10KSB 1 k214-05.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended: December 31, 2005 Commission file number: 0-29274 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP (Name of small business issuer 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 (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: Name of each exchange on Title of each class which registered None None Securities registered under Section 12(g) of the Exchange Act: Limited Partnership Units (Title of class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Check if disclosure of delinquent filers in response to Rule 405 of Regulation S-B is not contained in this Form, and no disclosure will 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-KSB or and amendment to this Form 10-KSB. [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No [X] The Issuer's revenues for the year ended December 31, 2005 were $1,533,121. As of February 28, 2006, there were 22,802.447 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 $22,802,447. DOCUMENTS INCORPORATED BY REFERENCE The registrant has not incorporated any documents by reference into this report. Transitional Small Business Disclosure Format: Yes No [X] PART I ITEM 1. DESCRIPTION OF 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 triple 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 triple net leases. The Partnership's properties were purchased with subscription proceeds 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. In addition, certain tenants may be granted options to purchase properties after a specified portion of the lease term has elapsed. 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. DESCRIPTION OF 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 triple net leases, which are classified as operating leases. Under a triple net lease, the tenant is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses for the property. The primary lease terms are for 15 to 20 years. 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. The leases provide the tenants with two to five five-year renewal options subject to the same terms and conditions as the primary term. Certain tenants may be granted options to purchase the property at a formula price, which would exceed the original cost. The actual sale price of a property to a tenant may or may not exceed original cost depending on market and other conditions. Property Activity On October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $810,000. The Partnership obtained title to the land in the form of an undivided fee simple interest. The land is leased to SFG Farmington I Limited Partnership (SFG) under a Lease Agreement with a primary term of 20 years and annual rental payments of $85,050. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to SFG for the construction of a Johnny Carino's restaurant on the site. Pursuant to the Lease, any improvements to the land during the term of the Lease, become property of the lessor. The Partnership charged interest on the advances at a rate of 10.5%. On May 28, 2003, after the development was completed, the Lease Agreement was amended to require annual rental payments of $231,000. Total acquisition costs, including the cost of the land, were $2,183,344. In June 2004, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Farmington, New Mexico to an unrelated third party. On October 6, 2004, the sale closed with the Partnership receiving net sale proceeds of $2,893,779, which resulted in a net gain of $786,594. At the time of sale, the cost and related accumulated depreciation was $2,183,344 and $76,159, respectively. On September 19, 2003, the Partnership purchased a 37% interest in a Winn-Dixie store in Panama City, Florida for $1,714,965. The property is leased to Winn-Dixie Montgomery, Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $138,380. The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Income & Growth Fund 24 LLC, affiliates of the Partnership. ITEM 1. DESCRIPTION OF BUSINESS. (Continued) Through March 31, 2004, the Partnership sold 16.5975% of the Winn-Dixie store in Panama City, Florida, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $900,843, which resulted in a net gain of $139,707. The total cost and related accumulated depreciation of the interests sold was $769,300 and $8,164, respectively. For the years ended December 31, 2004 and 2003, the net gain was $137,068 and $2,639, respectively. In February 2005, the tenant of the Winn-Dixie store and its parent company, Winn-Dixie, Inc., filed for Chapter 11 bankruptcy reorganization. Rents are current and the Partnership expects to continue to receive all scheduled rents in future months unless the Lease is rejected by Winn-Dixie. If the Lease is affirmed, Winn-Dixie must comply with all Lease terms. If the Lease is rejected, Winn-Dixie would be required to return possession of the property to the Partnership and the Partnership would be responsible for real estate taxes and other costs associated with maintaining the property. The Partnership has evaluated the lease and property value and decided that there is no impairment loss at this time. At December 31, 2005, the book value of this property was $876,128. During the first nine months of 2003, the Partnership sold the Children's World in Mundelein, Illinois, in seven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,010,839, which resulted in a net gain of $495,127. The total cost and related accumulated depreciation of the interests sold was $1,618,824 and $103,112, respectively. During the third quarter of 2003, the Partnership sold its 25.0% interest in the Champps Americana restaurant in Centerville, Ohio, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,384,939, which resulted in a net gain of $498,449. The total cost and related accumulated depreciation of the interests sold was $984,426 and $97,936, respectively. During the fourth quarter of 2003, the Partnership sold 37.0128% of the Garden Ridge retail store in Pineville, North Carolina, in eleven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $3,968,116, which resulted in a net gain of $1,347,739. The cost and related accumulated depreciation of the interests sold was $3,310,163 and $689,786, respectively. On January 13, 2004, the Partnership sold its remaining 3.7372% interest in the Garden Ridge retail store to an unrelated third party. The Partnership received net sale proceeds of $392,836, which resulted in a net gain of $128,636. