(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 10K.

 

 

AEI Income & Growth Fund 26 LLC (“Company”), a Limited Liability Company, was formed on March 14, 2005 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 previous Chief Executive Officer and sole director of AFM, served as the Special Managing Member until his withdrawal date effective March 31, 2020. AFM is a wholly owned subsidiary of AEI Capital Corporation of which the Estate of Robert P. Johnson Trust and Patricia Johnson the wife of the deceased, own a majority interest. AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Company.

 

In August 2021, the Managing Member mailed a Consent Statement (Proxy) seeking the consent of the Limited Members, as required by Section 6.1 of the Operating Agreement, to initiate the final disposition, liquidation and distribution of all of the Company’s properties and assets within the next 12 to 24 months. On October 12, 2021, the proposal was approved with a majority of Units voting in favor of the proposal. As a result, the Managing Member is proceeding with the planned liquidation of the Company.

 

 

In April 2020, the Financial Accounting Standards Board (FASB) issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant or if a lease concession was under the enforceable rights and obligations within the existing lease agreement. The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under current lease guidance. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance.

 

DuringOther accounting standards that have been issued or proposed by the year ended December 31, 2020,FASB are currently not applicable to the Company provided lease concessionsor are not expected to certain tenants in response tohave a significant impact on the impactCompany's financial position, results of COVID-19, in the form of rent deferrals. The Company has made an election to account for such lease concessions consistent with how those concessions would be accounted for under lease guidance if enforceable rightsoperations, and obligations for those concessions had already existed in the leases. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights as lessor, including concessions that result in the total payments required by the modified lease being substantially the same as or less than total payments required by the original lease.

 

 

The Company owns a 40% interest in a former Sports Authority store in Wichita, Kansas. On March 2, 2016, the tenant, TSA Stores, Inc., and its parent company, The Sports Authority, Inc., the guarantor of the lease, filed for Chapter 11 bankruptcy reorganization. In June 2016, the tenant filed a motion with the bankruptcy court to reject the lease for this store effective June 30, 2016, at which time the tenant returned possession of the property to the owners. As of December 31, 2020, the tenant owed $19,366 of past due rent, which was not accruedrecorded for financial reporting purposes. On March 23, 2021, a motion to dismiss the bankruptcy case was issued by a federal judge to The Sports Authority, Inc., the Company will therefore not be receiving any of the past due rent. The owners listed the property for lease with a real estate broker in the Wichita area. While the property was vacant, the Company was responsible for its 40% share of real estate taxes and other costs associated with maintaining the property.

 

On September 21, 2017, the Company entered into a lease agreement with a primary term of 10 years with Biomat USA, Inc. (“Biomat”) as a replacement tenant for 28% of the square footage of the property. The tenant operates a Biomat USA Plasma Center in the space. The Company’s 40% share of annual rent, which commenced on June 18, 2018, is $37,071. Biomat agreed to pay for the costs to divide the building into two separate spaces, the costs of tenant improvements to remodel the Biomat space and 28% of the cost to replace the roof.

 

On August 27, 2019, the Company entered into a lease agreement with a primary term of 10 years with BigTime Fun Center, LLC as a replacement tenant for 57% of the square footage of the property. The tenant willwas to operate an indoor sports entertainment center in the space. The Company’s 40% share of annual rent, which was to commence on February 23, 2020, iswas $78,000. As part of the agreement, the Company was towould pay a tenant improvement allowance of $64,000 when certain conditions arewere met by the tenant. Due to ongoing difficulties due to the COVID-19 Pandemicpandemic the Company was negotiating a rent commencement date of April 1, 2021. As a part of the negotiations the tenant improvement allowance was to be replaced with a ten month rent abatement starting April 1, 2021. Additionally, this agreement would forebear rent and additional charges for the period from February 23, 2020 to March 31, 2021. In September 2019, the Company paid $32,760 to a real estate broker for its 40% share of the lease commission due as part of the lease transaction. This amount was capitalized and willwas to be amortized over the term of the lease. On January 22, 2021 the owner of Big Time FunFund Center, LLC informed the Company that it doesdid not intend to open the Wichita property. As a result of the tenant informing the Company of their intention not to open, the full amount of the lease commission was amortized in the fourth quarter of 2020. The property is currently being marketed for lease with a real estate broker in the Wichita area.

 

In April 2021, the Company entered into an agreement to sell its 55% interest in the Advance Auto Parts store in Middletown, Ohio to an unrelated third party. On June 29, 2021, the sale closed with the Company receiving net proceeds of $99,069, which resulted in a gain of $18,606. At the time of sale, the cost and related accumulated depreciation and amortization was $576,598 and $496,135, respectively.

