AEI INCOME & GROWTH FUND XXII LTD PARTNERSHIP - FORM 10-Q - November 14, 2018

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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, 2018

Commission File Number:  000-24003

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

State of Minnesota
  
41-1848181
(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.     ☒ Yes    ☐ 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).     ☒ Yes    ☐ 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.

☐ Large accelerated filer
☐ Accelerated filer
☐ Non-accelerated filer
☒ Smaller reporting company
☐ Emerging growth company
  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

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


AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP

INDEX


   
Page
Part I – Financial Information
  
       
 
Item 1.
Financial Statements:
  
       
   
Balance Sheets as of September 30, 2018 and December 31, 2017
3
       
   
Statements for the Periods ended September 30, 2018 and 2017:
  
         
     
Income
4
         
     
Cash Flows
5
         
     
Changes in Partners' Capital (Deficit)
6
         
   
Notes to Financial Statements
7 - 11
       
 
Item 2.
Management's Discussion and Analysis of Financial
  
     
Condition and Results of Operations
11 - 16
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16
       
 
Item 4.
Controls and Procedures
16
       
Part II – Other Information
  
       
 
Item 1.
Legal Proceedings
16
       
 
Item 1A.
Risk Factors
16
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
       
 
Item 3.
Defaults Upon Senior Securities
17
       
 
Item 4.
Mine Safety Disclosures
17
       
 
Item 5.
Other Information
17
       
 
Item 6.
Exhibits
17
       
Signatures
18

- 2 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
BALANCE SHEETS

ASSETS

   
September 30,
    
December 31,
  
   
2018
    
2017
  
   
(unaudited)
        
Current Assets:
            
Cash
  
$
835,835
    
$
913,966
  
                 
Real Estate Investments:
                
Land
    
2,367,033
      
2,367,033
  
Buildings
    
6,631,829
      
6,631,829
  
Acquired Intangible Lease Assets
    
932,882
      
932,882
  
Real Estate Held for Investment, at cost
    
9,931,744
      
9,931,744
  
Accumulated Depreciation and Amortization
    
(3,140,310
)
    
(2,871,573
)
Real Estate Held for Investment, Net
    
6,791,434
      
7,060,171
  
Total Assets
  
$
7,627,269
    
$
7,974,137
  

LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
            
Payable to AEI Fund Management, Inc.
  
$
4,847
    
$
29,826
  
Distributions Payable
    
142,476
      
142,476
  
Unearned Rent
    
31,271
      
9,620
  
Total Current Liabilities
    
178,594
      
181,922
  
                 
Partners' Capital (Deficit):
                
General Partners
    
(35,057
)
    
(24,751
)
Limited Partners – 24,000 Units authorized;
   13,503 and 13,641 Units issued and outstanding
   as of 9/30/2018 and 12/31/2017, respectively
    
7,483,732
      
7,816,966
  
Total Partners' Capital
    
7,448,675
      
7,792,215
  
Total Liabilities and Partners' Capital
  
$
7,627,269
    
$
7,974,137
  







The accompanying Notes to Financial Statements are an integral part of these statements.
- 3 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(unaudited)


   
Three Months Ended September 30
    
Nine Months Ended September 30
  
   
2018
    
2017
    
2018
    
2017
  
                         
Rental Income
  
$
186,252
    
$
188,647
    
$
531,470
    
$
565,213
  
                                 
Expenses:
                                
Partnership Administration – Affiliates
    
27,361
      
27,574
      
80,287
      
85,650
  
Partnership Administration and Property
   Management – Unrelated Parties
    
4,486
      
8,197
      
28,435
      
26,227
  
Depreciation and Amortization
    
77,141
      
77,141
      
231,423
      
231,423
  
Total Expenses
    
108,988
      
112,912
      
340,145
      
343,300
  
                                 
Operating Income
    
77,264
      
75,735
      
191,325
      
221,913
  
                                 
Other Income:
                                
Interest Income
    
1,897
      
761
      
3,875
      
2,295
  
                                 
Net Income
  
$
79,161
    
$
76,496
    
$
195,200
    
$
224,208
  
                                 
Net Income Allocated:
                                
