Management, Inc. performs the administrative and operating functions for the Company.  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.

(6)  Discontinued Operations –

The tenant of the Johnny Carino’s restaurants was experiencing financial difficulties and closed the restaurants in Pueblo, Colorado (October 2013) and Lake Charles, Louisiana (January 2014). On March 27, 2014, the tenant filed for Chapter 11 bankruptcy reorganization.  Shortly thereafter, the tenant filed a motion with the bankruptcy court to reject the leases and returned possession of the properties to the Company.  As of the date of the bankruptcy filing, the tenant owed $97,680 of past due rent, which was not accrued for financial reporting purposes.  While the properties are vacant, the Company is responsible for the real estate taxes and other costs associated with maintaining the properties.  The Company submitted a Proof of Claim for damages to the bankruptcy court for each property.  The tenant’s reorganization plan was approved by the bankruptcy court effective February 2, 2015.  In August 2015, the Company received payments totaling $137,474 on its claims from the plan.

In September 2013, the Company decided to sell its 50% interest in the Johnny Carino’s restaurant in Lake Charles and classified it as Real Estate Held for Sale.  In March 2014, the Company entered into an agreement to sell the Lake Charles property to an unrelated third party.  On August 1, 2014, the sale closed with the Company receiving net sale proceeds of $551,544, which resulted in a net gain of $1,544.  At the time of sale, the cost and related accumulated depreciation was $911,408 and $361,408, respectively.

In September 2013, the Company decided to sell the Johnny Carino’s restaurant in Pueblo and classified it as Real Estate Held for Sale.  Based on its long-lived asset valuation analysis, the Company determined the property was impaired.  As a result, in the fourth quarter of 2014, a charge to discontinued operations for real estate impairment of $150,000 was recognized, which was the difference between the carrying value at December 31, 2014 of $800,000 and the estimated fair value of $650,000.  The charge was recorded against the cost of the land and building. In June 2015, the Company entered into an agreement to sell the property to an unrelated third party.  If the sale was completed, the Company expected to receive net proceeds of approximately $779,000.  In October 2015, the buyer withdrew the offer.  The Company continues to seek a buyer for the property and may not be able to negotiate a purchase with similar economic terms.
 
 
Page 11 of 23

 

AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

(6)  Discontinued Operations – (Continued)

In the fourth quarter of 2013, the Company decided to sell its 45% interest in the CarMax Auto Superstore in Lithia Springs, Georgia.  At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $3,395,625.  On March 7, 2014, to facilitate the sale of the property, the Company contributed its interest in the property via a limited liability company to CM Lithia Springs DST as described in Note 4.

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
   
2015
 
2014
 
2015
 
2014
                 
Rental Income
$
0
$
0
$
0
$
60,166
Bankruptcy Claim Payments Received
 
137,474
 
0
 
137,474
 
0
Property Management Expenses
 
(15,226)
 
(30,596)
 
(52,388)
 
(65,414)
Income from Equity Method Investment
   Held for Sale
 
0
 
224,201
 
0
 
1,376,982
Gain on Disposal of Real Estate
 
0
 
1,544
 
0
 
1,544
Income from Discontinued Operations
$
122,248
$
195,149
$
85,086
$
1,373,278


   
Three Months Ended September 30
 
Nine Months Ended September 30
   
2015
 
2014
 
2015
 
2014
Cash Flows from Discontinued Operations:
               
Operating Activities
$
122,248
$
(30,596)
$
85,086
$
(5,248)
Investing Activities
$
0
$
1,721,544
$
0
$
5,294,164

(7)  Members’ Capital –

For the nine months ended September 30, 2015 and 2014, the Company declared distributions of $1,629,638 and $1,629,437, respectively.  The Limited Members received distributions of $1,585,799 and $1,585,807 and the Managing Members received distributions of $43,839 and $43,630 for the periods, respectively.  The Limited Members' distributions represented $38.69 and $38.40 per LLC Unit outstanding using 40,989 and 41,302 weighted average Units in 2015 and 2014, respectively.  The distributions represented $24.96 and $38.40 per Unit of Net Income and $13.73 and $0 per Unit of return of contributed capital for the periods, respectively.
 
 
Page 12 of 23

 
AEI INCOME & GROWTH FUND 25 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)

(7)  Members’ Capital – (Continued)

As part of the distributions discussed above, the Company distributed net sale proceeds of $252,525 and $262,626 in 2015 and 2014, respectively.  The Limited Members received distributions of $250,000 and $260,000 and the Managing Members received distributions of $2,525 and $2,626 for the periods, respectively.  The Limited Members’ distributions represented $6.11 and $6.30 per Unit for the periods, respectively.

