-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LsprsJVEJZmAXJAdBOxIzdG8RxZcw7Zr45H5UDSlC/UtFspfH6FubdLu70h3gqLe XP9v7IzAah2h7rpZ86FIQg== 0000819577-09-000015.txt : 20090330 0000819577-09-000015.hdr.sgml : 20090330 20090330144647 ACCESSION NUMBER: 0000819577-09-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090330 DATE AS OF CHANGE: 20090330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP CENTRAL INDEX KEY: 0000931755 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 411789725 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-85076 FILM NUMBER: 09713654 BUSINESS ADDRESS: STREET 1: 30 EAST 7TH ST SUITE 1300 CITY: ST PAUL STATE: MN ZIP: 55101 BUSINESS PHONE: 6512277333 MAIL ADDRESS: STREET 1: 30 EAST 7TH ST SUITE 1300 CITY: ST PAUL STATE: MN ZIP: 55101 10-K 1 k214-08.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended: December 31, 2008 Commission file number: 000-29274 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) State of Minnesota 41-1789725 (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 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No [X] 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 [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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 [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No [X] As of June 30, 2008, there were 22,779.113 Units of limited partnership interest outstanding and owned by nonaffiliates of the registrant, which Units had an aggregate market value (based solely on the price at which they were sold since there is no ready market for such Units) of $22,779,113. DOCUMENTS INCORPORATED BY REFERENCE The registrant has not incorporated any documents by reference into this report. PART I ITEM 1. BUSINESS. AEI Income & Growth Fund XXI Limited Partnership (the "Partnership" or the "Registrant") is a limited partnership which was organized pursuant to the laws of the State of Minnesota on August 22, 1994. The registrant is comprised of AEI Fund Management XXI, Inc. (AFM) as Managing General Partner, Robert P. Johnson, the President and sole director of AFM, as the Individual General Partner, and purchasers of partnership units as Limited Partners. The Partnership offered for sale up to $24,000,000 of limited partnership interests (the "Units") (24,000 Units at $1,000 per Unit) pursuant to a registration statement effective February 1, 1995. The Partnership commenced operations on April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the Partnership offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units ($24,000,000) was reached. The Partnership was organized to acquire existing and newly constructed commercial properties located in the United States, to lease such properties to tenants under net leases, to hold such properties and to eventually sell such properties. From subscription proceeds, the Partnership purchased ten properties including partial interests in seven properties, at a total cost of $19,686,525. The balance of the subscription proceeds was applied to organization and syndication costs, working capital reserves and distributions, which represented a return of capital. The properties are commercial, single tenant buildings leased under net leases. The Partnership's properties were purchased without any indebtedness. The Partnership will not finance properties in the future to obtain proceeds for new property acquisitions. If it is required to do so, the Partnership may incur short-term indebtedness, which may be secured by a portion of the Partnership's properties, to finance day-to-day cash flow requirements (including cash flow necessary to repurchase Units). The amount of borrowings that may be secured by the properties is limited in the aggregate to 10% of the purchase price of all properties. The Partnership will not incur borrowings prior to application of the proceeds from sale of the Units, will not incur borrowings to pay distributions, and will not incur borrowings while there is cash available for distributions. The Partnership will hold its properties until the General Partners determine that the sale or other disposition of the properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell properties, the General Partners will consider factors such as potential appreciation, net cash flow and income tax considerations. The Partnership expects to sell some or all of its properties prior to its final liquidation and to reinvest the proceeds from such sales in additional properties. The Partnership reserves the right, at the discretion of the General Partners, to either distribute proceeds from the sale of properties to the Partners or to reinvest such proceeds in additional properties, provided that sufficient proceeds are distributed to the Limited Partners to pay federal and state income taxes related to any taxable gain recognized as a result of the sale. It is anticipated that the Partnership will commence liquidation through the sale of its remaining properties twelve to fifteen years after its formation, although final liquidation may be delayed by a number of circumstances, including market conditions and seller financing of properties. ITEM 1. BUSINESS. (Continued) Leases Although there are variations in the specific terms of the leases, the following is a summary of the general terms of the Partnership's leases. The properties are leased to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Partnership is responsible for repairs to the structural components of the building, the roof, and the parking lot. At the time the properties were acquired, the remaining primary lease terms varied from 13 to 20 years, except for the Best Buy store and the Fresenius Medical Center, which had remaining primary terms of 10 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term. The leases provide for base annual rental payments, payable in monthly installments, and contain rent clauses which entitle the Partnership to receive additional rent in future years based on stated rent increases. Property Activity During the Last Three Years As of December 31, 2005, the Partnership owned a significant interest in eleven properties and a minor interest in three properties with a total original cost of $19,103,659, including acquisition expenses. During the years ended December 31, 2006, 2007 and 2008, the Partnership sold four property interests and received net sale proceeds of $3,049,973, $3,889,014 and $3,330,150, which resulted in net gains of $819,029, $1,170,293 and $716,856, respectively. During the last three years, the Partnership purchased additional property with property sales proceeds. One property was purchased in 2006 for $1,682,887 and three properties were purchased in 2008 for $5,672,315. As of December 31, 2008, the Partnership owned a significant interest in eleven properties and a minor interest in three properties with a total original cost of $17,696,193, including acquisition expenses. As of December 31, 2008, one of these properties was under construction and the Partnership had a commitment to expend an additional $1,266,000 to complete the building. Major Tenants During 2008, five tenants each contributed more than ten percent of the Partnership's total rental revenue. The major tenants in aggregate contributed 78% of total rental revenue in 2008. It is anticipated that, based on minimum rental payments required under the leases, each major tenant will continue to contribute more than ten percent of rental revenue in 2009 and future years. Any failure of these major tenants could materially affect the Partnership's net income and cash distributions. Competition The Partnership is a minor factor in the commercial real estate business. There are numerous entities engaged in the commercial real estate business which have greater financial resources than the Partnership. At the time the Partnership elects to dispose of its properties, the Partnership will be in competition with other persons and entities to find buyers for its properties. ITEM 1. BUSINESS. (Continued) Employees The Partnership has no direct employees. Management services are performed for the Partnership by AEI Fund Management, Inc., an affiliate of AFM. ITEM 1A. RISK FACTORS. Not required for a smaller reporting company. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not required for a smaller reporting company. ITEM 2. PROPERTIES. Investment Objectives The Partnership's investment objectives are to acquire existing or newly-developed commercial properties throughout the United States that offer the potential for (i) regular cash distributions of lease income; (ii) growth in lease income through rent escalation provisions; (iii) preservation of capital through all-cash sale-leaseback transactions; (iv) capital growth through appreciation in the value of properties; and (v) stable property performance through long-term lease contracts. The Partnership does not have a policy, and there is no limitation, as to the amount or percentage of assets that may be invested in any one property. However, to the extent possible, the General Partners attempt to diversify the type and location of the Partnership's properties. Description of Properties The Partnership's properties are commercial, single tenant buildings. The properties were acquired on a debt-free basis and are leased to various tenants under net leases, classified as operating leases. The Partnership holds an undivided fee simple interest in the properties. The Partnership's properties are subject to the general competitive conditions incident to the ownership of single tenant investment real estate. Since each property is leased under a long-term lease, there is little competition until the Partnership decides to sell the property. At this time, the Partnership will be competing with other real estate owners, on both a national and local level, in attempting to find buyers for the properties. In the event of a tenant default, the Partnership would be competing with other real estate owners, who have property vacancies, to attract a new tenant to lease the property. The Partnership's tenants operate in industries that are very competitive and can be affected by factors such as changes in regional or local economies, seasonality and changes in consumer preference. ITEM 2. PROPERTIES. (Continued) The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2008. Total Property Annual Purchase Acquisition Lease Annual Rent Property Date Costs Tenant Payment Per Sq. Ft. Arby's Restaurant Montgomery, AL RTM Gulf (2.6811%) 5/31/95 $ 23,049 Coast, LLC $ 2,886 $36.31 Champps Americana Restaurant Champps Livonia, MI Operating (.1534%) 5/19/98 $ 6,366 Corporation $ 806 $57.41 Tumbleweed Restaurant Tumbleweed, Fort Wayne, IN 9/11/00 $1,334,315 Inc. $155,387 $26.18 Johnny Carino's Restaurant Austin, TX Kona Restaurant (1.1839%) 9/26/01 $ 27,083 Group, Inc. $ 2,214 $28.94 KinderCare KinderCare Daycare Center Learning Andover, MN 6/14/02 $1,264,207 Centers, Inc. $132,224 $15.33 KinderCare Daycare Center KinderCare Ballwin, MO Learning (92.233%) 6/14/02 $1,399,892 Centers, Inc. $146,211 $19.01 Winn-Dixie Store Panama City, FL Winn-Dixie Stores (20.4025%) 9/19/03 $ 945,665 Leasing, LLC $ 76,305 $ 7.23 Jared Jewelry Store Hanover, MD Sterling Jewelers (50%) 2/9/04 $1,989,135 Inc. $168,551 $58.04 Jared Jewelry Store Auburn Hills, MI Sterling Jewelers (40%) 1/14/05 $1,466,048 Inc. $102,520 $44.50 CarMax Auto Superstore Lithia Springs, GA CarMax Auto (20%) 3/18/05 $1,885,231 Superstores, Inc. $146,286 $38.01 Applebee's Restaurant Johnstown, PA (62%) 9/21/06 $1,682,887 B.T. Woodlipp, Inc.$121,340 $37.68 ITEM 2. PROPERTIES. (Continued) Total Property Annual Purchase Acquisition Lease Annual Rent Property Date Costs Tenant Payment Per Sq. Ft. Best Buy Store Eau Claire, WI Best Buy (54%) 1/31/08 $3,637,706 Stores, L.P. $256,001 $10.01 Fresenius Medical Center Bio-Medical Shreveport, LA Applications of (55%) 10/2/08 $1,360,617 Louisiana, LLC $102,520 $21.93 Tractor Supply Company Store Rapid City, SD (63%) Tractor Supply (land only)(1)11/21/08 $ 601,028 Company (1) (1) Store was under construction as of December 31, 2008. Rent payments will commence when construction is complete and the store opens for business, which is expected to be in May 2009. The properties listed above with a partial ownership percentage are owned with affiliates of the Partnership and/or unrelated third parties. The remaining interests in the Winn- Dixie store are owned by AEI Net Lease Income & Growth Fund XIX Limited Partnership and unrelated third parties. The remaining interest in the Jared Jewelry store in Hanover, Maryland is owned by AEI Net Lease Income & Growth Fund XX Limited Partnership. The remaining interest in the Jared Jewelry store in Auburn Hills, Michigan is owned by AEI Income & Growth Fund 25 LLC. The remaining interests in the CarMax auto superstore are owned by AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership. The remaining interest in the Applebee's restaurant is owned by AEI Income & Growth Fund XXII Limited Partnership. The remaining interests in the Best Buy store are owned by AEI Income & Growth Fund 23 LLC and AEI Income & Growth Fund 26 LLC. The remaining interest in the Fresenius Medical Center is owned by AEI Income & Growth Fund 24 LLC. The remaining interest in the Tractor Supply Company store is owned by AEI Income & Growth Fund 27 LLC. The remaining interests in the Arby's restaurant, the Champps Americana restaurant in Livonia, Michigan, the Johnny Carino's restaurant in Austin, Texas and the KinderCare daycare center in Ballwin, Missouri are owned by unrelated third parties. The Partnership accounts for properties owned as tenants- in-common with affiliated entities and/or unrelated third parties using the proportionate consolidation method. Each tenant-in- common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses. ITEM 2. PROPERTIES. (Continued) At the time the properties were acquired, the remaining primary lease terms varied from 13 to 20 years, except for the Best Buy store and the Fresenius Medical Center, which had remaining primary terms of 10 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term. Pursuant to the lease agreements, the tenants are required to provide proof of adequate insurance coverage on the properties they occupy. The General Partners believe the properties are adequately covered by insurance and consider the properties to be well-maintained and sufficient for the Partnership's operations. For tax purposes, the Partnership's properties are depreciated under the Modified Accelerated Cost Recovery System (MACRS). The largest depreciable component of a property is the building which is depreciated, using the straight-line method, over 39 or 40 years. The remaining depreciable components of a property are personal property and land improvements which are depreciated, using an accelerated method, over 5 and 15 years, respectively. Since the Partnership has tax-exempt Partners, the Partnership is subject to the rules of Section 168(h)(6) of the Internal Revenue Code which requires a percentage of the properties' depreciable components to be depreciated over longer lives using the straight-line method. In general, the federal tax basis of the properties for tax depreciation purposes is the same as the basis for book depreciation purposes. At December 31, 2008, all properties listed above were 100% occupied. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. (a) As of December 31, 2008, there were 1,245 holders of record of the registrant's Limited Partnership Units. There is no other class of security outstanding or authorized. The registrant's Units are not a traded security in any market. 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. Cash distributions of $16,535 and $17,743 were made to the General Partners and $1,636,989 and $1,756,590 were made to the Limited Partners for 2008 and 2007, respectively. The distributions were made on a quarterly basis and represent Net Cash Flow, as defined, except as discussed below. These distributions should not be compared with dividends paid on capital stock by corporations. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. As part of the Limited Partner distributions discussed above, the Partnership distributed net sale proceeds of $479,262 and $379,986 in 2008 and 2007, respectively. (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 September of each year. The purchase price of the Units is based on a formula specified in the Partnership Agreement. Units tendered to the Partnership are redeemed on October 1st 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 last three months of 2008, the Partnership did not purchase any Units. ITEM 6. SELECTED FINANCIAL DATA. Not required for a smaller reporting company. ITEM 7. 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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 cost (including capitalized acquisition expenses). The Partnership anticipates that for acquisitions completed on or after January 1, 2009, acquisition- related transaction costs will be expensed as incurred as a result of the adoption of Statement of Financial Accounting Standards No. 141(R), Business Combinations. 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 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. 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 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 years ended December 31, 2008 and 2007, the Partnership recognized rental income from continuing operations of $1,084,916 and $811,445, respectively. In 2008, rental income increased due to additional rent received from two property acquisitions in 2008 and rent increases on three properties. For the years ended December 31, 2008 and 2007, the Partnership incurred Partnership administration expenses from affiliated parties of $251,277 and $218,000, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communication with the Limited Partners. These expenses were higher in 2008, when compared to 2007, mainly due to additional expenses related to property sale activities in the second half of 2008. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $36,872 and $32,894, 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) For the years ended December 31, 2008 and 2007, the Partnership recognized interest income of $65,629 and $129,856, respectively. Interest income decreased due to lower money market interest rates in 2008, when compared to 2007. 