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AEI Income & Growth Fund XXII LTD Partnership

Filed: 12 Nov 20, 1:52pm
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, 2020
 
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
None None None
 
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 every Interactive Data File required to be submitted 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 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
 
1

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
 
INDEX
 
 
     
  Page
Part I – Financial Information
 
    
 
Item 1.
Financial Statements (unaudited):
 
    
  
Balance Sheets as of September 30, 2020 and December 31, 2019
3
    
  
Statements for the Periods ended September 30, 2020 and 2019:
 
     
   
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 - 17
    
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
    
 
Item 4.
Controls and Procedures
18
    
Part II – Other Information
 
    
 
Item 1.
Legal Proceedings
18
    
 
Item 1A.
Risk Factors
18
    
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19
    
 
Item 3.
Defaults Upon Senior Securities
19
    
 
Item 4.
Mine Safety Disclosures
19
    
 
Item 5.
Other Information
19
    
 
Item 6.
Exhibits
19
    
Signatures
20
 
2

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
BALANCE SHEETS
 
ASSETS
 
  September 30, December 31,
  2020 2019
  (unaudited)  
Current Assets:    
Cash$1,841,068 $3,725,349 
     
Real Estate Investments:    
Land 1,865,579  1,622,456 
Buildings 5,535,336  4,115,876 
Acquired Intangible Lease Assets 1,181,359  932,882 
Real Estate Held for Investment, at cost 8,582,274  6,671,214 
Accumulated Depreciation and Amortization (2,221,073 (2,281,861
Real Estate Held for Investment, Net 6,361,201  4,389,353 
Total Assets$8,202,269 $8,114,702 
 
LIABILITIES AND PARTNERS' CAPITAL
 
Current Liabilities:    
Payable to AEI Fund Management, Inc.$18,462 $9,285 
Distributions Payable 109,280  136,599 
Unearned Rent 13,492  0 
Total Current Liabilities 141,234  145,884 
     
Partners’ Capital:    
General Partners 11,153  14,876 
Limited Partners – 24,000 Units authorized;
   12,692 Units issued and outstanding
   as of 9/30/2020 and 12/31/2019
 8,049,882  7,953,942 
Total Partners' Capital 8,061,035  7,968,818 
Total Liabilities and Partners' Capital$8,202,269 $8,114,702 
 
 
 
 
 
 
 
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
  2020 2019 2020 2019
         
Rental Income$142,933 $124,487 $376,977 $444,519 
         
Expenses:        
Partnership Administration – Affiliates 29,113  27,698  76,435  80,748 
Partnership Administration and Property
   Management – Unrelated Parties
 8,668  4,922  35,455  37,691 
Depreciation and Amortization 59,873  51,982  158,417  179,252 
Total Expenses 97,654  84,602  270,307  297,691 
         
Operating Income 45,279  39,885  106,670  146,828 
         
Other Income:        
Gain on Sale of Real Estate 324,442  885,582  324,442  1,540,914 
Interest Income 610  12,490  8,528  23,198 
Total Other Income 325,052  898,072  332,970  1,564,112 
         
Net Income$370,331 $937,957 $439,640 $1,710,940 
         
Net Income Allocated:        
General Partners$4,621 $12,172 $6,700 $68,381 
Limited Partners 365,710  925,785  432,940  1,642,559 
Total$370,331 $937,957 $439,640 $1,710,940 
         
Net Income per Limited Partnership Unit$28.81 $71.41 $34.11 $125.09 
         
Weighted Average Units Outstanding –
      Basic and Diluted
 12,692  12,965  12,692  13,131 
         
 
 
 
 
 
 
 
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
  2020 2019
Cash Flows from Operating Activities:    
Net Income$439,640 $1,710,940 
     