On April 1, 2015, the Company repurchased a total of 199.52 Units for $128,478 from 12 Limited Members in accordance with the Operating Agreement.  On April 1, 2014, the Company repurchased a total of 104.12 Units for $65,305 from seven Limited Members.  The Company acquired these Units using Net Cash Flow from operations.  The repurchases increase the remaining Limited Members’ ownership interest in the Company.  As a result of these repurchases and pursuant to the Operating Agreement, the Managing Members received distributions of $3,973 and $2,020 in 2015 and 2014, respectively.

(8)  Fair Value Measurements –

Fair value, as defined by 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, 2015 and December 31, 2014, the Company had no financial assets or liabilities measured at fair value on a recurring basis or nonrecurring basis that would require disclosure.  The Company had the following nonfinancial assets measured on a nonrecurring basis that were recorded at fair value.

The Johnny Carino’s restaurant in Pueblo, Colorado, with a carrying amount of $800,000 at December 31, 2014, was written down to its estimated fair value of $650,000 after completing our long-lived asset valuation analysis.  The resulting impairment charge of $150,000 was included in earnings for the fourth quarter of 2014.  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 13 of 23

 

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 Company’s financial condition and results of operations, including the following:

 
Market and economic conditions which affect the value of the properties the Company 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 Members;
 
resolution by the Managing Members of conflicts with which they may be confronted;
 
the success of the Managing Members 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 Company operate.

Application of Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with 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 Company’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 Company’s assets and liabilities, or the results of reported operations, will be affected if management’s estimates or assumptions prove inaccurate.

Management of the Company 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 the managing member of the Company.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Company 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 14 of 23

 

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 term of the respective leases.  Below market leases will be amortized as an adjustment of rental income over the remaining terms 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 Company tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable.  For properties the Company 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.
 
 
Page 15 of 23

 

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 Company reimburses these expenses subject to detailed limitations contained in the Operating Agreement.

Results of Operations

For the nine months ended September 30, 2015 and 2014, the Company recognized rental income from continuing operations of $1,843,926 and $1,687,256, respectively.  In 2015, rental income increased due to additional rent received from one property acquisition in 2014 and one acquisition in 2015, and rent increases on four properties.  These increases in rental income were partially offset by a decrease in rent due to the sale of the Advance Auto store in Brownsville, Texas.  Based on the scheduled rent for the properties as of October 31, 2015, the Company expects to recognize rental income from continuing operations of approximately $2,486,000 and $2,583,000 in 2015 and 2016, respectively.

For the nine months ended September 30, 2015 and 2014, the Company incurred LLC administration expenses from affiliated parties of $271,009 and $245,639, respectively.  These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Members.  During the same periods, the Company incurred LLC administration and property management expenses from unrelated parties of $79,311 and $56,023, 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, 2015, the Company incurred property acquisition expenses of $139,639 related to the purchase of the Fresenius Medical Center in Gretna, Louisiana.  For the nine months ended September 30, 2014, the Company incurred property acquisition expenses of $51,940 related to the purchase of the Premier Diagnostic Imaging center in Terre Haute, Indiana.

During the nine months ended September 30, 2015, the Company recognized gain on sale of real estate of $424,001.  In the fourth quarter of 2014, the Company decided to sell the Advance Auto store in Brownsville, Texas.  In February 2015, the Company entered into an agreement to sell the property to an unrelated third party.  On April 20, 2015, the sale closed with the Company receiving net proceeds of $1,550,344, which resulted in a net gain of $424,001.  At the time of sale, the cost and related accumulated depreciation was $1,585,269 and $458,926, respectively.  At December 31, 2014, the property was classified as Real Estate Held for Sale with a carrying value of $1,126,343.

For the nine months ended September 30, 2015 and 2014, the Company recognized interest income of $7,300 and $4,972, respectively.
Page 16 of 23

 
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 Company included the operating results and sale of the property in discontinued operations.  In addition, the Company reclassified the prior periods’ operating results of the property to discontinued operations.  For the nine months ended September 30, 2015, the Company recognized income from discontinued operations of $85,086, representing bankruptcy claim payments received less property management expenses.  For the nine months ended September 30, 2014, the Company recognized income from discontinued operations of $1,373,278, representing rental income of $60,166, income from an equity method investment held for sale of $1,376,982 and gain on disposal of real estate of $1,544, which were partially offset by property management expenses of $65,414.