 

In November 2021,March 2022, the Company entered into an agreement to sell its Dollar TreeZales store in West Point, MississippiEnid, Oklahoma to an unrelated third party. The sale is subject to contingencies and may not be completed. IfOn April 29, 2022 the sale is completed,closed with the Company expects to receivereceiving net proceeds of approximately $1,591,000,$1,607,072, which will resultresulted in a net gain of approximately $332,000.$448,851. At the time of the sale, the cost and related accumulated depreciation and amortization was $1,600,000 and $441,779, respectively.

 

 

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.

 

For the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, the Company declared distributions of $280,205$4,720,713 and $283,297,$187,319, respectively. The Limited Members were allocated distributions of $271,799$4,670,000 and $274,798$181,700 and the Managing Members were allocated distributions of $8,406$50,713 and $8,499$5,619 for the periods, respectively. The Limited Members' distributions represented $0.16$2.79 and $0.11 per LLC Unit outstanding using 1,698,2971,674,277 and 1,738,0061,708,225 weighted average Units in 20212022 and 2020,2021, respectively. The distributions represented $0.04$1.23 and $0.03 per Unit of Net Income and $0.12$1.56 and $0.13$0.08 per Unit of return of contributed capital in 20212022 and 2020,2021, respectively.

 

For the nine months ended September 30, 2021,On April 1, 2022, the Company repurchased a total of 59,562.88,332.87 Units for $305,367$46,534 from eightfive Limited Members in accordance with the Operating Agreement. The Company acquired these Units using net sales proceeds. For the nine months ended September 30, 2020,On April 1, 2021, the Company did not repurchase anyrepurchased a total of 59,562.8 Units for $305,367 from theeight Limited Members. The Company acquired these Units using net sales proceeds.  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 $1,439 and $9,444 in 2021.2022 and 2021, respectively.

 

 

 

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:

 

 

 

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 memberManaging Member of the Company.

 

 

 

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 relative 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.

 

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 relative 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.

 

 

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.

 

 

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.

 

The Company is 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 revenues and investment property value. However, due to the recent outbreak and continuing effect of the coronavirus (COVID-19) in the U.S. and globally, our tenants and operating partners may be impacted. See Note 8 on COVID-19 effect on our operations. The impact of COVID-19 on our future results could still be significant and will largely depend on continuing developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets.

 

 

For the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, the Company recognized rental income of $499,069$213,590 and $497,193,$332,567, respectively. In 2021,2022, rental income increaseddecreased due to a sale of one property in 2021 and two properties in 2022, which was partially offset by a rent increase on one property. Based on the scheduled rent for the properties owned as of OctoberJuly 31, 2021,2022, the Company expects to recognize rental income of approximately $665,000$299,000 in 2021.2022.

 

 

For the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, the Company incurred LLC administration expenses from affiliated parties of $99,605$49,542 and $81,936,$64,372, 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 $68,811$58,652 and $78,932,$51,207, 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.

 

The Company owns a 40% interest in a former Sports Authority store in Wichita, Kansas. On March 2, 2016, the tenant, TSA Stores, Inc., and its parent company, The Sports Authority, Inc., the guarantor of the lease, filed for Chapter 11 bankruptcy reorganization. In June 2016, the tenant filed a motion with the bankruptcy court to reject the lease for this store effective June 30, 2016, at which time the tenant returned possession of the property to the owners. As of December 31, 2020, the tenant owed $19,366 of past due rent, which was not accruedrecorded for financial reporting purposes. On March 23, 2021, a motion to dismiss the bankruptcy case was issued by a federal judge to The Sports Authority, Inc., the Company will therefore not be receiving any of the past due rent. The owners listed the property for lease with a real estate broker in the Wichita area. While the property was vacant, the Company was responsible for its 40% share of real estate taxes and other costs associated with maintaining the property.

 

On September 21, 2017, the Company entered into a lease agreement with a primary term of 10 years with Biomat USA, Inc. (“Biomat”) as a replacement tenant for 28% of the square footage of the property. The tenant operates a Biomat USA Plasma Center in the space. The Company’s 40% share of annual rent, which commenced on June 18, 2018, is $37,071. Biomat agreed to pay for the costs to divide the building into two separate spaces, the costs of tenant improvements to remodel the Biomat space and 28% of the cost to replace the roof.