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
    
Depreciation and Amortization 196,430  216,566 
Gain on Sale of Real Estate (324,442 (1,540,914
Increase (Decrease) in Payable to
   AEI Fund Management, Inc.
 9,177  (31,604
Increase (Decrease) in Unearned Rent 13,492  2,111 
Total Adjustments (105,343 (1,353,841
Net Cash Provided By (Used For)
   Operating Activities
 334,297  357,099 
     
Cash Flows from Investing Activities:
    
Investments in Real Estate (2,778,060 (30,000
Proceeds from Sale of Real Estate 934,224  3,602,430 
Net Cash Provided By (Used For)
   Investing Activities
 (1,843,836 3,572,430 
     
Cash Flows from Financing Activities:    
Distributions Paid to Partners (374,742 (427,423
Repurchase of Partnership Units 0  (375,681
Net Cash Provided By (Used For)
   Financing Activities
 (374,742 (803,104
     
Net Increase (Decrease) in Cash (1,884,281 3,126,425 
     
Cash, beginning of period 3,725,349  850,519 
     
Cash, end of period$1,841,068 $3,976,944 
     
 
 
 
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, 2018$(37,817$7,394,501 $7,356,684   13,462.92 
         
Distributions Declared (4,274 (138,200 (142,474  
         
Net Income 1,895  61,271  63,166   
         
Balance, March 31, 2019 (40,196 7,317,572  7,277,376   13,462.92 
         
Distributions Declared (4,274 (138,201 (142,475  
         
Repurchase of Partnership Units (3,757 (371,924 (375,681  (497.89
         
Net Income 54,314  655,503  709,817   
         
Balance, June 30, 2019 6,087  7,462,950  7,469,037   12,965.03 
         
Distributions Declared (3,334 (134,700 (138,034  
         
Net Income 12,172  925,785  937,957   
         
Balance, September 30, 2019$14,925 $8,254,035 $8,268,960   12,965.03 
         
         
         
Balance, December 31, 2019$14,876 $7,953,942 $7,968,818   12,691.78 
         
Distributions Declared (4,098 (132,501 (136,599  
         
Net Income 805  26,042  26,847   
         
Balance, March 31, 2020 11,583  7,847,483  7,859,066   12,691.78 
         
Distributions Declared (3,046 (98,498 (101,544  
         
Net Income 1,274  41,188  42,462   
         
Balance, June 30, 2020 9,811  7,790,173  7,799,984   12,691.78 
         
Distributions Declared (3,279 (106,001 (109,280  
         
Net Income 4,621  365,710  370,331   
         
Balance, September 30, 2020$11,153 $8,049,882 $8,061,035   12,691.78 
         
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, 2020
(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 10K.
 
(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 Chief Executive Officer 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 and his wife own a majority interest. 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 ended. 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.
 
(3)  Recently Issued Accounting Pronouncements –
 
Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of these pronouncements to have a significant effect on the Partnership’s financial statements.
 
8

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
 
(4)  Real Estate Investments –
 
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 decreased from $149,302 to $129,395 effective February 1, 2019. In addition, beginning on February 1, 2019, the tenant received free rent for one month that equaled $10,783.
 
In December 2018, the Partnership decided to sell the Applebee’s restaurant in Crawfordsville, Indiana. In January 2019, the Partnership entered into an agreement to sell the property to an unrelated third party. On April 8, 2019, the sale closed with the Partnership receiving net proceeds of $1,863,691, which resulted in a net gain of $655,332. At the time of sale, the cost and related accumulated depreciation was $1,856,656 and $648,297, respectively.
 
In June 2019, the Partnership entered into an agreement with the tenant of the Tractor Supply Company store in Grand Forks, North Dakota to extend the lease term ten years to end on November 30, 2030. The annual rent remained the same with a 4.0% increase scheduled to occur after five years. As part of the agreement, the Partnership paid a tenant improvement allowance of $30,000 that was capitalized.
 
In June 2019, the Partnership reached an agreement to sell its 50% interest in the Tractor Supply Company store to an unrelated third party. On August 1, 2019, the sale closed with the Partnership receiving net proceeds of $1,738,739, which resulted in a net gain of $885,582. At the time of sale, the cost and related accumulated depreciation was $1,433,874 and $580,717, respectively.
 