The tenant of the Johnny Carino’s restaurants was experiencing financial difficulties and closed the restaurants in Pueblo, Colorado (October 2013) and Lake Charles, Louisiana (January 2014). On March 27, 2014, the tenant filed for Chapter 11 bankruptcy reorganization.  Shortly thereafter, the tenant filed a motion with the bankruptcy court to reject the leases and returned possession of the properties to the Company.  As of the date of the bankruptcy filing, the tenant owed $97,680 of past due rent, which was not accrued for financial reporting purposes.  While the properties are vacant, the Company is responsible for the real estate taxes and other costs associated with maintaining the properties.  The Company submitted a Proof of Claim for damages to the bankruptcy court for each property.  The tenant’s reorganization plan was approved by the bankruptcy court effective February 2, 2015.  In August 2015, the Company received payments totaling $137,474 on its claims from the plan.

In September 2013, the Company decided to sell its 50% interest in the Johnny Carino’s restaurant in Lake Charles and classified it as Real Estate Held for Sale.  In March 2014, the Company entered into an agreement to sell the Lake Charles property to an unrelated third party.  On August 1, 2014, the sale closed with the Company receiving net sale proceeds of $551,544, which resulted in a net gain of $1,544.  At the time of sale, the cost and related accumulated depreciation was $911,408 and $361,408, respectively.

In September 2013, the Company decided to sell the Johnny Carino’s restaurant in Pueblo and classified it as Real Estate Held for Sale.  Based on its long-lived asset valuation analysis, the Company determined the property was impaired.  As a result, in the fourth quarter of 2014, a charge to discontinued operations for real estate impairment of $150,000 was recognized, which was the difference between the carrying value at December 31, 2014 of $800,000 and the estimated fair value of $650,000.  The charge was recorded against the cost of the land and building. In June 2015, the Company entered into an agreement to sell the property to an unrelated third party.  If the sale was completed, the Company expected to receive net proceeds of approximately $779,000.  In October 2015, the buyer withdrew the offer.  The Company continues to seek a buyer for the property and may not be able to negotiate a purchase with similar economic terms.
 
 
Page 17 of 23

 

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

In the fourth quarter of 2013, the Company decided to sell its 45% interest in the CarMax Auto Superstore in Lithia Springs, Georgia.  At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $3,395,625.  The remaining interests in the property were owned by three affiliated entities, AEI Income & Growth Fund XXI Limited Partnership, AEI Income & Growth Fund 24 LLC and AEI Private Net Lease Millennium Fund Limited Partnership.  On March 7, 2014, to facilitate the sale of the property, the Company and affiliated entities contributed their respective interests in the property via a limited liability company to CM Lithia Springs DST (“CMLS”), a Delaware statutory trust (“DST”) in exchange for Class B ownership interests in CMLS.  In addition, a small amount of cash was contributed for working capital.  A DST is a recognized mechanism for selling property to investors who are looking for replacement real estate to complete like-kind exchanges under Section 1031 of the Internal Revenue Code.  As investors purchased Class A ownership interests in CMLS, the proceeds received were used to redeem, on a one-for-one basis, the Class B ownership interests of the Company and affiliated entities.  From March 13, 2014 to July 25, 2014, CMLS sold 100% of its Class A ownership interests to investors and redeemed 100% of the Class B ownership interests from the Company and affiliated entities.  As of December 31, 2014, the Partnership had no ongoing interest in CMLS.

The investment in CMLS was recorded using the equity method of accounting in the accompanying financial statements.  Under the equity method, the investment in CMLS was stated at cost and adjusted for the Company’s share of net income or losses and reduced by proceeds received from the sale of the Class B ownership interests of CMLS as well as distributions from net rental income.  For the nine months ended September 30, 2014, the Company’s share of the net income of CMLS was $1,376,982.

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, 2015, the Company's cash balances decreased $2,178,395 as a result of cash used to purchase property, and distributions paid to the Members and cash used to repurchase Units in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property.  During the nine months ended September 30, 2014, the Company's cash balances increased $2,698,098 as a result of cash generated from the sale of property and proceeds received from an equity method investment held for sale, which were partially offset by cash used to purchase property, distributions paid to the Members and cash used to repurchase Units in excess of cash generated from operating activities, and cash paid for an equity method investment held for sale.
 
 
Page 18 of 23

 

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

Net cash provided by operating activities increased from $1,436,571 in 2014 to $1,487,741 in 2015 as a result of an increase in total rental and interest income in 2015, which was partially offset by an increase in LLC administration and property management expenses in 2015 and net timing differences in the collection of payments from the tenants and the payment of expenses.  During 2015 and 2014, cash from operations was reduced by $139,639 and $51,940, respectively, of acquisition expenses related to the purchase of real estate.  Pursuant to accounting guidance, the acquisition expenses were reflected as operating cash outflows.  However, pursuant to the Company’s Operating Agreement, acquisition expenses were funded with proceeds from property sales.