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $264,200. On December 30, 2003, the Partnership purchased a Johnny Carino's restaurant in Laredo, Texas for $2,605,079. The property is leased to Kona Restaurant Group, Inc. under a Lease Agreement with a primary term of 13 years and annual rental payments of $215,646. ITEM 1. DESCRIPTION OF BUSINESS. (Continued) On February 9, 2004, the Partnership purchased a 50% interest in a Jared Jewelry store in Hanover, Maryland for $1,989,135. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $153,228. The remaining interest in the property was purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Partnership. On September 20, 2004, the Partnership purchased a 40% interest in an Eckerd drug store in Utica, New York for $1,848,107. The property is leased to Eckerd Corporation under a Lease Agreement with a primary term of 20 years and annual rental payments of $149,671. The remaining interest in the property was purchased by AEI Accredited Investor Fund 2002 Limited Partnership, an affiliate of the Partnership. On January 14, 2005, the Partnership purchased a 40% interest in a Jared Jewelry store in Auburn Hills, Michigan for $1,466,048. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a remaining primary term of 15 years and annual rental payments of $102,520. The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership. On March 18, 2005, the Partnership purchased a 20% interest in a CarMax auto superstore in Lithia Springs, Georgia for $1,885,231. The property is leased to CarMax Auto Superstores, Inc. under a Lease Agreement with a remaining primary term of 13.4 years and annual rental payments of $136,080. The remaining interests in the property were purchased by AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership, affiliates of the Partnership. Major Tenants During 2005, four tenants each contributed more than ten percent of the Partnership's total rental revenue. The major tenants in aggregate contributed 71% of total rental revenue in 2005. 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 2006 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. Employees The Partnership has no direct employees. Management services are performed for the Partnership by AEI Fund Management, Inc., an affiliate of AFM. ITEM 2. DESCRIPTION OF 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 triple net leases, which are 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. The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2005. Total Property Annual Annual Purchase Acquisition Lease Rent Per Property Date Costs Tenant Payment Sq. Ft. Arby's Restaurant Montgomery, AL RTM Gulf (2.6811%) 5/31/95 $ 23,049 Coast, Inc. $ 2,760 $34.72 Champps Champps Americana Restaurant Entertainment San Antonio,TX 12/23/97 $2,833,357 of Texas, Inc. $336,847 $38.81 Champps Americana Restaurant Champps Livonia, MI Operating (.1534%) 5/19/98 $ 6,366 Corporation $ 751 $53.49 ITEM 2. DESCRIPTION OF PROPERTIES. (Continued) Total Property Annual Annual Purchase Acquisition Lease Rent Per Property Date Costs Tenant Payment Sq. Ft. Tumbleweed Restaurant Tumbleweed, Fort Wayne, IN 9/11/00 $1,334,315 Inc. $146,425 $24.68 Johnny Carino's Restaurant Austin, TX Kona Restaurant (1.1839%) 9/26/01 $ 27,083 Group, Inc. $ 2,993 $39.13 Children's World KinderCare Daycare Center Learning Andover, MN 6/14/02 $1,264,207 Centers, Inc. $120,204 $13.94 Children's World KinderCare Daycare Center Learning Ballwin, MO 6/14/02 $1,517,778 Centers, Inc. $144,113 $17.28 Children's World KinderCare Daycare Center Learning Kimberly, WI 6/14/02 $1,358,239 Centers, Inc. $129,087 $12.49 Winn-Dixie Retail Store Panama City, FL Winn-Dixie (20.4025%) 9/19/03 $ 945,665 Montgomery, Inc.$ 76,305 $ 7.23 Johnny Carino's Restaurant Kona Restaurant Laredo, TX 12/30/03 $2,605,079 Group, Inc. $217,803 $31.26 Jared Jewelry Store Hanover, MD Sterling Jewelers (50%) 2/9/04 $1,989,135 Inc. $153,228 $52.76 Eckerd Drug Store Utica, NY Eckerd (40%) 9/20/04 $1,848,107 Corporation $149,671 $25.45 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.$136,080 $35.36 ITEM 2. DESCRIPTION OF PROPERTIES. (Continued) 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 interests in the Eckerd drug store are owned by AEI Accredited Investor Fund 2002 Limited Partnership and unrelated third parties. 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 interests in the Arby's restaurant, the Champps Americana restaurant in Livonia, Michigan and the Johnny Carino's restaurant in Austin, Texas are owned by unrelated third parties. The Partnership accounts for properties owned as tenants- in-common with affiliated Partnerships 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. At the time the properties were acquired, the remaining primary Lease terms varied from 13 to 20 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. Through December 31, 2005, 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 COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. (a) As of December 31, 2005, there were 1,277 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 $21,161 and $22,424 were made to the General Partners and $2,095,000 and $2,220,005 were made to the Limited Partners in 2005 and 2004, 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. As part of the Limited Partner distributions discussed above, the Partnership distributed $670,030 and $945,136 of proceeds from property sales in 2005 and 2004, 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. ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. Small Business Issuer Purchases of Equity Securities Maximum Number of Total Number of Units Units that May Total Number Average Purchased as Part of Yet Be Purchased of Units Price Paid Publicly Announced Under the Plans Period Purchased per Unit Plans or Programs or Programs 10/1/05 to 10/31/05 17 $ 542.45 1,197.55(1) (2) 11/1/05 to 11/30/05 -- -- -- -- 12/1/05 to 12/31/05 -- -- -- -- (1) The Partnership's repurchase plan is mandated by the Partnership Agreement as included in the prospectus related to the original offering of the Units. (2) The Partnership Agreement contains annual limitations on repurchases described in the paragraph above and has no expiration date. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. The Management's Discussion and Analysis contains various "forward looking statements" within the meaning of federal securities laws which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, taxation levels, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward looking statements made by the Partnership, must be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following: Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate; the federal income tax consequences of rental income, deductions, gain on sales and other items and the affects 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) The Application of Critical Accounting Policies The preparation of the Partnership's financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of real estate and the allocation by AEI Fund Management, Inc. of expenses to the Partnership as opposed to other funds they manage. The Partnership purchases properties and records them in the financial statements at the lower of cost or estimated realizable value. The Partnership initially records the properties at cost (including capitalized acquisition expenses). The Partnership is required to periodically evaluate the carrying value of properties to determine whether their realizable value has declined. For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property's probability-weighted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property's estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the realizable value, an impairment loss is recorded to reduce the carrying value of the property to its realizable value. A change in these assumptions or analysis could cause material changes in the carrying value of the properties. 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, 2005 and 2004, the Partnership recognized rental income from continuing operations of $1,533,121 and $1,308,238, respectively. In 2005, rental income increased due to additional rent received from three property acquisitions in 2004 and 2005 and rent increases on two properties. For the years ended December 31, 2005 and 2004, the Partnership incurred Partnership administration expenses from affiliated parties of $243,270 and $216,944, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and correspondence to the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $30,853 and $25,620, 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) For the years ended December 31, 2005 and 2004, the Partnership recognized interest income of $40,658 and $58,155, respectively. In 2005, interest income decreased due to the Partnership having less money invested in a money market account due to property acquisitions. For the year ended December 31, 2004, the Partnership recognized gain on sale of real estate from continuing operations of $137,068 from the sale of the Winn-Dixie store. Since the Partnership retains an ownership interest in the property, the operating results and gain on sale of the property were not classified as discontinued operations. On January 1, 2004, the Partnership owned 36.4787% of the Winn-Dixie store in Panama City, Florida. During the first quarter of 2004, the Partnership sold 16.0762% of the property, in three separate transactions, to unrelated third parties. The Partnership received net sale proceeds of $874,236, which resulted in a net gain of $137,068. The cost and related accumulated depreciation of the interests sold was $745,138 and $7,970, respectively. In February 2005, Winn-Dixie Montgomery, Inc., the tenant of the Winn-Dixie store in Panama City, Florida, and its parent company, Winn-Dixie, Inc., filed for Chapter 11 bankruptcy reorganization. Rents are current and the Partnership expects to continue to receive all scheduled rents in future months unless the Lease is rejected by Winn-Dixie. If the Lease is affirmed, Winn-Dixie must comply with all Lease terms. If the Lease is rejected, Winn-Dixie would be required to return possession of the property to the Partnership and the Partnership would be responsible for real estate taxes and other costs associated with maintaining the property. The Partnership has evaluated the lease and property value and decided that there is no impairment loss at this time. At December 31, 2005, the book value of this property was $876,128. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassifies the prior periods operating results and any partial sales of the property to discontinued operations. For the year ended December 31, 2005, the Partnership recognized income from discontinued operations of $108,080, representing rental income less property management expenses and depreciation. For the year ended December 31, 2004, the Partnership recognized income from discontinued operations of $1,086,460, representing rental income less property management expenses and depreciation of $171,230 and gain on disposal of real estate of $915,230. On January 13, 2004, the Partnership sold its remaining 3.7372% interest in the Garden Ridge retail store in Pineville, North Carolina to an unrelated third party. The Partnership received net sale proceeds of $392,836, which resulted in a net gain of $128,636. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $264,200. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) In June 2004, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Farmington, New Mexico to an unrelated third party. On October 6, 2004, the sale closed with the Partnership receiving net sale proceeds of $2,893,779, which resulted in a net gain of $786,594. At the time of sale, the cost and related accumulated depreciation was $2,183,344 and $76,159, respectively. Inflation has had a minimal effect on income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. In addition, leases may contain rent clauses which entitle the Partnership to receive additional rent in future years if gross receipts for the property exceed certain specified amounts. Increases in sales volumes of the tenants, due to inflation and real sales growth, may result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions. Liquidity and Capital Resources During the year ended December 31, 2005, the Partnership's cash balances decreased $4,433,143 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities. During the year ended December 31, 2004, the Partnership's cash balances decreased $723,049 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. Net cash provided by operating activities increased from $1,199,642 in 2004 to $1,472,315 in 2005 as a result of an increase in total rental and interest income in 2005 and net timing differences in the collection of payments from the tenants and the payment of expenses, which were partially offset by an increase in Partnership administration and property management expenses in 2005. 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 year ended December 31, 2004, the Partnership generated cash flow from the sale of real estate of $4,160,851. During the years ended December 31, 2005 and 2004, the Partnership expended $3,351,279 and $3,847,538, respectively, to invest in real properties (inclusive of acquisition expenses) as the Partnership reinvested cash generated from property sales. On February 9, 2004, the Partnership purchased a 50% interest in a Jared Jewelry store in Hanover, Maryland for $1,989,135. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $153,228. The remaining interest in the property was purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Partnership. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On September 20, 2004, the Partnership purchased a 40% interest in an Eckerd drug store in Utica, New York for $1,848,107. The property is leased to Eckerd Corporation under a Lease Agreement with a primary term of 20 years and annual rental payments of $149,671. The remaining interest in the property was purchased by AEI Accredited Investor Fund 2002 Limited Partnership, an affiliate of the Partnership. On January 14, 2005, the Partnership purchased a 40% interest in a Jared Jewelry store in Auburn Hills, Michigan for $1,466,048. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a remaining primary term of 15 years and annual rental payments of $102,520. The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership. On March 18, 2005, the Partnership purchased a 20% interest in a CarMax auto superstore in Lithia Springs, Georgia for $1,885,231. The property is leased to CarMax Auto Superstores, Inc. under a Lease Agreement with a remaining primary term of 13.4 years and annual rental payments of $136,080. The remaining interests in the property were purchased by AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership, affiliates of the Partnership. The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners. The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first ten days after the end of each quarter. The Partnership attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Partners in the fourth quarter of each year. For the years ended December 31, 2005 and 2004, the Partnership declared distributions of $2,116,161 and $2,242,429, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $2,095,000 and $2,220,005 and the General Partners received distributions of $21,161 and $22,424 for the periods, respectively. In September and December 2005, the Partnership declared special distributions of $303,030 and $176,768, respectively, of net sale proceeds. In December 2004, the Partnership declared a special distribution of $606,061 of net sale proceeds, which resulted in higher distributions in 2004 and a higher distribution payable at December 31, 2004. During 2005 and 2004, the Partnership distributed $676,798 and $954,682 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $29.36 and $41.38 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 6. 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 2005, four Limited Partners redeemed a total of 17 Partnership Units for $9,222 in accordance with the Partnership Agreement. During 2004, five Limited Partners redeemed a total of 88.04 Partnership Units for $53,859. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 49 Limited Partners redeemed 1,092.51 Partnership Units for $885,943. 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 $93 and $544 in 2005 and 2004, respectively. The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis. ITEM 7. FINANCIAL STATEMENTS. See accompanying index to financial statements. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Balance Sheet as of December 31, 2005 and 2004 Statements for the Years Ended December 31, 2005 and 2004: 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, 2005 and 2004, and the related statements of income, cash flows and changes in partners' capital for the years then ended. These financial statements are the responsibility of the Partnership's management. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. /s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P. Certified Public Accountants Minneapolis, Minnesota January 27, 2006 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP BALANCE SHEET DECEMBER 31 ASSETS 2005 2004 CURRENT ASSETS: Cash and Cash Equivalents $ 862,160 $ 5,295,303 Receivables 2,232 18,809 ----------- ----------- Total Current Assets 864,392 5,314,112 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 5,766,615 5,560,626 Buildings and Equipment 11,488,937 10,191,754 Accumulated Depreciation (1,630,529) (1,193,144) ----------- ----------- 15,625,023 14,559,236 Real Estate Held for Sale 1,795,224 0 ----------- ----------- Net Investments in Real Estate 17,420,247 14,559,236 ----------- ----------- Total Assets $18,284,639 $19,873,348 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 10,510 $ 36,234 Distributions Payable 583,254 1,011,957 Unearned Rent 32,784 0 ----------- ----------- Total Current Liabilities 626,548 1,048,191 ----------- ----------- PARTNERS' CAPITAL: General Partners 14,148 25,818 Limited Partners, $1,000 per Unit; 