10QSB 1 q222-07.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Quarter Ended: June 30, 2007 Commission file number: 24003 AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP (Exact Name of Small Business Issuer as Specified in its Charter) State of Minnesota 41-1848181 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 30 East 7th Street, Suite 1300, St. Paul, Minnesota 55101 (Address of Principal Executive Offices) (651) 227-7333 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [X] No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No [X] Transitional Small Business Disclosure Format: Yes No [X] AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP INDEX PART I. Financial Information Item 1. Balance Sheet as of June 30, 2007 and December 31, 2006 Statements for the Periods ended June 30, 2007 and 2006: Operations Cash Flows Changes in Partners' Capital Notes to Financial Statements Item 2. Management's Discussion and Analysis Item 3. Controls and Procedures PART II. Other Information Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits Signatures AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP BALANCE SHEET JUNE 30, 2007 AND DECEMBER 31, 2006 (Unaudited) ASSETS 2007 2006 CURRENT ASSETS: Cash and Cash Equivalents $ 893,343 $ 2,386,110 Receivables 235 2,305 Note Receivable 47,042 101,966 ----------- ----------- Total Current Assets 940,620 2,490,381 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 4,007,550 3,769,056 Buildings and Equipment 8,389,765 7,224,694 Accumulated Depreciation (974,617) (806,997) ----------- ----------- Net Investments in Real Estate 11,422,698 10,186,753 ----------- ----------- Total Assets $12,363,318 $12,677,134 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 11,039 $ 56,792 Distributions Payable 254,669 278,014 Unearned Rent 33,703 8,730 ----------- ----------- Total Current Liabilities 299,411 343,536 ----------- ----------- PARTNERS' CAPITAL: General Partners 4,859 10,828 Limited Partners, $1,000 per Unit; 24,000 Units authorized; 16,917 Units issued; 15,838 and 15,884 Units outstanding in 2007 and 2006, respectively 12,059,048 12,322,770 ----------- ----------- Total Partners' Capital 12,063,907 12,333,598 ----------- ----------- Total Liabilities and Partners' Capital $12,363,318 $12,677,134 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE PERIODS ENDED JUNE 30 (Unaudited) Three Months Ended Six Months Ended 6/30/07 6/30/06 6/30/07 6/30/06 RENTAL INCOME $ 265,987 $ 162,722 $ 526,041 $ 323,116 EXPENSES: Partnership Administration - Affiliates 40,003 40,130 82,925 80,227 Partnership Administration and Property Management - Unrelated Parties 3,883 6,350 12,174 13,654 Depreciation 84,799 44,894 167,620 89,790 ----------- ----------- ----------- ----------- Total Expenses 128,685 91,374 262,719 183,671 ----------- ----------- ----------- ----------- OPERATING INCOME 137,302 71,348 263,322 139,445 OTHER INCOME: Interest Income 10,976 11,686 26,331 16,182 ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 148,278 83,034 289,653 155,627 Income(Loss) from Discontinued Operations 0 197,222 0 (183,564) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 148,278 $ 280,256 $ 289,653 $ (27,937) =========== =========== =========== =========== NET INCOME (LOSS) ALLOCATED: General Partners $ 4,449 $ 4,011 $ 8,690 $ (279) Limited Partners 143,829 276,245 280,963 (27,658) ----------- ----------- ----------- ----------- $ 148,278 $ 280,256 $ 289,653 $ (27,937) =========== =========== =========== =========== INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 9.08 $ 5.15 $ 17.71 $ 9.60 Discontinued Operations 0 12.15 0 (11.32) ----------- ----------- ----------- ----------- Total $ 9.08 $ 17.30 $ 17.71 $ (1.72) =========== =========== =========== =========== Weighted Average Units Outstanding 15,838 15,970 15,861 16,042 =========== =========== =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30 (Unaudited) 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 289,653 $ (27,937) Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 167,620 165,859 Real Estate Impairment 0 495,638 Gain on Sale of Real Estate 0 (93,745) (Increase) Decrease in Receivables 2,070 (776) Decrease in Payable to AEI Fund Management, Inc. (45,753) (16,415) Increase in Unearned Rent 24,973 32,990 ----------- ----------- Total Adjustments 148,910 583,551 ----------- ----------- Net Cash Provided By Operating Activities 438,563 555,614 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments In Real Estate (1,403,565) 0 Proceeds from Sale of Real Estate 0 997,272 Payments Received on Note Receivable 54,924 8,730 ----------- ----------- Net Cash Provided By (Used For) Investing Activities (1,348,641) 1,006,002 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in Distributions Payable (23,345) (87,681) Distributions to Partners (519,235) (561,981) Redemption Payments (40,109) (123,987) ----------- ----------- Net Cash Used For Financing Activities (582,689) (773,649) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,492,767) 787,967 CASH AND CASH EQUIVALENTS, beginning of period 2,386,110 613,710 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 893,343 $ 1,401,677 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Note Receivable Acquired in Sale of Property $ 0 $ 164,000 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIODS ENDED JUNE 30 (Unaudited) Limited Partnership General Limited Units Partners Partners Total Outstanding BALANCE, December 31, 2005 $ (9,421) $12,189,158 $12,179,737 16,113.62 Distributions (13,425) (548,556) (561,981) Redemption Payments (3,720) (120,267) (123,987) (143.73) Net Loss (279) (27,658) (27,937) -------- ----------- ----------- ----------- BALANCE, June 30, 2006 $ (26,845) $11,492,677 $11,465,832 15,969.89 ======== =========== =========== =========== BALANCE, December 31, 2006 $ 10,828 $12,322,770 $12,333,598 15,884.14 Distributions (13,456) (505,779) (519,235) Redemption Payments (1,203) (38,906) (40,109) (46.58) Net Income 8,690 280,963 289,653 -------- ----------- ----------- ----------- BALANCE, June 30, 2007 $ 4,859 $12,059,048 $12,063,907 15,837.56 ======== =========== =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 (Unaudited) (1) The condensed statements included herein have been prepared by the Partnership, 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Partnership 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 Partnership's latest annual report on Form 10-KSB. (2) Organization - AEI Income & Growth Fund XXII Limited Partnership (Partnership) was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management XXI, Inc. (AFM), the Managing General Partner. Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AEI Fund Management, Inc. (AEI), an affiliate of AFM, performs the administrative and operating functions for the Partnership. The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer. The Partnership commenced operations on May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. The offering terminated January 9, 1999 when the extended offering period expired. The Partnership received subscriptions for 16,917.222 Limited Partnership Units. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $16,917,222 and $1,000, respectively. During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 97% to the Limited Partners and 3% to the General Partners. Distributions to Limited Partners will be made pro rata by Units. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (2) Organization - (Continued) 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. 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. (3) Reclassification - Certain items in the prior year's financial statements have been reclassified to conform to 2007 presentation. These reclassifications had no effect on Partners' capital, net income or cash flows. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (4) Investments in Real Estate - On September 21, 2006, the Partnership purchased a 38% interest in an Applebee's restaurant in Johnstown, Pennsylvania for $1,031,187. The property is leased to B.T. Woodlipp, Inc. under a Lease Agreement with a primary term of 20 years and initial annual rent of $74,370. The remaining interest in the property was purchased by AEI Income & Growth Fund XXI Limited Partnership, an affiliate of the Partnership. On December 21, 2006, the Partnership purchased a 65% interest in an Advance Auto Parts store in Indianapolis, Indiana for $1,244,173. The property is leased to Advance Stores Company, Inc. under a Lease Agreement with a remaining primary term of 13.5 years and initial annual rent of $87,168. The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership. On December 29, 2006, the Partnership purchased a 60% interest in an Applebee's restaurant in Crawfordsville, Indiana for $1,856,656. The property is leased to Apple Indiana II LLC under a Lease Agreement with a primary term of 20 years and initial annual rent of $133,933. The remaining interest in the property was purchased by AEI Income & Growth Fund 26 LLC, an affiliate of the Partnership. On January 19, 2007, the Partnership purchased a 50% interest in a Tractor Supply Company store in Grand Forks, North Dakota for $1,403,565. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 13.9 years and initial annual rent of $102,351. The remaining interest in the property was purchased by AEI Income & Growth Fund 24 LLC, an affiliate of the Partnership. (5) Note Receivable - On May 11, 2006, as part of the sale of the Tumbleweed restaurant in Fort Wayne, Indiana, the Partnership received a Promissory Note in the amount of $164,000 from the tenant, who purchased the property. The Note requires monthly payments of $9,550, bears interest at a 6% rate and is unsecured. The Note is due on November 8, 2007. As of June 30, 2007, the outstanding principal due on the Note was $47,042. (6) Payable to AEI Fund Management, Inc. - AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (7) Discontinued Operations - In July 2003, the tenant of the Razzoo's restaurant in Austin, Texas notified the Partnership that it was experiencing financial difficulty stemming from lower than expected sales and that it might not be able to pay future rents. In November 2004, the Partnership and the tenant entered into an agreement to amend the Lease to provide the tenant with options to purchase the property and terminate the Lease. Under the purchase option, which expired October 31, 2006, the tenant could have elected to purchase the Partnership's interest in the property for $1,248,000. Under the termination option, the tenant could elect to terminate the Lease by providing no less than six months prior written notice and paying a termination payment equal to one year's rent. As part of this agreement, the Partnership received a personal guarantee from the majority shareholder of the tenant for payment of the rent through October 31, 2006. In addition, the Partnership was reimbursed for certain expenses it incurred related to legal action it pursued in connection with this situation. The tenant continued to pay rent and complied with its Lease obligations. On April 30, 2006, the tenant exercised its option to terminate the Lease effective October 31, 2006. The tenant paid the Partnership the required payment of $158,860 on October 31, 2006, and the Lease was terminated. The Partnership actively marketed the property for sale and listed it with a real estate broker in the