The major components of the Company's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate, including proceeds from an equity method investment held for sale.  During the nine months ended September 30, 2015 and 2014, the Company generated cash flow from the sale of real estate of $1,550,344 and $551,544, respectively.  During the same periods, the Company expended $3,456,892 and $2,334,000 to invest in real properties as the Company reinvested cash generated from property sales.  During the nine months ended September 30, 2014, the Company paid cash for an equity method investment held for sale of $27,380.  During the same period, the Company received proceeds from the equity method investment of $4,770,000.  All but a small portion of these proceeds were generated from the sale of the CarMax Auto Superstore as discussed above.

On August 12, 2014, the Company purchased a Premier Diagnostic Imaging center in Terre Haute, Indiana for $2,334,000.  The property is leased to Terre Haute Regional Hospital, L.P. under a Lease Agreement with a remaining primary term of 7.8 years (as of the date of purchase) and annual rent of $178,550.

On June 9, 2015, the Company purchased a Fresenius Medical Center in Gretna, Louisiana for $3,456,892.  The property is leased to Bio-Medical Application of Louisiana, a subsidiary of Fresenius Medical Care Holdings, Inc., under a Lease Agreement with a remaining primary term of 15.0 years and annual rent of $224,698.

The Company's primary use of cash flow, other than investment in real estate, is distribution payments to Members and cash used to repurchase Units.  The Company 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 Company attempts to maintain a stable distribution rate from quarter to quarter.  The Company may repurchase tendered Units on April 1st and October 1st of each year subject to limitations.

For the nine months ended September 30, 2015 and 2014, the Company declared distributions of $1,629,638 and $1,629,437, respectively.  Pursuant to the Operating Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Members and 3% to the Managing Members.  Distributions of Net Proceeds of Sale were allocated 99% to the Limited Members and 1% to the Managing Members.  The Limited Members received distributions of $1,585,799 and $1,585,807 and the Managing Members received distributions of $43,839 and $43,630 for the periods, respectively.
 
 
Page 19 of 23

 

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

As part of the distributions discussed above, the Company distributed net sale proceeds of $252,525 and $262,626 in 2015 and 2014, respectively.  The Limited Members received distributions of $250,000 and $260,000 and the Managing Members received distributions of $2,525 and $2,626 for the periods, respectively.  The Limited Members’ distributions represented $6.11 and $6.30 per Unit for the periods, respectively.  The Company anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Members in the future.

The Company may repurchase Units from Limited Members who have tendered their Units to the Company.  Such Units may be acquired at a discount.  The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year.  In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company.

On April 1, 2015, the Company repurchased a total of 199.52 Units for $128,478 from 12 Limited Members in accordance with the Operating Agreement.  On April 1, 2014, the Company repurchased a total of 104.12 Units for $65,305 from seven Limited Members.  The Company acquired these Units using Net Cash Flow from operations.  The repurchases increase the remaining Limited Members’ ownership interest in the Company.  As a result of these repurchases and pursuant to the Operating Agreement, the Managing Members received distributions of $3,973 and $2,020 in 2015 and 2014, 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 Company obligations on both a short-term and long-term basis.

Off-Balance Sheet Arrangements

As of September 30, 2015 and December 31, 2014, the Company 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.
 
 
Page 20 of 23

 

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 Member of the Company 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 Member 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 Member, 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 Company is a party or of which the Company's property is subject.

ITEM 1A.  RISK FACTORS.

Not required for a smaller reporting company.
 
 
Page 21 of 23

 

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

(a) None.

(b) Not applicable.

(c) Pursuant to Section 7.7 of the Operating Agreement, each Limited Member has the right to present Units to the Company for purchase by submitting notice to the Managing Member during January or July of each year.  The purchase price of the Units is equal to 80% 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 Member in accordance with the provisions of the Operating Agreement.  Units tendered to the Company during January and July may be repurchased on April 1st and October 1st, respectively, of each year subject to the following limitations.  The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year.  In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company.  During the period covered by this report, the Company 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 Managing Member 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 Managing Member 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 Managing Member pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
Page 22 of 23

 


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 11, 2015
AEI Income & Growth Fund 25 LLC
 
By:
AEI Fund Management XXI, Inc.
 
Its:
Managing Member
     
     
     
 
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 23 of 23