24,000 Units authorized and issued; 22,802 and 22,819 Units outstanding in 2005 and 2004, respectively 17,643,943 18,799,339 ----------- ----------- Total Partners' Capital 17,658,091 18,825,157 ----------- ----------- Total Liabilities and Partners'Capital $18,284,639 $19,873,348 =========== =========== 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 2005 2004 RENTAL INCOME $ 1,533,121 $ 1,308,238 EXPENSES: Partnership Administration - Affiliates 243,270 216,944 Partnership Administration and Property Management - Unrelated Parties 30,853 25,620 Depreciation 449,326 367,464 ----------- ----------- Total Expenses 723,449 610,028 ----------- ----------- OPERATING INCOME 809,672 698,210 OTHER INCOME: Interest Income 40,658 58,155 Gain on Sale of Real Estate 0 137,068 ----------- ----------- Total Other Income 40,658 195,223 ----------- ----------- INCOME FROM CONTINUING OPERATIONS 850,330 893,433 Income from Discontinued Operations 108,080 1,086,460 ----------- ----------- NET INCOME $ 958,410 $ 1,979,893 =========== =========== NET INCOME ALLOCATED: General Partner $ 9,584 $ 19,799 Limited Partners 948,826 1,960,094 ----------- ----------- $ 958,410 $ 1,979,893 =========== =========== INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 36.90 $ 38.65 Discontinued Operations 4.69 47.00 ----------- ----------- Total $ 41.59 $ 85.65 =========== =========== Weighted Average Units Outstanding 22,815 22,885 =========== =========== 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 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 958,410 $ 1,979,893 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 490,268 414,555 Gain on Sale of Real Estate 0 (1,052,298) (Increase) Decrease in Receivables 16,577 (18,230) Decrease in Payable to AEI Fund Management, Inc. (25,724) (124,278) Increase in Unearned Rent 32,784 0 ----------- ----------- Total Adjustments 513,905 (780,251) ----------- ----------- Net Cash Provided By Operating Activities 1,472,315 1,199,642 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (3,351,279) (3,847,538) Proceeds from Sale of Real Estate 0 4,160,851 ----------- ----------- Net Cash Provided By (Used For) Investing Activities (3,351,279) 313,313 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (Decrease) in Distributions Payable (428,703) 60,828 Distributions to Partners (2,116,161) (2,242,429) Redemption Payments (9,315) (54,403) ------------ ----------- Net Cash Used For Financing Activities (2,554,179) (2,236,004) ------------ ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (4,433,143) (723,049) CASH AND CASH EQUIVALENTS, beginning of period 5,295,303 6,018,352 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 862,160 $ 5,295,303 ============ =========== 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, 2003 $ 28,987 $19,113,109 $19,142,096 22,907.49 Distributions (22,424) (2,220,005) (2,242,429) Redemption Payments (544) (53,859) (54,403) (88.04) Net Income 19,799 1,960,094 1,979,893 -------- ----------- ----------- ----------- BALANCE, December 31, 2004 25,818 18,799,339 18,825,157 22,819.45 Distributions (21,161) (2,095,000) (2,116,161) Redemption Payments (93) (9,222) (9,315) (17.00) Net Income 9,584 948,826 958,410 -------- ----------- ----------- ----------- BALANCE, December 31, 2005 $ 14,148 $17,643,943 $17,658,091 22,802.45 ======== =========== =========== =========== 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, 2005 AND 2004 (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, 2005 AND 2004 (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 primarily 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, 2005 AND 2004 (2) Summary of Significant Accounting Policies - (Continued) Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents may include cash in checking, cash invested in money market accounts, certificates of deposit, federal agency notes and commercial paper with a term of three months or less. 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 triple 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 which 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (2) Summary of Significant Accounting Policies - (Continued) Real estate is recorded at the lower of cost or estimated net realizable value. 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. 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 and any partial sales of the property to discontinued operations. The Partnership accounts for properties owned as tenants- in-common with affiliated Partnerships 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, 2005 and 2004. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (2) Summary of Significant Accounting Policies - (Continued) Reclassification Certain items in the prior year's financial statements have been reclassified to conform to 2005 presentation. These reclassifications had no effect on Partners' capital, net income or cash flows. Newly Issued Pronouncements The Partnership has considered the accounting pronouncements issued after December 2004 and has determined that none of these pronouncements will have a material impact on its financial statements. (3) Related Party Transactions - As of December 31, 2005, the Partnership owns a 20.4025% interest in a Winn-Dixie store. The remaining interests in this property are owned by AEI Net Lease Income & Growth Fund XIX Limited Partnership, an affiliate of the Partnership, and unrelated third parties. The Partnership owns a 50% interest in a Jared Jewelry store in Hanover, Maryland. The remaining interest in this property is owned by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Partnership. The Partnership owns a 40% interest in an Eckerd drug store in Utica, New York. The remaining interests in this property are owned by AEI Accredited Investor Fund 2002 Limited Partnership, an affiliate of the Partnership, and unrelated third parties. The Partnership owns a 40% interest in a Jared Jewelry store in Auburn Hills, Michigan. The remaining interest in this property is owned by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership. The Partnership owns a 20% interest in a CarMax auto superstore in Lithia Springs, Georgia. The remaining interests in this property are owned by AEI Income & Growth Fund 24 LLC, AEI Income & Growth Fund 25 LLC and AEI Private Net Lease Millennium Fund Limited Partnership, affiliates of the Partnership. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (3) Related Party Transactions - (Continued) 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 2005 2004 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 the results of operations to the Limited Partners. $ 243,270 $ 216,944 ======== ======== 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. $ 31,502 $ 26,899 ======== ======== c.AEI is reimbursed for all costs and direct expenses incurred by it in acquiring properties on behalf of the Partnership. $ 47,279 $ 64,938 ======== ======== d.AEI is reimbursed for all costs incurred in connection with the sale of property. $ 0 $ 64,144 ======== ======== 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, 2005 AND 2004 (4) Investments in Real Estate - The Partnership leases its properties to various tenants under triple net leases, which are classified as operating leases. Under a triple net lease, the tenant is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses of the property. At the time the properties were acquired, the remaining primary Lease terms varied from 13 to 20 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 contain rent clauses which entitle the Partnership to receive additional rent in future years based on stated rent increases. The Partnership's properties are commercial, single-tenant buildings. The Arby's restaurant was constructed and acquired in 1995. The Champps Americana restaurants in San Antonio, Texas and Livonia, Michigan were constructed and acquired in 1997 and 1998, respectively. The Tumbleweed restaurant was constructed and acquired in 2000. The Johnny Carino's restaurant in Austin, Texas was constructed and acquired in 2001. The Children's World daycare centers in Andover, Minnesota and Kimberly, Wisconsin were constructed in 1998 and acquired in 2002. The Children's World 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 Johnny Carino's restaurant in Laredo, Texas was constructed in 1999 and acquired in 2003. The Jared Jewelry store in Hanover, Maryland was constructed in 2001 and acquired in 2004. The Eckerd drug store was constructed 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. 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, 2005 AND 2004 (4) Investments in Real Estate - (Continued) The cost of the properties not held for sale and related accumulated depreciation at December 31, 2005 are as follows: Buildings and Accumulated Property Land Equipment Total Depreciation Arby's, Montgomery, AL $ 10,033 $ 13,016 $ 23,049 $ 5,511 Champps Americana, San Antonio, TX 1,127,016 1,706,341 2,833,357 599,696 Champps Americana, Livonia, MI 1,753 4,613 6,366 1,519 Tumbleweed, Fort Wayne, IN 562,078 772,237 1,334,315 191,750 Johnny Carino's, Austin, TX 13,771 13,312 27,083 2,329 Children's World, Andover, MN 179,755 1,084,452 1,264,207 153,630 Children's World, Ballwin, MO 255,080 1,262,698 1,517,778 178,883 Children's World, Kimberly, WI 312,007 1,046,232 1,358,239 148,215 Winn-Dixie, Panama City, FL 187,081 758,584 945,665 69,537 Johnny Carino's, Laredo, TX 1,160,803 1,444,276 2,605,079 115,542 Jared Jewelry, Hanover, MD 861,065 1,128,070 1,989,135 84,605 Jared Jewelry, Auburn Hills, MI 280,993 1,185,055 1,466,048 45,427 CarMax, Lithia Springs, GA 815,180 1,070,051 1,885,231 33,885 ---------- ----------- ----------- ---------- $5,766,615 $11,488,937 $17,255,552 $1,630,529 ========== =========== =========== ========== On January 1, 2004, the Partnership owned 36.4787% of the Winn-Dixie store in Panama City, Florida. During the first quarter of 2004, the Partnership sold 16.0762% of the property, in three separate transactions, to unrelated third parties. The Partnership received net sale proceeds of $874,236, which resulted in a net gain of $137,068. The cost and related accumulated depreciation of the interests sold was $745,138 and $7,970, respectively. In February 2005, Winn-Dixie Montgomery, Inc., the tenant of the Winn-Dixie store in Panama City, Florida, and its parent company, Winn-Dixie, Inc., filed for Chapter 11 bankruptcy reorganization. Rents are current and the Partnership expects to continue to receive all scheduled rents in future months unless the Lease is rejected by Winn-Dixie. If the Lease is affirmed, Winn-Dixie must comply with all Lease terms. If the Lease is rejected, Winn-Dixie would be required to return possession of the property to the Partnership and the Partnership would be responsible for real estate taxes and other costs associated with maintaining the property. The Partnership has evaluated the lease and property value and decided that there is no impairment loss at this time. At December 31, 2005, the book value of this property was $876,128. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (4) Investments in Real Estate - (Continued) On February 9, 2004, the Partnership purchased a 50% interest in a Jared Jewelry store in Hanover, Maryland for $1,989,135. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $153,228. On January 14, 2005, the Partnership purchased a 40% interest in a Jared Jewelry store in Auburn Hills, Michigan for $1,466,048. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a remaining primary term of 15 years and annual rental payments of $102,520. On March 18, 2005, the Partnership purchased a 20% interest in a CarMax auto superstore in Lithia Springs, Georgia for $1,885,231. The property is leased to CarMax Auto Superstores, Inc. under a Lease Agreement with a remaining primary term of 13.4 years and annual rental payments of $136,080. 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, 2005, the minimum future rent payments required by the leases are as follows: 2006 $ 1,724,428 2007 1,737,125 2008 1,739,856 2009 1,743,248 2010 1,756,944 Thereafter 13,810,046 ----------- $22,511,647 =========== There were no contingent rents recognized in 2005 or 2004. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (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 2005 2004 KinderCare Learning Centers, Inc. Child Care $ 393,404 $ 393,404 Champps Americana Group Restaurant 337,598 337,580 Sterling Jewelers Inc. Retail 252,261 N/A Kona Restaurant Group, Inc. Restaurant 219,358 218,639 SFG Farmington-I Limited Partnership Restaurant N/A 176,355 ---------- ---------- Aggregate rent revenue of major tenants $1,202,621 $1,125,978 ========== ========== Aggregate rent revenue of major tenants as a percentage of total rent revenue 71% 74% ========== ========== (6) Discontinued Operations - On January 13, 2004, the Partnership sold its remaining 3.7372% interest in the Garden Ridge retail store in Pineville, North Carolina to an unrelated third party. The Partnership received net sale proceeds of $392,836, which resulted in a net gain of $128,636. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $264,200. In June 2004, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Farmington, New Mexico to an unrelated third party. On October 6, 2004, the sale closed with the Partnership receiving net sale proceeds of $2,893,779, which resulted in a net gain of $786,594. At the time of sale, the cost and related accumulated depreciation was $2,183,344 and $76,159, respectively. On September 20, 2004, the Partnership purchased a 40% interest in an Eckerd drug store in Utica, New York for $1,848,107. The property is leased to Eckerd Corporation under a Lease Agreement with a primary term of 20 years and annual rental payments of $149,671. The Partnership is attempting to sell its interest in the Eckerd drug store. At December 31, 2005, the property was classified as Real Estate Held for Sale with a book value of $1,795,224. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (6) Discontinued Operations - (Continued) During 2005 and 2004, the Partnership distributed $676,798 and $954,682 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $29.36 and $41.38 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: 2005 2004 Rental Income $ 149,671 $ 219,600 Property Management Expenses (649) (1,279) Depreciation (40,942) (47,091) Gain on Disposal of Real Estate 0 915,230 --------- ---------- Income from Discontinued Operations $ 108,080 $1,086,460 ========= ========== (7) Partners' Capital - Cash distributions of $21,161 and $22,424 were made to the General Partners and $2,095,000 and $2,220,005 were made to the Limited Partners for the years ended December 31, 2005 and 2004, respectively. The Limited Partners' distributions represent $91.83 and $97.01 per Limited Partnership Unit outstanding using 22,815 and 22,885 weighted average Units in 2005 and 2004, respectively. The distributions represent $41.19 and $83.29 per Unit of Net Income and $50.64 and $13.72 per Unit of return of capital in 2005 and 2004, respectively. As part of the Limited Partner distributions discussed above, the Partnership distributed $670,030 and $945,136 of proceeds from property sales in 2005 and 2004, 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (7) Partners' Capital - (Continued) During 2005, four Limited Partners redeemed a total of 17 Partnership Units for $9,222 in accordance with the Partnership Agreement. During 2004, five Limited Partners redeemed a total of 88.04 Partnership Units for $53,859. 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 $93 and $544 in 2005 and 2004, respectively. After the effect of redemptions, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $1,052.52 per original $1,000 invested. (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: 2005 2004 Net Income for Financial Reporting Purposes $ 958,410 $1,979,893 Depreciation for Tax Purposes Under Depreciation for Financial Reporting Purposes 149,263 106,517 Income Accrued for Tax Purposes Over Income for Financial Reporting Purposes 32,784 0 Gain on Sale of Real Estate for Tax Purposes Under Gain for Financial Reporting Purposes 0 (34,276) ---------- ---------- Taxable Income to Partners $1,140,457 $2,052,134 ========== ========== AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (8) Income Taxes - (Continued) 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: 2005 2004 Partners' Capital for Financial Reporting Purposes $17,658,091 $18,825,157 Adjusted Tax Basis of Investments in Real Estate Over Net Investments in Real Estate for Financial Reporting Purposes 492,141 342,878 Income Accrued for Tax Purposes Over Income for Financial Reporting Purposes 32,784 0 Syndication Costs Treated as Reduction of Capital for Financial Reporting Purposes 3,208,043 3,208,042 ----------- ----------- Partners' Capital for Tax Reporting Purposes $21,391,059 $22,376,077 =========== =========== (9) Fair Value of Financial Instruments - The estimated fair values of the financial instruments, none of which are held for trading purposes, are as follows at December 31: 2005 2004 Carrying Fair Carrying Fair Amount Value Amount Value Money Market Funds $ 862,160 $ 862,160 $5,295,303 $5,295,303 --------- --------- ---------- ---------- Total Cash and Cash Equivalents $ 862,160 $ 862,160 $5,295,303 $5,295,303 ========= ========= ========== ========== ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of the Partnership are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms. (b) Changes in internal controls There were no significant changes made in the Partnership's internal controls during the most recent period covered by this report that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. ITEM 8B. OTHER INFORMATION. None. PART III ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. 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: Robert P. Johnson, age 61, 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 2006. 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 National Association of Securities Dealers, Inc. (NASD) 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 eleven limited partnerships and a managing member in four LLCs. Patrick W. Keene, age 46, 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 2006. 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. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. 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-KSB any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 2005. 