 

On August 27, 2019, the Company entered into a lease agreement with a primary term of 10 years with BigTime Fun Center, LLC as a replacement tenant for 57% of the square footage of the property. The tenant willwas to operate an indoor sports entertainment center in the space. The Company’s 40% share of annual rent, which was to commence on February 23, 2020, iswas $78,000. As part of the agreement, the Company was towould pay a tenant improvement allowance of $64,000 when certain conditions arewere met by the tenant. Due to ongoing difficulties due to the COVID-19 Pandemicpandemic the Company was negotiating a rent commencement date of April 1, 2021. As a part of the negotiations the tenant improvement allowance was to be replaced with a ten month rent abatement starting April 1, 2021. Additionally, this agreement would forebear rent and additional charges for the period from February 23, 2020 to March 31, 2021. In September 2019, the Company paid $32,760 to a real estate broker for its 40% share of the lease commission due as part of the lease transaction. This amount was capitalized and willwas to be amortized over the term of the lease. On January 22, 2021 the owner of Big Time FunFund Center, LLC informed the Company that it doesdid not intend to open the Wichita property. As a result of the tenant informing the Company of their intention not to open, the full amount of the lease commission was amortized in the fourth quarter of 2020. The property is currently being marketed for lease with a real estate broker in the Wichita area.

 

 

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.

 

During the ninesix months ended SeptemberJune 30, 2022, the Company's cash balances increased $3,196,102 as a result of cash generated from the sale of two properties, which was partially offset by distributions paid to the Members and cash used to repurchase Units. During the six months ended June 30, 2021, the Company's cash balances decreased $131,439$175,462 as a result of distributions paid to the Members and cash used to repurchase Units in excess of cash generated from operating activities, which was partially offset by cash generated from the sale of property.

 

Net cash provided by operating activities increaseddecreased from $291,319$229,146 in 20202021 to $366,055$132,314 in 20212022 as a result of net timing differencesa decrease in the collection of payments from the tenantsrental income and the payment of expenses,interest income, which waswere partially offset by a decrease in total rental and interest income in 2021 and an increase in LLC administration expenses.and property management expenses in 2022.

 

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. During the ninesix months ended SeptemberJune 30, 2022 and 2021, the Company generated cash flow from the sale of real estate of $99,069.$5,317,737 and $99,069, respectively.

 

 

In April 2021, the Company entered into an agreement to sell its 55% interest in the Advance Auto Parts store in Middletown, Ohio to an unrelated third party. On June 29, 2021, the sale closed with the Company receiving net proceeds of $99,069, which resulted in a gain of $18,606. At the time of sale, the cost and related accumulated depreciation and amortization was $576,598 and $496,135, respectively.

 

In November 2021,March 2022, the Company entered into an agreement to sell its Dollar TreeZales store in West Point, MississippiEnid, Oklahoma to an unrelated third party. The sale is subject to contingencies and may not be completed. IfOn April 29, 2022 the sale is completed,closed with the Company expects to receivereceiving net proceeds of approximately $1,591,000,$1,607,072, which will resultresulted in a net gain of approximately $332,000.$448,851. At the time of the sale, the cost and related accumulated depreciation and amortization was $1,600,000 and $441,779, respectively.

 

The Company'sCompany’s primary use of cash flow, other than investment in real estate,as a result of the planned liquidation, 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 ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, the Company declared distributions of $280,205$4,720,713 and $283,297,$187,319, 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 were allocated distributions of $271,799$4,670,000 and $274,798$181,700 and the Managing Members were allocated distributions of $8,406$50,713 and $8,499$5,619 for the periods, respectively.

 

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, 2022, the Company repurchased a total of 59,562.88,332.87 Units for $305,367$46,534 from eightfive Limited Members in accordance with the Operating Agreement. The Company acquired these Units using net sales proceeds. For the nine months ended September 30, 2020,On April 1, 2021, the Company did not repurchase anyrepurchased a total of 59,562.8 Units for $305,367 from theeight Limited Members. The Company acquired these Units using net sales proceeds.  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 $1,439 and $9,444 in 2021.2022 and 2021, 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.

 

As of SeptemberJune 30, 20212022 and December 31, 2020,2021, 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.

 

Not required for a smaller reporting company.

 

 

(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.

 

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

 

 

Not required for a smaller reporting company.

 

 

(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 85% 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. The purchase price is equal to 100% of the net asset value per Unit in the case of Units of a deceased investor, who purchased the Units in the initial offering and who is a natural person, including Units held by an investor that is an IRA or other qualified plan for which the deceased person was the primary beneficiary, or Units held by an investor that is a grantor trust for which the deceased person was the grantor.

 

None.

 

 

Not Applicable.

 

 

None.

 

 

 

 

 

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.