In April 2020, the Partnership entered into an agreement with the tenant of the PetSmart store in Galveston, Texas to extend the lease term ten years to end on April 30, 2032. As part of the agreement, the Partnership paid a tenant improvement allowance of $42,500 that was capitalized.
 
In May 2020, the Partnership reached an agreement to sell its 34% interest in the PetSmart store to an unrelated third party. On July 28, 2020, the sale closed with the Partnership receiving net proceeds of $934,224, which resulted in a net gain of $324,442. At the time of sale, the cost and related accumulated depreciation and amortization was $867,000 and $257,218, respectively.
 
On July 31, 2020, the Partnership purchased a 50% interest in a Talecris plasma facility in Dallas, Texas for $2,735,560. The Partnership allocated $452,929 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles of $284,438 and above-market lease intangibles of $168,491. The property is leased to Talecris Plasma Resources, Inc. under a lease agreement with a remaining primary term of 8.1 years (as of the date of purchase) and annual rent of $182,035. The remaining interest in this property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership.
 
9

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
 
(4)  Real Estate Investments – (Continued)
 
The Partnership owns a 28% interest in a Staples store in Clermont, Florida. The remaining interests in the property are owned by affiliates of the Partnership. On July 17, 2020, the lease term ended, and the tenant returned possession of the property to the owners. While the property is vacant, the Partnership is responsible for its 28% share of real estate taxes and other costs associated with maintaining the property. The owners have listed the property for sale or lease with a real estate broker in the Clermont area. The annual rent from this property represented approximately 15% of the total annual rent of the Partnership’s property portfolio. The loss of rent and increased expenses related to this property will decrease the Partnership’s cash flow. However, at this time, the Partnership does not anticipate the need to further reduce its regular quarterly cash distribution rate.
 
(5)  Payable to AEI Fund Management, Inc. –
 
AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.
 
(6)  Partners’ Capital –
 
For the nine months ended September 30, 2020 and 2019, the Partnership declared distributions of $347,423 and $422,983, respectively. The Limited Partners received distributions of $337,000 and $411,102 and the General Partners received distributions of $10,423 and $11,881 for the periods, respectively. The Limited Partners' distributions represented $26.55 and $31.31 per Limited Partnership Unit outstanding using 12,692 and 13,131 weighted average Units in 2020 and 2019, respectively. The distributions represented $26.55 and $31.31 per Unit of Net Income and $0.00 and $0.00 per Unit of return of capital in 2020 and 2019, respectively.
 
As part of the distributions discussed above, the Partnership distributed net sale proceeds of $40,404 in 2019. The Limited Partners received distributions of $40,000 and the General Partners received distributions of $404. The Limited Partners’ distributions represented $3.09 per Unit.
 
For the nine months ended September 30, 2020, the Partnership did not repurchase any Units from the Limited Partners. For the nine months ended September 30, 2019, the Partnership repurchased a total of 497.89 Units for $371,924 from 16 Limited Partners in accordance with the Partnership Agreement. The Partnership acquired these Units using net sales proceeds. 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 $3,757 in 2019.
 
10

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
 
(7)  Fair Value Measurements –
 
As of September 30, 2020 and December 31, 2019, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.
 
(8)  Coronavirus Outbreak –
 
During the first quarter of 2020, there was a global outbreak of a new strain of coronavirus, COVID-19 which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines, placing restrictions on travel, and limiting hours of operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as retail, restaurants and transportation. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the coronavirus. Nevertheless, the coronavirus presents material uncertainty and risk with respect to the Partnership’s performance and financial results, such as the potential negative impact to the tenants of its properties, the potential closure of certain of its properties, increased costs of operations, decrease in values of its properties, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Up to the date of this filing, the Partnership has not received modification rent requests from any tenant of the five properties owned by the Partnership. All rent has been paid in full by each tenant.
 
