CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These forward-looking statements are not historical facts but are the intent,
belief or current expectations of the Partnership's management based on its
knowledge and understanding of the business and industry. Words such as "may,"
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
"would," "could," "should" and variations of these words and similar expressions
are intended to identify forward-looking statements. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we can give no assurance that these expectations will prove to have been
correct. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
Examples of forward-looking statements include, but are not limited to,
statements we make regarding:
? our expectations regarding financial condition or results of operations in any
future period;
? our future sources of, and needs for, liquidity and capital resources;
? our expectations regarding economic and business conditions (both nationally
and where the Properties are located);
? our business strategies and our ability to grow our business;
? our decisions and policies with respect to the potential retention or
disposition of one or more Properties;
? our ability to find a suitable purchaser for any marketed Properties;
? our ability to agree on an acceptable purchase price or contract terms for any
Property sales;
? our ability to collect rents on our leases;
? our ability to maintain relationships with our tenants, and when necessary
extend lease terms or identify new tenants; and
? our future capital expenditures.
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of
operations is based upon the Partnership's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial statements
requires persons performing the functions of the Partnership's management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On a regular basis, we evaluate these estimates, including
investment impairment. These estimates are based on the General Partner's
historical industry experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates.
The Partnership believes that its most significant accounting policies pertain
to:
Depreciation methods and lives- Depreciation of the properties is provided on a
straight-line basis over the estimated useful life of the buildings and
improvements. Additionally, the value of real estate is typically based on
market conditions and property performance. As a result, depreciated book value
of real estate may not reflect the market value of real estate assets.
Revenue recognition- Rental revenue from investment properties is recognized on
the straight-line basis over the life of the respective lease when
collectability is reasonably assured. Percentage rents are accrued only when the
tenant has reached the sales breakpoint stipulated in the lease and
collectability is reasonably assured.
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Impairment-The Partnership periodically reviews its long-lived assets, primarily
real estate, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The
Partnership's review involves comparing current and future operating performance
of the assets, the most significant of which is undiscounted operating cash
flows, to the carrying value of the assets of the individual properties. Based
on this analysis, if deemed necessary, a provision for possible loss is
recognized.
Investment Properties
As of December 31, 2022, the Partnership owned eight Properties, all of which
feature tenants that are franchisees of casual restaurants. The following are
operated at the aforementioned eight Properties: seven Wendy's restaurants, and
an Applebee's restaurant. The Properties are located in a total of three states.
Property taxes, general maintenance, insurance and ground rent on the Properties
are the responsibility of the respective tenants. A more detailed discussion of
tax payments, insurance and ground rent is provided in Item 2, and incorporated
herein by this reference.
There were no building improvements capitalized during 2022 or 2021.
Further Information
A summary of significant developments as of December 31, 2022, by Property, for
Properties with such developments, can be found in Item 2, Properties.
Net Income
Net income for the fiscal years ended December 31, 2022 and 2021 was $2,069,792
and $1,575,407, respectively. Net income per Limited Partner Interest for the
fiscal years ended December 31, 2022 and 2021 was $44.28 and $33.70,
respectively.
Results of Operations
Net income for the fiscal years ended December 31, 2022 and 2021 was $2,069,792
and $1,575,407, respectively. See the paragraphs below for further information
as to variances in individual operating income and expense items. We are not
aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally that may reasonably be expected to
have a material impact, favorable or unfavorable, on Partnership revenues and
investment property value.
Fiscal year ended December 31, 2022 as compared to fiscal year ended December
31, 2021:
Operating Rental Income: Operating rental income for the fiscal years ended
December 31, 2022 and 2021 was $1.611 and $1.753 million, respectively. The
rental income was comprised of monthly lease obligations per the tenant leases
and percentage rents obligations related to operating tenants who had reached
their sales breakpoint. The decrease in 2022 compared to 2021 was due to the
lower base rental income and percentage rent due to property sales in each of
2021 and 2022.