General Partners
  
$
2,375
    
$
2,295
    
$
5,856
    
$
6,726
  
Limited Partners
    
76,786
      
74,201
      
189,344
      
217,482
  
Total
  
$
79,161
    
$
76,496
    
$
195,200
    
$
224,208
  
                                 
Net Income per Limited Partnership Unit
  
$
5.69
    
$
5.35
    
$
13.97
    
$
15.62
  
                                 
Weighted Average Units Outstanding –
      Basic and Diluted
    
13,503
      
13,879
      
13,549
      
13,920
  
                                 










The accompanying Notes to Financial Statements are an integral part of these statements.
- 4 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(unaudited)


   
Nine Months Ended September 30
  
   
2018
    
2017
  
Cash Flows from Operating Activities:
            
Net Income
  
$
195,200
    
$
224,208
  
                 
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
                
Depreciation and Amortization
    
268,737
      
268,737
  
Increase (Decrease) in Payable to
   AEI Fund Management, Inc.
    
(24,979
)
    
(13,992
)
Increase (Decrease) in Unearned Rent
    
21,651
      
29,245
  
Total Adjustments
    
265,409
      
283,990
  
Net Cash Provided By (Used For)
   Operating Activities
    
460,609
      
508,198
  
                 
Cash Flows from Financing Activities:
                
Distributions Paid to Partners
    
(427,427
)
    
(433,386
)
Repurchase of Partnership Units
    
(111,313
)
    
(99,630
)
Net Cash Provided By (Used For)
   Financing Activities
    
(538,740
)
    
(533,016
)
                 
Net Increase (Decrease) in Cash
    
(78,131
)
    
(24,818
)
                 
Cash, beginning of period
    
913,966
      
1,117,341
  
                 
Cash, end of period
  
$
835,835
    
$
1,092,523
  
                 











The accompanying Notes to Financial Statements are an integral part of these statements.
- 5 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(unaudited)


   
General Partners
    
Limited Partners
    
Total
    
Limited Partnership Units Outstanding
  
                         
Balance, December 31, 2016
  
$
(13,011
)
  
$
8,369,357
    
$
8,356,346
      
14,001.92
  
                                 
Distributions Declared
    
(11,588
)
    
(421,798
)
    
(433,386
)
        
                                 
Repurchase of Partnership Units
    
(2,989
)
    
(96,641
)
    
(99,630
)
    
(123.00
)
                                 
Net Income
    
6,726
      
217,482
      
224,208
          
                                 
Balance, September 30, 2017
  
$
(20,862
)
  
$
8,068,400
    
$
8,047,538
      
13,878.92
  
                                 
                                 
Balance, December 31, 2017
  
$
(24,751
)
  
$
7,816,966
    
$
7,792,215
      
13,641.12
  
                                 
Distributions Declared
    
(12,823
)
    
(414,604
)
    
(427,427
)
        
                                 
Repurchase of Partnership Units
    
(3,339
)
    
(107,974
)
    
(111,313
)
    
(138.53
)
                                 
Net Income
    
5,856
      
189,344
      
195,200
          
                                 
Balance, September 30, 2018
  
$
(35,057
)
  
$
7,483,732
    
$
7,448,675
      
13,502.59
  
                                 
















The accompanying Notes to Financial Statements are an integral part of these statements.
- 6 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(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 XXII Limited Partnership ("Partnership") was formed to acquire and lease commercial properties to operating tenants.  The Partnership's operations are managed by AEI Fund Management XXI, 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 May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted.  The offering terminated January 9, 1999 when the extended offering period expired.  The Partnership received subscriptions for 16,917.222 Limited Partnership Units.  Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $16,917,222 and $1,000, respectively.

During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 97% to the Limited Partners and 3% to the General Partners.  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 9% 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.
- 7 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

(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 9% 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 May 2015, 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.  Approval of either proposal required the affirmative vote of holders of a majority of the outstanding units.  On June 17, 2015, 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, 2046, 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.