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.
 
12

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.
 
13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
 
Factors Which May Influence Results of Operations
 
The Partnership 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 of the coronavirus (COVID-19) in the U.S. and globally, our tenants and operating partners may be impacted. The impact of the coronavirus on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus, the success of actions taken to contain or treat the coronavirus, and reactions by consumers, companies, governmental entities and capital markets.
 
Results of Operations
 
For the nine months ended September 30, 2020 and 2019, the Partnership recognized rental income of $376,977 and $444,519, respectively. In 2020, rental income decreased due to the sale of two properties in 2019 and one property in 2020. This decrease was partially offset by rent increases on one property, rent received from one property acquisition in 2020, and by free rent for one month in 2019 related to the Best Buy store as discussed below. Based on the scheduled rent for the properties owned as of October 31, 2020, the Partnership expects to recognize rental income of approximately $479,000 and $506,000 in 2020 and 2021, respectively.
 
For the nine months ended September 30, 2020 and 2019, the Partnership incurred Partnership administration expenses from affiliated parties of $76,435 and $80,748, 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 $35,455 and $37,691, 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, 2020 and 2019, the Partnership recognized interest income of $8,528 and $23,198, respectively. In 2020, interest income decreased due to the Partnership having less money invested in a money market account due to property sales and higher money market interest rates in 2019.
 
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 decreased from $149,302 to $129,395 effective February 1, 2019. In addition, beginning on February 1, 2019, the tenant received free rent for one month that equaled $10,783.
 
In April 2020, the Partnership entered into an agreement with the tenant of the PetSmart store in Galveston, Texas to extend the lease term ten years to end on April 30, 2032. As part of the agreement, the Partnership paid a tenant improvement allowance of $42,500 that was capitalized.
 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
 
On July 31, 2020, the Partnership purchased a 50% interest in a Talecris plasma facility in Dallas, Texas for $2,735,560. The Partnership allocated $452,929 of the purchase price to Acquired Intangible Lease Assets, representing in-place lease intangibles of $284,438 and above-market lease intangibles of $168,491. The property is leased to Talecris Plasma Resources, Inc. under a lease agreement with a remaining primary term of 8.1 years (as of the date of purchase) and annual rent of $182,035. The remaining interest in this property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership.
 
The Partnership owns a 28% interest in a Staples store in Clermont, Florida. The remaining interests in the property are owned by affiliates of the Partnership. On July 17, 2020, the lease term ended, and the tenant returned possession of the property to the owners. While the property is vacant, the Partnership is responsible for its 28% share of real estate taxes and other costs associated with maintaining the property. The owners have listed the property for sale or lease with a real estate broker in the Clermont area. The annual rent from this property represented approximately 15% of the total annual rent of the Partnership’s property portfolio. The loss of rent and increased expenses related to this property will decrease the Partnership’s cash flow. However, at this time, the Partnership does not anticipate the need to further reduce its regular quarterly cash distribution rate.
 
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, 2020, the Partnership's cash balances decreased $1,884,281 as a result of cash used to purchase property, cash paid for a tenant improvement allowance and distributions paid to the Partners in excess of cash generated from operating activities, which was partially offset by cash generated from the sale of property. During the nine months ended September 30, 2019, the Partnership's cash balances increased $3,126,425 as a result of cash generated from the sale of property, which was partially offset by distributions paid to the Partners and cash used to repurchase units in excess of cash generated from operating activities.
 
Net cash provided by operating activities decreased from $357,099 in 2019 to $334,297 in 2020 as a result of a decrease in total rental and interest income in 2020, which was partially offset by a decrease in Partnership administration and property management expenses in 2020 and net timing differences in the collection of payments from the tenants and the payment of expenses.
 