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Management expects total base operating rental income to be approximately
$1,241,280 for the 2023 fiscal year based on operating leases currently in place
and does not include rents from properties held for sale. Future operating
rental income has the potential to either decrease or increase. Future operating
rental income may decrease with a tenant default and/or we may reclassify
certain additional properties as properties held for sale. Future operating
rental income may also increase with additional rents due from tenants, if those
tenants experience increased sales levels, which require the payment of
additional rent to the Partnership. Operating percentage rents included in
operating rental income in the fiscal years ended December 31, 2022 and 2021
were $342,359 and $388,701, respectively. However, the 2021 additional rent
earned was reduced by a capital improvements rent credit to the tenant of the
Folly Road Property, so, the actual revenue earned from 2021 was $366,473, net
of the $22,229 rent credit. Management expects percentage rents for the fiscal
year ending December 31, 2023 to be about the same as those received in 2022
because the same strong sales performance from 2022 is expected again in 2023.
Partnership Management Fees Expense: Partnership management fees expense for the
fiscal years ended December 31, 2022 and 2021 were $272,316 and $274,980,
respectively. The General Partner receives a fee for managing the Partnership.
See Note 5, Transactions with General Partner and Its Affiliates, for further
information.
General and Administrative Expense: General and administrative expenses for the
fiscal years ended December 31, 2022 and 2021 were $120,470 and $66,038,
respectively. General and administrative expenses were comprised of management
expense, state/city registration and annual report filing fees, office supplies
and printing costs, outside storage expenses, copy/fax costs, postage and
shipping expenses, long-distance telephone expenses, website fees, bank fees and
state income tax expenses. Total operating general and administrative expenses
for the fiscal year ended December 31, 2022 were higher than in the fiscal year
ended December 31, 2021, primarily due to about $50,000 in higher state income
tax expense paid on behalf of the limited partners related to 2021 income.
Management expects the total operating general and administrative expenses for
the fiscal year ending December 31, 2023 to be higher than for the fiscal year
ended December 31, 2021 due to an expected increase in state income taxes due
for 2022 income as a result of the sale of the Walton Way property, and 2023
increased quarterly estimated state income tax payments.
Professional Services: Professional services expenses for the fiscal years ended
December 31, 2022 and 2021 were $240,302 and $197,792, respectively.
Professional service expenses were primarily comprised of investor relations
data processing, investor mailings processing, website design, legal, auditing
and tax preparation fees, electronic tax filings, and SEC report conversion and
processing fees. The General Partner anticipates that total professional
services expenses for the fiscal year ending December 31, 2023 will be about
$90,000 lower than incurred for the fiscal year ended December 31, 2022. The
costs in 2023 are expected to decrease due to switching investor relations firms
and the related decrease in contract costs for the new investor relations
services firm.
Cash Flow Analysis
Net cash flows provided by operating activities for the fiscal years ended
December 31, 2022 and 2021 were $993,976 and $1,512,480, respectively. Cash
flows from operating activities was lower in 2022 primarily due to the increase
in net income year over year offset by the gain on the sale of the Walton Way
property and the decrease in percentage rent receivable year over year.
Depreciation and amortization are non-cash items and do not affect the current
operating cash flow of the Partnership or distributions to the limited partners.
Cash flows provided from investing activities for the fiscal years ended
December 31, 2022 and 2021 were $1,448,425 and $584,379, respectively. The 2022
amount is largely comprised of proceeds from the sale of the Walton Way
property. The 2021 amount is comprised of proceeds from the sale of the
Martinez, GA property, offset by a leasing commission paid to the General
Partner related to the six Wendy's leases that were extended thru December 31,
2040 as of January 1, 2021.