- 8 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

(3)  Recently Adopted Accounting Pronouncements –

In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers.  This standard was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Entities are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle.  Those steps include the following:  (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation.

Management has concluded that all of the Partnership's material revenue streams fall outside of the scope of this guidance.  The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption.  During 2018, the Partnership selected the modified retrospective transition method as of the date of adoption effective January 1, 2018.  Management has concluded that the majority of total revenues consist of rental income from leasing arrangements, which are specifically excluded from the standard.  The Partnership analyzed its remaining revenue streams, inclusive of gains and losses on real estate sales, and concluded there are no changes in revenue recognition with the adoption of the new standard.  As such, adoption of the standard did not result in a cumulative adjustment recognized as of January 1, 2018, and the standard did not have a material impact on the Partnership's financial statements.

In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted, and is required to be applied prospectively to any transactions occurring within the period of adoption.  We expect the new standard will result in all of our real estate acquisitions being considered asset acquisitions, whereby substantially all acquisition costs related to our real estate acquisitions will be capitalized.  Prior to the adoption of the new standard, all of our real estate acquisitions completed after January 1, 2009, were considered acquisitions of businesses, whereby all acquisition-related costs were expensed as incurred.  During 2018, the Partnership has adopted the accounting pronouncement effective January 1, 2018, and applied this guidance prospectively.  The adoption did not have a material effect on its financial statements.

- 9 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

(4)  Recently Issued Accounting Pronouncements –

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements for the analysis of partners' capital for interim financial statements. Under the amendments, an analysis of changes in each caption of partners' capital presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Partnership anticipates its first presentation of year-to-date quarterly changes in partners' capital will be included in its Form 10-Q for the quarter ended March 31, 2019.

(5)  Real Estate Investments –

In February 2018, the Partnership entered into an agreement with the tenant of the Advance Auto Parts store in Indianapolis, Indiana to extend the lease term five years to end on April 30, 2025.  As part of the agreement, the annual rent decreased from $95,885 to $81,861 effective January 1, 2018.  In addition, beginning on March 1, 2018, the tenant received free rent for four months that equaled $27,287.

In July 2018, the Partnership entered into an agreement with the tenant of the Best Buy store in Lake Geneva, Wisconsin to extend the lease term five years to end on March 31, 2024.  As part of the agreement, the annual rent will decrease from $149,302 to $129,395 effective February 1, 2019.  In addition, beginning on February 1, 2019, the tenant will receive free rent for one month that equals $10,783.

(6)  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.

(7)  Partners' Capital –

For the nine months ended September 30, 2018 and 2017, the Partnership declared distributions of $427,427 and $433,386, respectively.  The Limited Partners received distributions of $414,604 and $421,798 and the General Partners received distributions of $12,823 and $11,588 for the periods, respectively.  The Limited Partners' distributions represented $30.60 and $30.30 per Limited Partnership Unit outstanding using 13,549 and 13,920 weighted average Units in 2018 and 2017, respectively.  The distributions represented $5.97 and $8.66 per Unit of Net Income and $24.63 and $21.64 per Unit of return of capital in 2018 and 2017, respectively.

- 10 -
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

(7)  Partners' Capital – (Continued)

As part of the distributions discussed above, the Partnership distributed net sale proceeds of $70,707 in 2017.  The Limited Partners received distributions of $70,000 and the General Partners received distributions of $707.  The Limited Partners' distributions represented $5.04 per Unit.

On April 1, 2018, the Partnership repurchased a total of 138.53 Units for $107,974 from nine Limited Partners in accordance with the Partnership Agreement.  On April 1, 2017, the Partnership repurchased a total of 123.00 Units for $96,641 from four Limited Partners.  The Partnership acquired these Units using Net Cash Flow from operations.  The repurchases increase the remaining Limited Partners' ownership interest in the Partnership.  As a result of these repurchases and pursuant to the Partnership Agreement, the General Partners received distributions of $3,339 and $2,989 in 2018 and 2017, respectively.