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 of the property to discontinued operations. For the year ended December 31, 2008, the Partnership recognized income from discontinued operations of $953,842, representing rental income less property management expenses and depreciation of $236,986 and gain on disposal of real estate of $716,856. For the year ended December 31, 2007, the Partnership recognized income from discontinued operations of $1,697,808, representing rental income less property management expenses and depreciation of $527,515 and gain on disposal of real estate of $1,170,293. During the first three months of 2007, the Partnership sold its remaining 10.0242% interest in the Eckerd drug store in Utica, New York, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $509,303, which resulted in a net gain of $59,412. The cost and related accumulated depreciation of the interests sold was $463,144 and $13,253, respectively. On April 12, 2007, the Partnership sold 12.1042% of the KinderCare daycare center in Kimberly, Wisconsin to an unrelated third party. The Partnership received net sale proceeds of $236,188, which resulted in a net gain of $92,257. The cost and related accumulated depreciation of the interest sold was $164,404 and $20,473, respectively. On January 15, 2008, the Partnership sold its remaining 13.4184% interest in the KinderCare daycare center in Kimberly, Wisconsin to an unrelated third party. The Partnership received net sale proceeds of $258,749, which resulted in a net gain of $99,192. The cost and related accumulated depreciation of the interest sold was $182,253 and $22,696, respectively. At December 31, 2007, the property was classified as Real Estate Held for Sale with a book value of $159,557. On August 30, 2007, the Partnership sold the Champps Americana restaurant in San Antonio, Texas to the tenant. The Partnership received net sale proceeds of $3,143,523, which resulted in a net gain of $1,018,624. At the time of sale, the cost and related accumulated depreciation was $2,833,357 and $708,458, respectively. In March 2008, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Laredo, Texas to an unrelated third party. On May 15, 2008, the sale closed with the Partnership receiving net proceeds of $2,896,269, which resulted in a net gain of $536,717. At the time of sale, the cost and related accumulated depreciation was $2,605,079 and $245,527, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On December 23, 2008, the Partnership sold 7.767% of the KinderCare daycare center in Ballwin, Missouri to an unrelated third party. The Partnership received net sale proceeds of $175,132, which resulted in a net gain of $80,947. The cost and related accumulated depreciation of the interest sold was $117,886 and $23,701, respectively. The Partnership is attempting to sell its remaining 92.233% interest in the property. At December 31, 2008, the property was classified as Real Estate Held for Sale with a book value of $1,118,440. The Partnership is attempting to sell its 20.4025% interest in the Winn-Dixie store in Panama City, Florida. At December 31, 2008, the property was classified as Real Estate Held for Sale with a book value of $785,099. 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 year ended December 31, 2008, the Partnership's cash balances decreased $2,835,869 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property. During the year ended December 31, 2007, the Partnership's cash balances increased $3,316,080 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 $1,354,412 in 2007 to $1,188,730 in 2008 as a result of a decrease in total rental and interest income in 2008 and an increase in Partnership administration and property management expenses in 2008, which were partially offset by 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 years ended December 31, 2008 and 2007, the Partnership generated cash flow from the sale of real estate of $3,330,150 and $3,889,014, respectively. During the year ended December 31, 2008, the Partnership expended $5,672,315 to invest in real properties (inclusive of acquisition expenses) as the Partnership reinvested cash generated from property sales. On January 31, 2008, the Partnership purchased a 54% interest in a Best Buy store in Eau Claire, Wisconsin for $3,637,706. The property is leased to Best Buy Stores, L.P. under a Lease Agreement with a remaining primary term of 10 years and initial annual rent of $256,001 for the interest purchased. The remaining interests in the property were purchased by AEI Income & Growth Fund 23 LLC and AEI Income & Growth Fund 26 LLC, affiliates of the Partnership. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On October 2, 2008, the Partnership purchased a 55% interest in a Fresenius Medical Center in Shreveport, Louisiana for $1,360,617. The property is leased to Bio-Medical Applications of Louisiana, LLC, a subsidiary of Fresenius Medical Care Holdings, Inc., under a Lease Agreement with a remaining primary term of 9.8 years and initial annual rent of $102,520 for the interest purchased. The remaining interest in the property was purchased by AEI Income & Growth Fund 24 LLC, an affiliate of the Partnership. On November 21, 2008, the Partnership purchased a 63% interest in a parcel of land in Rapid City, South Dakota for $601,028, including acquisition expenses. The Partnership obtained title to the land in the form of an undivided fee simple interest in the 63% interest purchased. Simultaneous with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership will advance funds to Brad and Dad, LLC for the construction of a Tractor Supply Company store on the site. Through December 31, 2008, the Partnership had advanced $72,964 for the construction of the building. The purchase price, including the cost of the land and acquisition expenses, will be approximately $1,940,000. The remaining interest in the property was purchased by AEI Income & Growth Fund 27 LLC, an affiliate of the Partnership. The property is leased to Tractor Supply Company under a Lease Agreement with a primary term of 15 years and initial annual rent of $141,750 for the interest purchased. Pursuant to the Lease, the tenant will commence paying rent on the day the store opens for business, which is expected to be in May 2009. Pursuant to the development agreement, for the period from November 21, 2008 to the day that the tenant commences paying rent, Brad and Dad, LLC will pay the Partnership interest at a rate of 6.9% on the purchase price of the land and the amounts advanced for construction of the building. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property 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 week 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 in the fourth quarter of each year. For the years ended December 31, 2008 and 2007, the Partnership declared distributions of $1,653,524 and $1,774,333, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $1,636,989 and $1,756,590 and the General Partners received distributions of $16,535 and $17,743 for the years, respectively. In 2008, distributions were lower due to a decrease in the regular distribution rate per Unit, effective January 1, 2008. In June and September 2007, the Partnership declared special distributions of net sale proceeds of $70,707 and $118,182, respectively. In March and June 2008, the Partnership declared special distributions of net sale proceeds of $58,586 and $176,768, respectively. During 2008 and 2007, the Partnership distributed net sale proceeds of $484,103 and $383,824 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $21.05 and $16.66 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 7. 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. During 2008, the Partnership did not redeem any Units from the Limited Partners. During 2007, two Limited Partners redeemed a total of 23.34 Partnership Units for $9,445 in accordance with the Partnership Agreement. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 58 Limited Partners redeemed 1,197.55 Partnership Units for $949,024. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $96 in 2007. 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. The Economy and Market Conditions The impact of conditions in the current economy, including the turmoil in the credit markets, has adversely affected many real estate companies. However, the absence of mortgage financing on the Partnership's properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate companies. Nevertheless, a prolonged economic downturn may adversely affect the operations of the Partnership's tenants and their cash flows. If a tenant were to default on its lease obligations, the Partnership's income would decrease, its distributions would likely be reduced and the value of its properties might decline. Historically, the Partnership has sold properties at a gain and distributed the gain proceeds as part of its regular quarterly distributions, and to make special distributions on occasion. The remaining sales proceeds were reinvested in additional properties. Beginning in the fourth quarter of 2008, general economic conditions caused the volume of property sales to slow dramatically for all real estate sellers. In 2009, the Partnership will likely complete fewer property sales, if any, than it has in the past. Until property sales occur, quarterly distributions going forward will reflect the distribution of net core rental income and capital reserves, if any. Distribution rates in 2009 are expected to be variable and less than recent distribution rates until such time as economic conditions allow the Partnership to, once again, begin selling properties at acceptable prices and generating gains for distribution. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required for a smaller reporting company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See accompanying index to financial statements. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Balance Sheet as of December 31, 2008 and 2007 Statements for the Years Ended December 31, 2008 and 2007: Income Cash Flows Changes in Partners' Capital Notes to Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Partners: AEI Income & Growth Fund XXI Limited Partnership St. Paul, Minnesota We have audited the accompanying balance sheet of AEI Income & Growth Fund XXI Limited Partnership (a Minnesota limited partnership) as of December 31, 2008 and 2007, and the related statements of income, cash flows and changes in partners' capital for the years then ended. The Partnership's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AEI Income & Growth Fund XXI Limited Partnership as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P. Certified Public Accountants Minneapolis, Minnesota March 26, 2009 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP BALANCE SHEET DECEMBER 31 ASSETS 2008 2007 CURRENT ASSETS: Cash $ 2,068,293 $ 4,904,162 Receivables 5,032 0 ----------- ----------- Total Current Assets 2,073,325 4,904,162 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 4,712,813 4,759,346 Buildings and Equipment 10,564,859 9,987,497 Construction in Progress 72,964 0 Accumulated Depreciation (1,376,198) (1,643,293) ----------- ----------- 13,974,438 13,103,550 Real Estate Held for Sale 1,903,539 159,557 ----------- ----------- Net Investments in Real Estate 15,877,977 13,263,107 ----------- ----------- Total Assets $17,951,302 $18,167,269 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 43,300 $ 4,976 Distributions Payable 352,283 381,193 Unearned Rent 22,302 36,286 ----------- ----------- Total Current Liabilities 417,885 422,455 ----------- ----------- PARTNERS' CAPITAL: General Partners 12,901 15,015 Limited Partners, $1,000 per Unit; 24,000 Units authorized and issued; 22,779 Units outstanding 17,520,516 17,729,799 ----------- ----------- Total Partners' Capital 17,533,417 17,744,814 ----------- ----------- Total Liabilities and Partners' Capital $17,951,302 $18,167,269 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31 2008 2007 RENTAL INCOME $ 1,084,916 $ 811,445 EXPENSES: Partnership Administration - Affiliates 251,277 218,000 Partnership Administration and Property Management - Unrelated Parties 36,872 32,894 Depreciation 374,111 259,432 ----------- ----------- Total Expenses 662,260 510,326 ----------- ----------- OPERATING INCOME 422,656 301,119 OTHER INCOME: Interest Income 65,629 129,856 ----------- ----------- INCOME FROM CONTINUING OPERATIONS 488,285 430,975 Income from Discontinued Operations 953,842 1,697,808 ----------- ----------- NET INCOME $ 1,442,127 $ 2,128,783 =========== =========== NET INCOME ALLOCATED: General Partner $ 14,421 $ 21,288 Limited Partners 1,427,706 2,107,495 ----------- ----------- $ 1,442,127 $ 2,128,783 =========== =========== INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 21.22 $ 18.72 Discontinued Operations 41.46 73.73 ----------- ----------- Total $ 62.68 $ 92.45 =========== =========== Weighted Average Units Outstanding 22,779 22,797 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,442,127 $ 2,128,783 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 444,151 441,559 Gain on Sale of Real Estate (716,856) (1,170,293) Increase in Receivables (5,032) 0 Increase (Decrease) in Payable to AEI Fund Management, Inc. 38,324 (57,151) Increase (Decrease) in Unearned Rent (13,984) 11,514 ----------- ----------- Total Adjustments (253,397) (774,371) ----------- ----------- Net Cash Provided By Operating Activities 1,188,730 1,354,412 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (5,672,315) 0 Proceeds from Sale of Real Estate 3,330,150 3,889,014 ----------- ----------- Net Cash Provided By (Used For) Investing Activities (2,342,165) 3,889,014 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions Paid to Partners (1,682,434) (1,917,805) Redemption Payments 0 (9,541) ----------- ----------- Net Cash Used For Financing Activities (1,682,434) (1,927,346) ----------- ----------- NET INCREASE (DECREASE) IN CASH (2,835,869) 3,316,080 CASH, beginning of year 4,904,162 1,588,082 ----------- ----------- CASH, end of year $ 2,068,293 $ 4,904,162 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31 Limited Partnership General Limited Units Partner Partners Total Outstanding BALANCE, December 31, 2006 $ 11,566 $17,388,339 $17,399,905 22,802.45 Distributions Declared (17,743) (1,756,590) (1,774,333) Redemption Payments (96) (9,445) (9,541) (23.34) Net Income 21,288 2,107,495 2,128,783 -------- ----------- ----------- ---------- BALANCE, December 31, 2007 15,015 17,729,799 17,744,814 22,779.11 Distributions Declared (16,535) (1,636,989) (1,653,524) Net Income 14,421 1,427,706 1,442,127 -------- ----------- ----------- ---------- BALANCE, December 31, 2008 $ 12,901 $17,520,516 $17,533,417 22,779.11 ======== =========== =========== ========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (1) Organization - AEI Income & Growth Fund XXI 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 April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively. During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. 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 10% 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (1) Organization - (Continued) 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 10% 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. (2) Summary of Significant Accounting Policies - Financial Statement Presentation The accounts of the Partnership are maintained on the accrual basis of accounting for both federal income tax purposes and financial reporting purposes. Accounting Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The Partnership regularly assesses whether market events and conditions indicate that it is reasonably possible to recover the carrying amounts of its investments in real estate from future operations and sales. A change in those market events and conditions could have a material effect on the carrying amount of its real estate. Cash Concentrations of Credit Risk The Partnership's cash is deposited in one financial institution and at times during the year it may exceed FDIC insurance limits. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (2) Summary of Significant Accounting Policies - (Continued) Receivables Credit terms are extended to tenants in the normal course of business. The Partnership performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Receivables are recorded at their estimated net realizable value. The Partnership follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Partnership is of the belief that such accounts will be collectible in all material respects and thus an allowance is not necessary. Accounts are considered past due if payment is not made on a timely basis in accordance with the Partnership's credit terms. Receivables considered uncollectible are written off. Income Taxes The income or loss of the Partnership for federal income tax reporting purposes is includable in the income tax returns of the partners. In general, no recognition has been given to income taxes in the accompanying financial statements. The tax return and the amount of distributable Partnership income or loss are subject to examination by federal and state taxing authorities. If such an examination results in changes to distributable Partnership income or loss, the taxable income of the partners would be adjusted accordingly. Real Estate The Partnership's real estate is leased under net leases, classified as operating leases. The leases provide for base annual rental payments payable in monthly installments. The Partnership recognizes rental revenue according to the terms of the individual leases. For leases that contain stated rental increases, the increases are recognized in the year in which they are effective. Contingent rental payments are recognized when the contingencies on which the payments are based are satisfied and the rental payments become due under the terms of the leases. The Partnership purchases properties and records them at cost. The Partnership compares the carrying amount of its properties to the estimated probability-weighted future cash flows expected to result from the property and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the property, the Partnership recognizes an impairment loss by the amount by which the carrying amount of the property exceeds the fair value of the property. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (2) Summary of Significant Accounting Policies - (Continued) The Partnership has capitalized as Investments in Real Estate certain costs incurred in the review and acquisition of the properties. The costs were allocated to the land, buildings and equipment. The buildings and equipment of the Partnership are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 25 years and 5 years, respectively. 