For the fiscal year ended December 31, 2022, cash flows used in financing
activities were $3,237,003 and consisted of aggregate limited partner
distributions of $3,225,000 and General Partner distributions of $12,003. For
the fiscal year ended December 31, 2021, cash flows used in financing activities
were $1,203,265 and consisted of aggregate limited partner distributions of
$1,200,000 and General Partner distributions of $3,265. Both limited partner and
General Partner distributions have been, and will continue to be, made in
accordance with the Partnership Agreement. Management anticipates that aggregate
limited partner distributions will be approximately $1,000,000 during 2023.
Liquidity and Capital Resources
The Partnership's cash balance was $171,236 at December 31, 2022. Cash of
approximately $38,709 is anticipated to be used in 2023 for the payment of
quarter-end accrued liabilities which are included in the balance sheet.
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The Partnership's principal demands for funds historically have been, and are
expected to continue to be, for the payment of operating expenses and
distributions. Management anticipates that cash generated through the operations
of the Properties and potential sales of Properties will primarily provide the
sources for future liquidity and limited partner distributions. During the
process of leasing the Properties, the Partnership may experience competition
from owners and managers of other similarly situated properties. As a result, in
connection with negotiating tenant leases, along with recognizing market
conditions, management may offer rental concessions, or other inducements, which
may have an adverse impact on the results of the Partnership's operations. The
Partnership is also in competition with sellers of similar properties to locate
suitable purchasers for its Properties. The two primary liquidity risks in the
absence of mortgage debt are the Partnership's inability to collect rent
receivables and near- term or chronic property vacancies. The amount of cash to
be distributed to our limited partners is determined by the General Partner and
is dependent on a number of factors, including funds available for payment of
distributions, capital expenditures, and taxable income recognition matching,
which is primarily attributable to percentage rents and property sales.
As of December 31, 2022 and 2021, the Properties were 100% leased. In addition,
the Partnership collected 100% of its base rent due from current operating
tenants for the years ended December 31, 2022 and 2021, which we believe is a
good indication of overall tenant quality and stability.
Seven of the eight Properties are operated as Wendy's fast food restaurants and
are franchises of the international Wendy's Company. Operating base rents from
these seven leases comprised approximately 89% of the total 2022 operating base
rents included in operating rental income of the Partnership. During the year
ended December 31, 2022, additional percentage rents totaled $342,359, $319,565
of which were unbilled and were accrued in relation to the Properties operated
as Wendy's restaurants. Therefore, during 2022, the Partnership generated
approximately 90% of its total operating revenues from those seven Properties.
Since the Properties are leased to restaurant tenants, the restaurant market is
the major market segment with a material impact on Partnership operations. The
success of customer marketing and the operating effectiveness of the
Partnership's lessees will impact the Partnership's future operating success in
a very competitive restaurant and food service marketplace.
Off-Balance Sheet Arrangements
The Partnership does not have any off-balance sheet arrangements that are
reasonably likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Disposition Policies
In deciding whether to sell a Property, the General Partner considers factors
such as potential capital appreciation or depreciation, market and economic
conditions and the general strength of the real estate market, cash flow and
federal income tax considerations, including possible adverse federal income tax
consequences to the limited partners. The General Partner may exercise its
discretion as to whether and when to sell a Property, and there is no obligation
to sell any of the Properties at any particular time, except upon Partnership
dissolution currently scheduled for November 30, 2023 pursuant to the
Partnership Agreement.
Inflation
To the extent that tenants can pass through commodity inflation in their sales
prices, the Partnership will benefit from additional percentage rent from
increased sales. The majority of the Partnership's leases have percentage rental
clauses. Revenues from operating percentage rentals represented 21% of operating
rental income for the fiscal years ended December 31, 2022 and 2021. If,
however, inflation causes sales to decrease, operating margins to deteriorate
for lessees, or if expenses grow faster than revenues, then, inflation may well
negatively impact the portfolio through tenant defaults.
Due to the "triple-net" nature of the property leases, asset values generally
move inversely with interest rates.
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