The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the nine months ended September 30, 2020 and 2019, the Partnership generated cash flow from the sale of real estate of $934,224 and $3,602,430, respectively. During the same periods, the Partnership expended $2,778,060 and $30,000, respectively, to invest in real properties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
 
In December 2018, the Partnership decided to sell the Applebee’s restaurant in Crawfordsville, Indiana. In January 2019, the Partnership entered into an agreement to sell the property to an unrelated third party. On April 8, 2019, the sale closed with the Partnership receiving net proceeds of $1,863,691, which resulted in a net gain of $655,332. At the time of sale, the cost and related accumulated depreciation was $1,856,656 and $648,297, respectively.
 
In June 2019, the Partnership entered into an agreement with the tenant of the Tractor Supply Company store in Grand Forks, North Dakota to extend the lease term ten years to end on November 30, 2030. The annual rent remained the same with a 4.0% increase scheduled to occur after five years. As part of the agreement, the Partnership paid a tenant improvement allowance of $30,000 that was capitalized.
 
In June 2019, the Partnership reached an agreement to sell its 50% interest in the Tractor Supply Company store to an unrelated third party. On August 1, 2019, the sale closed with the Partnership receiving net proceeds of $1,738,739, which resulted in a net gain of $885,582. At the time of sale, the cost and related accumulated depreciation was $1,433,874 and $580,717, respectively.
 
In May 2020, the Partnership reached an agreement to sell its 34% interest in the PetSmart store to an unrelated third party. On July 28, 2020, the sale closed with the Partnership receiving net proceeds of $934,224, which resulted in a net gain of $324,442. At the time of sale, the cost and related accumulated depreciation and amortization was $867,000 and $257,218, respectively.
 
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, 2020 and 2019, the Partnership declared distributions of $347,423 and $422,983, 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 $337,000 and $411,102 and the General Partners received distributions of $10,423 and $11,881 for the periods, respectively.
 
As part of the distributions discussed above, the Partnership distributed net sale proceeds of $40,404 in 2019. The Limited Partners received distributions of $40,000 and the General Partners received distributions of $404. The Limited Partners’ distributions represented $3.09 per Unit.
 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
 
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.
 
For the nine months ended September 30, 2020, the Partnership did not repurchase any Units from the Limited Partners. For the nine months ended September 30, 2019, the Partnership repurchased a total of 497.89 Units for $371,924 from 16 Limited Partners in accordance with the Partnership Agreement. The Partnership acquired these Units using net sales proceeds. 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 $3,757 in 2019.
 
The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2020 and December 31, 2019, the Partnership had no material off-balance sheet arrangements that had or are reasonably likely to have current or future effects on its financial condition, results of operations, liquidity or capital resources.
 
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ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not required for a smaller reporting company.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
(a)  Disclosure Controls and Procedures.
 
Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing General Partner, in a manner that allows timely decisions regarding required disclosure.
 
(b)  Changes in Internal Control Over Financial Reporting.
 
During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS.
 
There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject.
 
ITEM 1A. RISK FACTORS.
 
Not required for a smaller reporting company.
 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES & USE OF PROCEEDS.
 
(a) None.
 
(b) Not applicable.
 
(c) Pursuant to Section 7.7 of the Partnership Agreement, 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.
 
10.1
Assignment of Purchase Agreement dated July 31, 2020 between the Partnership, AEI Income & Growth Fund 25 LLC and Dannemann, LLC relating to the Property at 8057 West Virginia Drive, Dallas, Texas (incorporated by reference to Exhibit 10.1 of Form 8-K filed August 6, 2020).
 
31.1
Certification of President 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.
 
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Certification of President and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
   
Dated:  November 12, 2020
AEI Income & Growth Fund XXII
 
Limited Partnership
 
By:
AEI Fund Management XXI, Inc.
 
Its:
Managing General Partner
   
   
   
 
By:
 /s/ MARNI J NYGARD
  
Marni J. Nygard
  
President
  
(Principal Executive Officer)
   
   
   
 
By:
/s/ KEITH E PETERSEN 
  
Keith E. Petersen
  
Chief Financial Officer
  
(Principal Accounting Officer)
 
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