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 of the property to discontinued operations. The Partnership accounts for properties owned as tenants- in-common with affiliated entities and/or unrelated third parties using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in-common interests. The financial statements reflect only this Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses. The Partnership's properties are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which the properties are located. These laws could require the Partnership to investigate and remediate the effects of the release or disposal of hazardous materials at these locations if found. For each property, an environmental assessment is completed prior to acquisition. In addition, the lease agreements typically strictly prohibit the production, handling, or storage of hazardous materials (except where incidental to the tenant's business such as use of cleaning supplies) in violation of applicable law to restrict environmental and other damage. Environmental liabilities are recorded when it is determined the liability is probable and the costs can reasonably be estimated. There were no environmental issues noted or liabilities recorded at December 31, 2008 and 2007. Fair Value Measurements Statement of Financial Accounting Standard No. 157 "Fair Value Measurements" ("SFAS 157") defines fair value, outlines a framework for measuring fair value, details the required disclosures and was effective January 1, 2008. SFAS 157's requirements for certain nonfinancial assets and liabilities recognized or disclosed at fair value on a nonrecurring basis are deferred until fiscal years beginning after November 15, 2008. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (2) Summary of Significant Accounting Policies - (Continued) Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. SFAS 157 establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. SFAS 157 requires the utilization of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data. The Partnership has no assets or liabilities measured at fair value on a recurring basis that would require disclosure under this pronouncement. When testing for recoverability of properties under SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, the provisions of this statement are used when comparing fair value to carrying value. Recently Issued Accounting Pronouncements In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"), which establishes principles and requirements for how an acquirer shall recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and any goodwill acquired in a business combination. Additionally, SFAS 141(R) requires that an acquirer must immediately expense all acquisition costs and fees associated with an acquisition. SFAS 141(R) became effective on January 1, 2009. We expect the adoption of SFAS 141(R) to have an impact on our results of operations to the extent properties are acquired in 2009 and future years. Acquisition expenses, which are currently capitalized as Investments in Real Estate, will instead be expensed immediately as incurred. Post acquisition, there will be a subsequent positive impact on operations through a reduction in depreciation expense over the estimated life of the properties. Reclassification Certain items related to discontinued operations in the prior year's financial statements have been reclassified to conform to 2008 presentation. These reclassifications had no effect on Partners' capital, net income or cash flows. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (3) Related Party Transactions - The Partnership owns the percentage interest shown below in the following properties as tenants-in-common with the affiliated entities listed: Winn-Dixie store (20.4025% - AEI Net Lease Income & Growth Fund XIX Limited Partnership and unrelated third parties); Jared Jewelry store in Hanover, Maryland (50% - AEI Net Lease Income & Growth Fund XX Limited Partnership); Jared Jewelry store in Auburn Hills, Michigan (40% - AEI Income & Growth Fund 25 LLC); CarMax auto superstore (20% - AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership); Applebee's restaurant (62% - AEI Income & Growth Fund XXII Limited Partnership); Best Buy store (54% - AEI Income & Growth Fund 23 LLC and AEI Income & Growth Fund 26 LLC); Fresenius Medical Center (55% - AEI Income & Growth Fund 24 LLC); and Tractor Supply Company store (63% - AEI Income & Growth Fund 27 LLC). AEI and AFM received the following compensation and reimbursements for costs and expenses from the Partnership: Total Incurred by the Partnership for the Years Ended December 31 2008 2007 a.AEI and AFM are reimbursed for all costs incurred in connection with managing the Partnership's operations, maintaining the Partnership's books and communicating with the Limited Partners. $ 251,277 $ 218,000 ======== ======== b.AEI and AFM are reimbursed for all direct expenses they have paid on the Partnership's behalf to third parties relating to Partnership administration and property management. These expenses included printing costs, legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs. $ 47,516 $ 38,854 ======== ======== c.AEI is reimbursed for all costs and direct expenses incurred by it in acquiring properties on behalf of the Partnership. $ 91,948 $ 0 ======== ======== d.AEI is reimbursed for all costs incurred in connection with the sale of property. $ 63,918 $ 38,867 ======== ======== The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a, b, c and d. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (4) Investments in Real Estate - The Partnership leases its properties to various tenants under net leases, classified as operating leases. Under a net lease, the tenant is responsible for real estate taxes, insurance, maintenance, repairs and operating expenses for the property. For some leases, the Company is responsible for repairs to the structural components of the building, the roof, and the parking lot. At the time the properties were acquired, the remaining primary lease terms varied from 13 to 20 years, except for the Best Buy store and the Fresenius Medical Center, which had remaining primary terms of 10 years. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term. The Partnership's properties are commercial, single-tenant buildings. The Arby's restaurant was constructed and acquired in 1995. The Champps Americana restaurant in Livonia, Michigan was constructed and acquired in 1998. The Tumbleweed restaurant was constructed and acquired in 2000. The Johnny Carino's restaurant in Austin, Texas was constructed and acquired in 2001. The KinderCare daycare center in Andover, Minnesota was constructed in 1998 and acquired in 2002. The KinderCare daycare center in Ballwin, Missouri was constructed in 1999 and acquired in 2002. The Winn-Dixie store was constructed in 1997 and acquired in 2003. The Jared Jewelry store in Hanover, Maryland was constructed in 2001 and acquired in 2004. The Jared Jewelry store in Auburn Hills, Michigan was constructed in 1999 and acquired in 2005. The CarMax auto superstore was constructed in 2003 and acquired in 2005. The Applebee's restaurant in Johnstown, Pennsylvania was constructed in 1996 and acquired in 2006. The Best Buy store was constructed in 1990, renovated in 1997 and acquired in 2008. The Fresenius Medical Center was constructed and acquired in 2008. The land for the Tractor Supply Company store was acquired in 2008 and construction of the store will be completed in 2009. There have been no costs capitalized as improvements subsequent to the acquisitions. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (4) Investments in Real Estate - (Continued) The cost of the properties not held for sale and related accumulated depreciation at December 31, 2008 are as follows: Buildings and Accumulated Property Land Equipment Total Depreciation Arby's, Montgomery, AL $ 10,033 $ 13,016 $ 23,049 $ 7,074 Champps Americana, Livonia, MI 1,753 4,613 6,366 2,053 Tumbleweed, Fort Wayne, IN 562,078 772,237 1,334,315 280,112 Johnny Carino's, Austin, TX 13,771 13,312 27,083 3,931 KinderCare, Andover, MN 179,755 1,084,452 1,264,207 283,764 Jared Jewelry, Hanover, MD 861,065 1,128,070 1,989,135 219,974 Jared Jewelry, Auburn Hills, MI 280,993 1,185,055 1,466,048 187,633 CarMax, Lithia Springs, GA 815,180 1,070,051 1,885,231 162,291 Applebee's, Johnstown, PA 431,754 1,251,133 1,682,887 114,687 Best Buy, Eau Claire, WI 853,357 2,784,349 3,637,706 102,093 Fresenius Medical Center, Shreveport, LA 102,046 1,258,571 1,360,617 12,586 Tractor Supply, Rapid City, SD 601,028 0 601,028 0 ---------- ----------- ----------- ---------- $4,712,813 $10,564,859 $15,277,672 $1,376,198 ========== =========== =========== ========== On January 31, 2008, the Partnership purchased a 54% interest in a Best Buy store in Eau Claire, Wisconsin for $3,637,706. The property is leased to Best Buy Stores, L.P. under a Lease Agreement with a remaining primary term of 10 years and initial annual rent of $256,001 for the interest purchased. On October 2, 2008, the Partnership purchased a 55% interest in a Fresenius Medical Center in Shreveport, Louisiana for $1,360,617. The property is leased to Bio-Medical Applications of Louisiana, LLC, a subsidiary of Fresenius Medical Care Holdings, Inc., under a Lease Agreement with a remaining primary term of 9.8 years and initial annual rent of $102,520 for the interest purchased. On November 21, 2008, the Partnership purchased a 63% interest in a parcel of land in Rapid City, South Dakota for $601,028, including acquisition expenses. The Partnership obtained title to the land in the form of an undivided fee simple interest in the 63% interest purchased. Simultaneous with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership will advance funds to Brad and Dad, LLC for the construction of a Tractor Supply Company store on the site. Through December 31, 2008, the Partnership had advanced $72,964 for the construction of the building. The purchase price, including the cost of the land and acquisition expenses, will be approximately $1,940,000. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (4) Investments in Real Estate - (Continued) The property is leased to Tractor Supply Company under a Lease Agreement with a primary term of 15 years and initial annual rent of $141,750 for the interest purchased. Pursuant to the Lease, the tenant will commence paying rent on the day the store opens for business, which is expected to be in May 2009. Pursuant to the development agreement, for the period from November 21, 2008 to the day that the tenant commences paying rent, Brad and Dad, LLC will pay the Partnership interest at a rate of 6.9% on the purchase price of the land and the amounts advanced for construction of the building. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property of the Partnership. The Partnership owns a 2.6811% interest in an Arby's restaurant in Montgomery, Alabama, a .1534% interest in a Champps restaurant in Livonia, Michigan and a 1.1839% interest in a Johnny Carino's restaurant in Austin, Texas. The remaining interests in these properties are owned by unrelated third parties, who own the properties with the Partnership as tenants-in-common. For properties owned as of December 31, 2008, the minimum future rent payments required by the leases are as follows: 2009 $ 1,495,992 2010 1,565,384 2011 1,573,117 2012 1,591,498 2013 1,608,854 Thereafter 9,534,473 ----------- $17,369,318 =========== There were no contingent rents recognized in 2008 and 2007. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (5) Major Tenants - The following schedule presents rent revenue from individual tenants, or affiliated groups of tenants, who each contributed more than ten percent of the Partnership's total rent revenue for the years ended December 31: Tenants Industry 2008 2007 KinderCare Learning Centers, Inc. Child Care $ 291,167 $ 300,103 Sterling Jewelers Inc. Retail 271,071 271,071 Best Buy Stores, L.P. Retail 235,335 N/A Tumbleweed, Inc. Restaurant 153,102 N/A CarMax Auto Superstores, Inc. Retail 140,446 N/A Champps Americana Group Restaurant N/A 239,909 Kona Restaurant Group, Inc. Restaurant N/A 223,745 ---------- ---------- Aggregate rent revenue of major tenants $1,091,121 $1,034,828 ========== ========== Aggregate rent revenue of major tenants as a percentage of total rent revenue 78% 68% ========== ========== (6) Discontinued Operations - During the first three months of 2007, the Partnership sold its remaining 10.0242% interest in the Eckerd drug store in Utica, New York, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $509,303, which resulted in a net gain of $59,412. The cost and related accumulated depreciation of the interests sold was $463,144 and $13,253, respectively. On April 12, 2007, the Partnership sold 12.1042% of the KinderCare daycare center in Kimberly, Wisconsin to an unrelated third party. The Partnership received net sale proceeds of $236,188, which resulted in a net gain of $92,257. The cost and related accumulated depreciation of the interest sold was $164,404 and $20,473, respectively. On January 15, 2008, the Partnership sold its remaining 13.4184% interest in the KinderCare daycare center in Kimberly, Wisconsin to an unrelated third party. The Partnership received net sale proceeds of $258,749, which resulted in a net gain of $99,192. The cost and related accumulated depreciation of the interest sold was $182,253 and $22,696, respectively. At December 31, 2007, the property was classified as Real Estate Held for Sale with a book value of $159,557. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (6) Discontinued Operations - (Continued) On August 30, 2007, the Partnership sold the Champps Americana restaurant in San Antonio, Texas to the tenant. The Partnership received net sale proceeds of $3,143,523, which resulted in a net gain of $1,018,624. At the time of sale, the cost and related accumulated depreciation was $2,833,357 and $708,458, respectively. In March 2008, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Laredo, Texas to an unrelated third party. On May 15, 2008, the sale closed with the Partnership receiving net proceeds of $2,896,269, which resulted in a net gain of $536,717. At the time of sale, the cost and related accumulated depreciation was $2,605,079 and $245,527, respectively. On December 23, 2008, the Partnership sold 7.767% of the KinderCare daycare center in Ballwin, Missouri to an unrelated third party. The Partnership received net sale proceeds of $175,132, which resulted in a net gain of $80,947. The cost and related accumulated depreciation of the interest sold was $117,886 and $23,701, respectively. The Partnership is attempting to sell its remaining 92.233% interest in the property. At December 31, 2008, the property was classified as Real Estate Held for Sale with a book value of $1,118,440. The Partnership is attempting to sell its 20.4025% interest in the Winn-Dixie store in Panama City, Florida. At December 31, 2008, the property was classified as Real Estate Held for Sale with a book value of $785,099. During 2008 and 2007, the Partnership distributed net sale proceeds of $484,103 and $383,824 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $21.05 and $16.66 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 years ended December 31: 2008 2007 Rental Income $ 317,670 $ 715,602 Property Management Expenses (10,644) (5,960) Depreciation (70,040) (182,127) Gain on Disposal of Real Estate 716,856 1,170,293 ---------- ---------- Income from Discontinued Operations $ 953,842 $1,697,808 ========== ========== AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (7) Partners' Capital - For the years ended December 31, 2008 and 2007, the Partnership declared distributions of $1,653,524 and $1,774,333, respectively. The Limited Partners received distributions of $1,636,989 and $1,756,590 and the General Partners received distributions of $16,535 and $17,743 for the years, respectively. The Limited Partners' distributions represent $71.86 and $77.05 per Limited Partnership Unit outstanding using 22,779 and 22,797 weighted average Units in 2008 and 2007, respectively. The distributions represent $62.68 and $77.05 per Unit of Net Income and $9.18 and $-0- per Unit of return of capital in 2008 and 2007, respectively. As part of the Limited Partner distributions discussed above, the Partnership distributed net sale proceeds of $479,262 and $379,986 in 2008 and 2007, respectively. 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. During 2008, the Partnership did not redeem any Units from the Limited Partners. During 2007, two Limited Partners redeemed a total of 23.34 Partnership Units for $9,445 in accordance with the Partnership Agreement. The Partnership acquired these Units using Net Cash Flow from operations. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $96 in 2007. After the effect of redemptions, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $1,053.60 per original $1,000 invested. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (8) Income Taxes - The following is a reconciliation of net income for financial reporting purposes to income reported for federal income tax purposes for the years ended December 31: 2008 2007 Net Income for Financial Reporting Purposes $1,442,127 $2,128,783 Depreciation for Tax Purposes Under Depreciation for Financial Reporting Purposes 117,939 135,571 Income Accrued for Tax Purposes Over (Under) Income for Financial Reporting Purposes (13,984) 11,515 Gain on Sale of Real Estate for Tax Purposes Under Gain for Financial Reporting Purposes (88,802) (250,183) ---------- ---------- Taxable Income to Partners $1,457,280 $2,025,686 ========== ========== The following is a reconciliation of Partners' capital for financial reporting purposes to Partners' capital reported for federal income tax purposes for the years ended December 31: 2008 2007 Partners'Capital for Financial Reporting Purposes $17,533,417 $17,744,814 Adjusted Tax Basis of Investments in Real Estate Over Net Investments in Real Estate for Financial Reporting Purposes 483,077 453,940 Income Accrued for Tax Purposes Over Income for Financial Reporting Purposes 22,302 36,286 Syndication Costs Treated as Reduction of Capital for Financial Reporting Purposes 3,208,043 3,208,043 ---------- ---------- Partners' Capital for Tax Reporting Purposes $21,246,839 $21,443,083 ========== ========== ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9AT.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) Internal Control Over Financial Reporting. (i) Management's Report on Internal Control Over Financial Reporting. The Managing General Partner, through its management, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a- 15(f) under the Exchange Act, and for performing an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management of the Managing General Partner; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Partnership's assets that could have a material effect on the financial statements. Management of the Managing General Partner performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008 based upon criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, management of the Managing General Partner determined that our internal control over financial reporting was effective as of December 31, 2008 based on the criteria in Internal Control-Integrated Framework issued by the COSO. ITEM 9AT.CONTROLS AND PROCEDURES. (Continued) This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report. (ii) 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. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The registrant is a limited partnership and has no officers, directors, or direct employees. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The General Partners are AEI Fund Management XXI, Inc. (AFM), the Managing General Partner, and Robert P. Johnson, Chief Executive Officer, President and sole director of AFM, the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AFM has only one senior financial executive, its Chief Financial Officer. The Chief Financial Officer reports directly to Mr. Johnson and is accountable for his actions to Mr. Johnson. Although Mr. Johnson and AFM require that all of their personnel, including the Chief Financial Officer, engage in honest and ethical conduct, ensure full, fair, accurate, timely, and understandable disclosure, comply with all applicable governmental laws, rules and regulations, and report to Mr. Johnson any deviation from these principles, because the organization is composed of only approximately 35 individuals, because the management of a partnership by an entity that has different interests in distributions and income than investors involves numerous conflicts of interest that must be resolved on a daily basis, and because the ultimate decision maker in all instances is Mr. Johnson, AFM has not adopted a formal code of conduct. Instead, the materials pursuant to which investors purchase Units disclose these conflicts of interest in detail and Mr. Johnson, as the CEO and sole director of AFM, resolves conflicts to the best of his ability, consistent with his fiduciary obligations to AFM and the fiduciary obligations of AFM to the Partnership. The director and officers of AFM are as follows: ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. (Continued) Robert P. Johnson, age 64, is Chief Executive Officer, President and sole director and has held these positions since the formation of AFM in August 1994, and has been elected to continue in these positions until December 2009. From 1970 to the present, he has been employed exclusively in the investment industry, specializing in limited partnership investments. In that capacity, he has been involved in the development, analysis, marketing and management of public and private investment programs investing in net lease properties as well as public and private investment programs investing in energy development. Since 1971, Mr. Johnson has been the president, a director and a registered principal of AEI Securities, Inc., which is registered with the SEC as a securities broker-dealer, is a member of the Financial Industry Regulatory Authority (FINRA) and is a member of the Security Investors Protection Corporation (SIPC). Mr. Johnson has been president, a director and the principal shareholder of AEI Fund Management, Inc., a real estate management company founded by him, since 1978. Mr. Johnson is currently a general partner or principal of the general partner in ten limited partnerships and a managing member in five LLCs. Patrick W. Keene, age 49, is Chief Financial Officer, Treasurer and Secretary and has held these positions since January 22, 2003 and has been elected to continue in these positions until December 2009. Mr. Keene has been employed by AEI Fund Management, Inc. and affiliated entities since 1986. Prior to being elected to the positions above, he was Controller of the various entities. From 1982 to 1986, Mr. Keene was with KPMG Peat Marwick Certified Public Accountants, first as an auditor and later as a tax manager. Mr. Keene is responsible for all accounting functions of AFM and the registrant. Since Mr. Johnson serves as the Individual General Partner of the Partnership, as well as the sole director of AFM, all of the duties that might be assigned to an audit committee are assigned to Mr. Johnson. Mr. Johnson is not an audit committee financial expert, as defined. As an officer and majority owner, through a parent company, of AFM, and as the Individual General Partner, Mr. Johnson is not a "disinterested director" and may be subject to a number of conflicts of interests in his capacity as sole director of AFM. Before the independent auditors are engaged, Mr. Johnson, as the sole director of AFM, approves all audit-related fees, and all permissible nonaudit fees, for services of our auditors. Section 16(a) Beneficial Ownership Reporting Compliance Under federal securities laws, the directors and officers of the General Partner of the Partnership, and any beneficial owner of more than 10% of a class of equity securities of the Partnership, are required to report their ownership of the Partnership's equity securities and any changes in such ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established by the Commission, and the Partnership is required to disclose in this Annual Report on 10-K any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 2008. Based upon information provided by officers and directors of the General Partner, all officers, directors and 10% owners filed all reports on a timely basis in the 2008 fiscal year. ITEM 11. EXECUTIVE COMPENSATION. The General Partner and affiliates are reimbursed at cost for all services performed on behalf of the registrant and for all third party expenses paid on behalf of the registrant. The cost for services performed on behalf of the registrant is actual time spent performing such services plus an overhead burden. These services include organizing the registrant and arranging for the offer and sale of Units, reviewing properties for acquisition and rendering administrative, property management and property sales services. The amount and nature of such payments are detailed in Item 13 of this annual report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth information pertaining to the ownership of the Units by each person known by the Partnership to beneficially own 5% or more of the Units, by each General Partner, and by each officer or director of the Managing General Partner as of February 28, 2009: Name and Address Number of Percent of Beneficial Owner Units Held of Class AEI Fund Management XXI, Inc. 0 0% Robert P. Johnson 0 0% Patrick W. Keene 0 0% Address for all: 1300 Wells Fargo Place 30 East 7th Street, St. Paul, Minnesota 55101 The General Partners know of no holders of more than 5% of the outstanding Units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The registrant, AFM and its affiliates have common management and utilize the same facilities. As a result, certain administrative expenses are allocated among these related entities. All of such activities and any other transactions involving the affiliates of the General Partner of the registrant are governed by, and are conducted in conformity with, the limitations set forth in the Limited Partnership Agreement of the registrant. Reference is made to Note 3 of the Financial Statements, as presented, and is incorporated herein by reference, for details of related party transactions for the years ended December 31, 2008 and 2007. Neither the registrant, nor the Managing General Partner of the registrant, has a board of directors consisting of any members who are "independent." The sole director of the Managing General Partner, Robert P. Johnson, is also the Individual General Partner of the registrant, and is the Chief Executive Officer, and indirectly the principal owner, of the Managing General Partner. Accordingly, there is no disinterested board, or other functioning body, that reviews related party transactions, or the transactions between the registrant and the General Partners, except as performed in connection with the audit of its financial statements. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued) The limitations included in the Partnership Agreement require that the cumulative reimbursements to the General Partners and their affiliates for certain expenses will not exceed an amount equal to the sum of (i) 20% of gross offering proceeds, (ii) 5% of Net Cash Flow for property management, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the General Partners. The cumulative reimbursements subject to this limitation are reimbursements for (i) organization and offering expenses, including commissions, (ii) acquisition expenses, (iii) services provided in the sales effort of properties, and (iv) expenses of controlling persons and overhead expenses directly attributable to the forgoing services or attributable to administrative services. As of December 31, 2008, these cumulative reimbursements to the General Partners and their affiliates did not exceed the limitation amount. The following table sets forth the forms of compensation, distributions and cost reimbursements paid by the registrant to the General Partners or their Affiliates in connection with the operation of the Fund and its properties for the period from inception through December 31, 2008. Person or Entity Amount Incurred From Receiving Form and Method Inception (August 31, 1994) Compensation of Compensation To December 31, 2008 AEI Securities, Inc. Selling Commissions equal to 8% $2,400,000 of proceeds plus a 2% nonaccountable expense allowance, most of which was reallowed to Participating Dealers. General Partners and Reimbursement at Cost for other $ 877,000 Affiliates Organization and Offering Costs. General Partners and Reimbursement at Cost for all $ 694,897 Affiliates Acquisition Expenses. General Partners and Reimbursement at Cost for all $3,256,326 Affiliates Administrative Expenses attributable to the Fund, including all expenses related to management of the Fund's properties and all other transfer agency, reporting, partner relations and other administrative functions. General Partners and Reimbursement at Cost for all expenses $ 999,851 Affiliates related to the disposition of the Fund's properties. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. (Continued) Person or Entity Amount Incurred From Receiving Form and Method Inception (August 31, 1994) Compensation of Compensation To December 31, 2008 General Partners 1% of Net Cash Flow in any fiscal $ 191,810 year until the Limited Partners have received annual, non-cumulative distributions of Net Cash Flow equal to 10% of their Adjusted Capital Contributions and 10% of any remaining Net Cash Flow in such fiscal year. General Partners 1% of distributions of Net Proceeds $ 60,333 of Sale until Limited Partners have received an amount equal to (a) their Adjusted Capital Contributions, plus (b) an amount equal to 12% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously distributed. 10% of distributions of Net Proceeds of Sale thereafter. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The following is a summary of the fees billed to the Partnership by Boulay, Heutmaker, Zibell & Co. P.L.L.P. for professional services rendered for the years ended December 31, 2008 and 2007: Fee Category 2008 2007 Audit Fees $ 16,100 $ 14,550 Audit-Related Fees 0 0 Tax Fees 0 0 All Other Fees 0 0 --------- -------- Total Fees $ 16,100 $ 14,550 ========= ======== Audit Fees - Consists of fees billed for professional services rendered for the audit of the Partnership's annual financial statements and review of the interim financial statements included in quarterly reports, and services that are normally provided by Boulay, Heutmaker, Zibell & Co. P.L.L.P. in connection with statutory and regulatory filings or engagements. Audit-Related Fees - Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of financial statements and are not reported under "Audit Fees." These services include consultations concerning financial accounting and reporting standards. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. (Continued) Tax Fees - Consists of fees billed for professional services for federal and state tax compliance, tax advice and tax planning. All Other Fees - Consists of fees for products and services other than the services reported above. Policy for Preapproval of Audit and Permissible Non-Audit Services of Independent Auditors Before the Independent Auditors are engaged by the Partnership to render audit or non-audit services, the engagement is approved by Mr. Johnson acting as the Partnership's audit committee. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) (1) A list of the financial statements contained herein is set forth on page 14. (a) (2) Schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or related notes. (a) (3) The Exhibits filed in response to Item 601 of Regulation S-K are listed below. 3.1 Certificate of Limited Partnership (incorporated by reference to Exhibit 3.1 of the registrant's Registration Statement on Form SB-2 filed October 10, 1994 [File No. 33- 85076C]). 3.2 Restated Limited Partnership Agreement to the Prospectus (incorporated by reference to Exhibit A of Amendment No. 2 of the registrant's Registration Statement on Form SB-2 filed January 20, 1995 [File No. 33-85076C]). 10.1 Net Lease Agreement dated March 8, 2000, between the Partnership and Tumbleweed, Inc. relating to the Property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.29 of Form 10-KSB filed March 30, 2000). 10.2 First Amendment to Net Lease Agreement dated September 11, 2000 between the Partnership and Tumbleweed, Inc. relating to the Property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed November 13, 2000). 10.3 Second Amendment to Net Lease Agreement dated September 11, 2000 between the Partnership and Tumbleweed, Inc. relating to the Property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 13, 2000). 10.4 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the Property at 1485 Bunker Lake Boulevard NW, Andover, Minnesota (incorporated by reference to Exhibit 10.4 of Form 8-K filed June 27, 2002). 10.5 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the Property at 497 Big Bend Road, Ballwin, Missouri (incorporated by reference to Exhibit 10.5 of Form 8-K filed June 27, 2002). ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (Continued) 10.6 Assignment and Assumption of Lease Agreement dated September 19, 2003 between the Partnership, AEI Net Lease Income & Growth Fund XIX Limited Partnership, AEI Income & Growth Fund 24 LLC and Transmitter Crossing, LLC relating to the Property at 3621 Highway 231 North, Panama City, Florida (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 13, 2003). 10.7 Assignment and Assumption of Lease dated February 9, 2004 between the Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership and Transmills, LLC relating to the Property at 7684 Arundel Mills, Hanover, Maryland (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 24, 2004). 10.8 Assignment and Assumption of Lease dated January 14, 2005 between the Partnership, AEI Income & Growth Fund 25 LLC and LMB Auburn Hills I LLC relating to the Property at 3960 Baldwin Road, Auburn Hills, Michigan (incorporated by reference to Exhibit 10.26 of Form 10-KSB filed March 30, 2005). 10.9 Assignment and Assumption of Lease dated March 18, 2005 between the Partnership, AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC, AEI Private Net Lease Millennium Fund Limited Partnership and Silver Capital Net Lease Fund II, LLC relating to the Property at 1977 Thornton Road, Lithia Springs, Georgia (incorporated by reference to Exhibit 10.28 of Form 10-KSB filed March 30, 2005). 10.10 Assignment and Assumption of Purchase and Sale Agreement dated September 11, 2006 between the Partnership, AEI Income & Growth Fund XXII Limited Partnership and AEI Fund Management, Inc. relating to the Property at 425 Galleria Drive, Johnstown, Pennsylvania (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed November 14, 2006). 10.11 Net Lease Agreement dated September 21, 2006 between the Partnership, AEI Income & Growth Fund XXII Limited Partnership and B.T. Woodlipp, Inc. relating to the Property at 425 Galleria Drive, Johnstown, Pennsylvania (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 14, 2006). 10.12 Purchase Agreement dated August 6, 2007 between the Partnership and Champps Operating Corporation relating to the Property at 11075 Interstate Highway 10 West, San Antonio, Texas (incorporated by reference to Exhibit 10.1 of Form 8-K filed September 6, 2007). 10.13 Assignment of Purchase Agreement dated January 15, 2008 between the Partnership, AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 26 LLC and AEI Fund Management, Inc. relating to the Property at 4090 Commonwealth Avenue, Eau Claire, Wisconsin (incorporated by reference to Exhibit 10.1 of Form 8-K filed February 6, 2008). 10.14 Assignment and Assumption of Lease dated January 31, 2008 between the Partnership, AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 26 LLC and Eau Claire Equity Fund Limited Partnership relating to the Property at 4090 Commonwealth Avenue, Eau Claire, Wisconsin (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 6, 2008). 10.15 Purchase Agreement dated March 3, 2008 between the Partnership and Healthfirst Real Estate III LP relating to the Property at 7603 San Dario Avenue, Laredo, Texas (incorporated by reference to Exhibit 10.1 of Form 10-Q filed May 14, 2008). 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 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEI INCOME & GROWTH FUND XXI Limited Partnership By: AEI Fund Management XXI, Inc. Its Managing General Partner March 26, 2009 By: /s/ Robert P Johnson Robert P. Johnson, President and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/Robert P Johnson President (Principal Executive Officer) March 26, 2009 Robert P. Johnson and Sole Director of Managing General Partner /s/Patrick W Keene Chief Financial Officer and Treasurer March 26, 2009 Patrick W. Keene (Principal Accounting Officer) EX-31.1 3 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, Robert P. Johnson, certify that: 1. I have reviewed this annual report on Form 10-K of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2009 /s/ Robert P Johnson Robert P. Johnson, President AEI Fund Management XXI, Inc. Managing General Partner EX-31.2 4 ex31-2.txt Exhibit 31.2 CERTIFICATIONS I, Patrick W. Keene, certify that: 1. I have reviewed this annual report on Form 10-K of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2009 /s/ Patrick W Keene Patrick W. Keene, Chief Financial Officer AEI Fund Management XXI, Inc. Managing General Partner EX-32 5 ex32.txt Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of AEI Income & Growth Fund XXI Limited Partnership (the "Partnership") on Form 10-K for the period ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Robert P. Johnson, President of AEI Fund Management XXI, Inc., the Managing General Partner of the Partnership, and Patrick W. Keene, Chief Financial Officer of AEI Fund Management XXI, Inc., each certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Robert P Johnson Robert P. Johnson, President AEI Fund Management XXI, Inc. Managing General Partner March 26, 2009 /s/ Patrick W Keene Patrick W. Keene, Chief Financial Officer AEI Fund Management XXI, Inc. Managing General Partner March 26, 2009 -----END PRIVACY-ENHANCED MESSAGE-----