Austin area. Based on an analysis of market conditions in the area, the Partnership determined the property was impaired in accordance with the requirements of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, in the first quarter of 2006, a charge to discontinued operations for real estate impairment of $495,638 was recognized, which was the difference between the book value at March 31, 2006 of $1,359,638 and the estimated fair value of $864,000. The charge was recorded against the cost of the land, building and equipment. In September 2006, the Partnership entered into an agreement to sell the Razzoo's restaurant to an unrelated third party. On November 21, 2006, the sale closed with the Partnership receiving net sale proceeds of $840,892, which resulted in a net loss of $23,108. At the time of sale, the net book value of the property was $864,000. On May 11, 2006, the Partnership sold the Tumbleweed restaurant in Fort Wayne, Indiana for $1,200,000 to the tenant. The sale agreement required a cash payment of $1,036,000 and a Promissory Note for $164,000. The Partnership recognized net sale proceeds of $1,161,272, which resulted in a net gain of $93,745. At the time of sale, the cost and related accumulated depreciation was $1,316,695 and $249,168, respectively. On November 3, 2006, the Partnership sold its 32% interest in the Garden Ridge retail store in Woodlands, Texas to an unrelated third party. The Partnership received net sale proceeds of $2,792,170, which resulted in a net gain of $366,215. At the time of sale, the cost and related accumulated depreciation was $2,661,132 and $235,177, respectively. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (7) Discontinued Operations - In November 2006, the Partnership entered into an agreement to sell the Children's World daycare center in Abingdon, Maryland to an unrelated third party. On December 6, 2006, the sale closed with the Partnership receiving net sale proceeds of $1,460,899, which resulted in a net gain of $652,292. At the time of sale, the cost and related accumulated depreciation was $1,051,772 and $243,165, respectively. During the first six months of 2007 and 2006, the Partnership distributed $106,061 and $131,313 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $6.62 and $8.14 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations for the periods ended June 30: Three Months Ended Six Months Ended 6/30/07 6/30/06 6/30/07 6/30/06 Rental Income $ 0 $ 139,838 $ 0 $ 299,892 Property Management Expenses 0 (5,160) 0 (5,494) Depreciation 0 (31,201) 0 (76,069) Real Estate Impairment 0 0 0 (495,638) Gain on Disposal of Real Estate 0 93,745 0 93,745 --------- --------- -------- --------- Income (Loss) from Discontinued Operations $ 0 $ 197,222 $ 0 $(183,564) ========= ========= ======== ========= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. The Management's Discussion and Analysis contains various "forward looking statements" within the meaning of federal securities laws 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 made by the Partnership, must 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. The Application of Critical Accounting Policies The preparation of the Partnership's financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of real estate and the allocation by AEI Fund Management, Inc. of expenses to the Partnership as opposed to other funds they manage. The Partnership purchases properties and records them in the financial statements at the lower of cost or estimated realizable value. The Partnership initially records the properties at cost (including capitalized acquisition expenses). The Partnership is required to periodically evaluate the carrying value of properties to determine whether their realizable value has declined. For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property's probability-weighted 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 realizable value, an impairment loss is recorded to reduce the carrying value of the property to its realizable value. A change in these assumptions or analysis could cause material changes in the carrying value of the properties. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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. Management of the Partnership has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing partner of the Partnership. Results of Operations For the six months ended June 30, 2007 and 2006, the Partnership recognized rental income from continuing operations of $526,041 and $323,116, respectively. In 2007, rental income increased due to additional rent received from four property acquisitions in 2006 and 2007 and rent increases on three properties. For the six months ended June 30, 2007 and 2006, the Partnership incurred Partnership administration expenses from affiliated parties of $82,925 and $80,227, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and correspondence to the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $12,174 and $13,654, 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 six months ended June 30, 2007 and 2006, the Partnership recognized interest income of $26,331 and $16,182, respectively. In 2007, interest income increased mainly due to the Partnership having more money invested in a money market account due to property sales. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassifies the prior periods operating results and any partial sales of the property to discontinued operations. For the six months ended June 30, 2006, the Partnership recognized a loss from discontinued operations of $183,564, representing a real estate impairment loss of $495,638, which was partially offset by rental income less property management expenses and depreciation of $218,329 and gain on disposal of real estate of $93,745. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) In July 2003, the tenant of the Razzoo's restaurant in Austin, Texas notified the Partnership that it was experiencing financial difficulty stemming from lower than expected sales and that it might not be able to pay future rents. In November 2004, the Partnership and the tenant entered into an agreement to amend the Lease to provide the tenant with options to purchase the property and terminate the Lease. Under the purchase option, which expired October 31, 2006, the tenant could have elected to purchase the Partnership's interest in the property for $1,248,000. Under the termination option, the tenant could elect to terminate the Lease by providing no less than six months prior written notice and paying a termination payment equal to one year's rent. As part of this agreement, the Partnership received a personal guarantee from the majority shareholder of the tenant for payment of the rent through October 31, 2006. In addition, the Partnership was reimbursed for certain expenses it incurred related to legal action it pursued in connection with this situation. The tenant continued to pay rent and complied with its Lease obligations. On April 30, 2006, the tenant exercised its option to terminate the Lease effective October 31, 2006. The tenant paid the Partnership the required payment of $158,860 on October 31, 2006, and the Lease was terminated. The Partnership actively marketed the property for sale and listed it with a real estate broker in the Austin area. Based on an analysis of market conditions in the area, the Partnership determined the property was impaired in accordance with the requirements of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, in the first quarter of 2006, a charge to discontinued operations for real estate impairment of $495,638 was recognized, which was the difference between the book value at March 31, 2006 of $1,359,638 and the estimated fair value of $864,000. The charge was recorded against the cost of the land, building and equipment. In September 2006, the Partnership entered into an agreement to sell the Razzoo's restaurant to an unrelated third party. On November 21, 2006, the sale closed with the Partnership receiving net sale proceeds of $840,892, which resulted in a net loss of $23,108. At the time of sale, the net book value of the property was $864,000. On May 11, 2006, the Partnership sold the Tumbleweed restaurant in Fort Wayne, Indiana for $1,200,000 to the tenant. The sale agreement required a cash payment of $1,036,000 and a Promissory Note for $164,000. The Partnership recognized net sale proceeds of $1,161,272, which resulted in a net gain of $93,745. At the time of sale, the cost and related accumulated depreciation was $1,316,695 and $249,168, respectively. The Note requires monthly payments of $9,550, bears interest at a 6% rate and is unsecured. The Note is due on November 8, 2007. On November 3, 2006, the Partnership sold its 32% interest in the Garden Ridge retail store in Woodlands, Texas to an unrelated third party. The Partnership received net sale proceeds of $2,792,170, which resulted in a net gain of $366,215. At the time of sale, the cost and related accumulated depreciation was $2,661,132 and $235,177, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) In November 2006, the Partnership entered into an agreement to sell the Children's World daycare center in Abingdon, Maryland to an unrelated third party. On December 6, 2006, the sale closed with the Partnership receiving net sale proceeds of $1,460,899, which resulted in a net gain of $652,292. At the time of sale, the cost and related accumulated depreciation was $1,051,772 and $243,165, respectively. Inflation has had a minimal effect on 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. In addition, leases may contain rent clauses which entitle the Partnership to receive additional rent in future years if gross receipts for the property exceed certain specified amounts. Increases in sales volumes of the tenants, due to inflation and real sales growth, may 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 six months ended June 30, 2007, the Partnership's cash balances decreased $1,492,767 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities. During the six months ended June 30, 2006, the Partnership's cash balances increased $787,967 as a result of cash generated from the sale of property, which was partially offset by distributions paid to the Partners in excess of cash generated from operating activities. Net cash provided by operating activities decreased from $555,614 in 2006 to $438,563 in 2007 as a result of a decrease in total rental and interest income in 2007 and net timing differences in the collection of payments from the tenants and the payment of expenses, which were partially offset by an increase in Partnership administration and property management expenses in 2007. 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 six months ended June 30, 2006, the Partnership generated cash flow from the sale of real estate of $997,272. During the six months ended June 30, 2007, the Partnership expended $1,403,565 to invest in real properties (inclusive of acquisition expenses) as the Partnership reinvested cash generated from property sales. On September 21, 2006, the Partnership purchased a 38% interest in an Applebee's restaurant in Johnstown, Pennsylvania for $1,031,187. The property is leased to B.T. Woodlipp, Inc. under a Lease Agreement with a primary term of 20 years and initial annual rent of $74,370. The remaining interest in the property was purchased by AEI Income & Growth Fund XXI Limited Partnership, an affiliate of the Partnership. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On December 21, 2006, the Partnership purchased a 65% interest in an Advance Auto Parts store in Indianapolis, Indiana for $1,244,173. The property is leased to Advance Stores Company, Inc. under a Lease Agreement with a remaining primary term of 13.5 years and initial annual rent of $87,168. The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership. On December 29, 2006, the Partnership purchased a 60% interest in an Applebee's restaurant in Crawfordsville, Indiana for $1,856,656 from AEI Fund Management XVII, Inc. (AFM), an affiliate of the General Partners. AFM purchased the property from Apple Indiana II LLC, an unrelated third party, on September 21, 2006. The price paid by the Partnership was equal to the price paid by AFM plus the expenses incurred to transfer ownership of the property to the Partnership, which were minimal. During the period the property was owned by AFM, the property generated a net loss of $4,217, which was charged to the Partnership. There was no benefit arising out of the transaction to the General Partners or their affiliates apart from compensation otherwise permitted by the Partnership Agreement. The property is leased to Apple Indiana II LLC under a Lease Agreement with a primary term of 20 years and initial annual rent of $133,933. The remaining interest in the property is owned by AEI Income & Growth Fund 26 LLC, an affiliate of the Partnership. On January 19, 2007, the Partnership purchased a 50% interest in a Tractor Supply Company store in Grand Forks, North Dakota for $1,403,565. The property is leased to Tractor Supply Company under a Lease Agreement with a remaining primary term of 13.9 years and initial annual rent of $102,351. The remaining interest in the property was purchased by AEI Income & Growth Fund 24 LLC, an affiliate of the Partnership. The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners. The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first ten days after the end of each quarter. The Partnership attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Partners on a semi-annual basis. For the six months ended June 30, 2007 and 2006, the Partnership declared distributions of $519,235 and $561,981, 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 $505,779 and $548,556 and the General Partners received distributions of $13,456 and $13,425 for the periods, respectively. In 2007, distributions were lower due to a decrease in the distribution rate per Unit, effective January 1, 2007. During the first six months of 2007 and 2006, the Partnership distributed $106,061 and $131,313 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $6.62 and $8.14 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership. On April 1, 2007, four Limited Partners redeemed a total of 46.58 Partnership Units for $38,906 in accordance with the Partnership Agreement. On April 1, 2006, four Limited Partners redeemed a total of 143.73 Partnership Units for $120,267. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 45 Limited Partners redeemed 803.6 Partnership Units for $631,925. The redemptions increase the remaining Limited Partner's ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $1,203 and $3,720 in 2007 and 2006, respectively. The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis. ITEM 3. CONTROLS AND PROCEDURES. (a) Evaluation of 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 its disclosure controls and procedures (as defined in Rule 13a-14(c) under 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, the disclosure controls and procedures of the Partnership are adequately designed to ensure that information required to be disclosed by us in the reports 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 controls There were no significant changes made in the Partnership's internal controls during the most recent period covered by this report that have materially affected, or are reasonably likely to materially affect, the Partnership's 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 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) During the period covered by this report, the Partnership did not sell any equity securities that are not registered under the Securities Act of 1933. (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 of the Units, 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 are redeemed 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. Small Business Issuer Purchases of Equity Securities Maximum Number Total Number of Units of Units that May Total Number Average Purchased as Part of Yet Be Purchased of Units Price Paid Publicly Announced Under the Plans Period Purchased per Unit Plans or Programs or Programs 4/1/07 to 4/30/07 46.58 $835.20 1,079.66(1) (2) 5/1/07 to 5/31/07 -- -- -- -- 6/1/07 to 6/30/07 -- -- -- -- (1) The Partnership's repurchase plan is mandated by the Partnership Agreement as included in the prospectus related to the original offering of the Units. (2) The Partnership Agreement contains annual limitations on repurchases described in the paragraph above and has no expiration date. ITEM 3.DEFAULTS UPON SENIOR SECURITIES None. PART II - OTHER INFORMATION (Continued) ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5.OTHER INFORMATION None. ITEM 6.EXHIBITS 31.1 Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 6, 2007 AEI Income & Growth Fund XXII Limited Partnership By: AEI Fund Management XXI, Inc. Its: Managing General Partner By:/s/ Robert P Johnson Robert P. Johnson President (Principal Executive Officer) By:/s/ Patrick W Keene Patrick W. Keene Chief Financial Officer (Principal Accounting Officer)