(8)  Fair Value Measurements –

As of September 30, 2018 and December 31, 2017, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.

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.

- 11 -
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

Application of Critical Accounting Policies

The Partnership'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 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 the 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.

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 lease values 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.

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

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.

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.

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

Results of Operations

For the nine months ended September 30, 2018 and 2017, the Partnership recognized rental income of $531,470 and $565,213, respectively.  In 2018, rental income decreased due to a rent decrease related to the Advance Auto Parts store, as discussed below.  This decrease was partially offset by rent increases on two properties.  Based on the scheduled rent for the properties as of October 31, 2018, the Partnership expects to recognize rental income of approximately $718,000 and $721,000 in 2018 and 2019, respectively.

For the nine months ended September 30, 2018 and 2017, the Partnership incurred Partnership administration expenses from affiliated parties of $80,287 and $85,650, 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 $28,435 and $26,227, 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, 2018 and 2017, the Partnership recognized interest income of $3,875 and $2,295, respectively.

In February 2018, the Partnership entered into an agreement with the tenant of the Advance Auto Parts store in Indianapolis, Indiana to extend the lease term five years to end on April 30, 2025.  As part of the agreement, the annual rent decreased from $95,885 to $81,861 effective January 1, 2018.  In addition, beginning on March 1, 2018, the tenant received free rent for four months that equaled $27,287.

In July 2018, the Partnership entered into an agreement with the tenant of the Best Buy store in Lake Geneva, Wisconsin to extend the lease term five years to end on March 31, 2024.  As part of the agreement, the annual rent will decrease from $149,302 to $129,395 effective February 1, 2019.  In addition, beginning on February 1, 2019, the tenant will receive free rent for one month that equals $10,783.

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, 2018 and 2017, the Partnership's cash balances decreased $78,131 and $24,818, respectively, as a result of distributions paid to the Partners and cash used to repurchase Units in excess of cash generated from operating activities.
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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

Net cash provided by operating activities decreased from $508,198 in 2017 to $460,609 in 2018 as a result of a decrease in total rental and interest income in 2018 and net timing differences in the collection of payments from the tenants and the payment of expenses, which were partially offset by a decrease in Partnership administration and property management expenses in 2018.

The Partnership's primary use of cash flow, other than investment in real estate, is distribution payments to Partners and cash used to repurchase Units.  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.  The Partnership may repurchase tendered Units on April 1st and October 1st of each year subject to limitations.

For the nine months ended September 30, 2018 and 2017, the Partnership declared distributions of $427,427 and $433,386, respectively.  Pursuant to the Partnership Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Partners and 3% to the General Partners.  Distributions of Net Proceeds of Sale were allocated 99% to the Limited Partners and 1% to the General Partners.  The Limited Partners received distributions of $414,604 and $421,798 and the General Partners received distributions of $12,823 and 11,588 for the periods, respectively.

As part of the distributions discussed above, the Partnership distributed net sale proceeds of $70,707 in 2017.  The Limited Partners received distributions of $70,000 and the General Partners received distributions of $707.  The Limited Partners' distributions represented $5.04 per Unit.

The Partnership may repurchase 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, 2018, the Partnership repurchased a total of 138.53 Units for $107,974 from nine Limited Partners in accordance with the Partnership Agreement.  On April 1, 2017, the Partnership repurchased a total of 123.00 Units for $96,641 from four Limited Partners.  The Partnership acquired these Units using Net Cash Flow from operations.  The repurchases increase the remaining Limited Partners' ownership interest in the Partnership.  As a result of these repurchases and pursuant to the Partnership Agreement, the General Partners received distributions of $3,339 and $2,989 in 2018 and 2017, 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.

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

Off-Balance Sheet Arrangements

As of September 30, 2018 and December 31, 2017, 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.

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, 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 may be repurchased 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 13, 2018
AEI Income & Growth Fund XXII
 
Limited Partnership
 
By:
AEI Fund Management XXI, 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)

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AEI INCOME & GROWTH FUND XXII LTD PARTNERSHIP Reports