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 2005 fiscal year. ITEM 10. 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 12 of this annual report on Form 10-KSB. ITEM 11. 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, 2006: Name and Address Number of Percent of Beneficial Owner Units Held of Class AEI Fund Management XXI, Inc. 0 0% 1300 Wells Fargo Place 30 East 7th Street, St. Paul, Minnesota 55101 Robert P. Johnson 0 0% 1300 Wells Fargo Place 30 East 7th Street, St. Paul, Minnesota 55101 Patrick W. Keene 0 0% 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 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 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, 2005 and 2004. 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, 2005, these cumulative reimbursements to the General Partners and their affiliates did not exceed the limitation amount. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (Continued) 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, 2005. Person or Entity Amount Incurred From Receiving Form and Method Inception (August 31, 1994) Compensation of Compensation To December 31, 2005 AEI Securities, Inc. Selling Commissions equal $2,400,000 to 8% 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 $ 575,453 Affiliates Acquisition Expenses General Partners and Reimbursement at Cost for all $2,556,479 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 $ 772,560 Affiliates expenses related to the disposition of the Fund's properties. General Partners 1% of Net Cash Flow in any fiscal $ 151,298 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 $ 45,370 Proceeds 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. PART IV ITEM 13. EXHIBITS. 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 May 31, 1995, between the Partnership and RTM Gulf Coast, Inc., relating to the Property at 2719 Zelda Road, Montgomery, Alabama (incorporated by reference to Exhibit A of Form 8-K filed June 14, 1995). 10.2 Net Lease Agreement dated March 14, 1997 between the Partnership and Champps Entertainment of Texas, Inc. relating to the Property at 11440 Interstate Highway 10, San Antonio, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed March 25, 1997). 10.3 Net Lease Agreement dated July 8, 1997 between the Partnership and Champps Americana, Inc. relating to the Property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed August 5, 1997). 10.4 First Amendment to Net Lease Agreement dated December 23, 1997 between the Partnership and Champps Entertainment of Texas, Inc. relating to the Property at 11440 Interstate Highway 10, San Antonio, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 5, 1998). 10.5 First Amendment to Net Lease Agreement dated May 19, 1998 between the Partnership and Champps Americana, Inc. relating to the Property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.2 of Form 8-K filed June 16, 1998). 10.6 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 10, 2000). 10.7 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 7, 2000). 10.8 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 7, 2000). 10.9 Net Lease Agreement dated March 8, 2001 between the Partnership, AEI Real Estate Fund 85-A Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, AEI Income & Growth Fund 23 LLC and Kona Restaurant Group, Inc. relating to the Property at 5601 Brodie Lane, Austin, Texas (incorporated by reference to Exhibit 10.4 of Form 10- QSB filed May 10, 2001). 10.10 First Amendment to Net Lease Agreement dated September 26, 2001 between the Partnership, AEI Real Estate Fund 85-A Limited Partnership, AEI Income & Growth Fund XX Limited Partnership, AEI Income & Growth Fund 23 LLC and Kona Restaurant Group, Inc. relating to the Property at 5601 Brodie Lane, Austin, Texas (incorporated by reference to Exhibit 10.10 of Form 10-QSB filed October 26, 2001). 10.11 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 18, 2002). ITEM 13. EXHIBITS. (Continued) 10.12 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 18, 2002). 10.13 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the Property at 749 Truman Street, Kimberly, Wisconsin (incorporated by reference to Exhibit 10.6 of Form 8-K filed June 18, 2002). 10.14 First Amendment to Net Lease Agreement dated May 28, 2003 between the Partnership and SFG Farmington I Limited Partnership relating to the Property at 3500 East Main Street, Farmington, New Mexico (incorporated by reference to Exhibit 10.2 of Form 8-K filed June 2, 2003). 10.15 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 11, 2003). 10.16 Net Lease Agreement dated December 30, 2003 between the Partnership and Kona Restaurant Group, Inc. relating to the Property at 7603 San Dario Avenue, Laredo, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 2, 2004). 10.17 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 17, 2004). 10.18 Purchase Agreement dated June 14, 2004 between the Partnership and Jaroslaw Paluha and Joseph A. Barraco relating to the Property at 3500 East Main Street, Farmington, New Mexico (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed August 10, 2004). 10.19 Assignment of Purchase Agreement dated August 16,2004 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and AEI Fund Management, Inc. relating to the Property at 121 Herkimer Road, Utica, New York (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed November 10, 2004). 10.20 Assignment and Assumption of Lease dated September 20, 2004 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and Herkimer Rd. & Euclid Rd. Development, LLC relating to the Property at 121 Herkimer Road, Utica, New York (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 10, 2004). 10.21 Assignment of Purchase Agreement dated December 15, 2004 between the Partnership, AEI Income & Growth Fund 25 LLC and AEI Fund Management, Inc. relating to the Property at 3960 Baldwin Road, Auburn Hills, Michigan (incorporated by reference to Exhibit 10.25 of Form 10-KSB filed March 18, 2005). 10.22 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 18, 2005). 10.23 Assignment of Agreement of Purchase and Sale dated March 3, 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 AEI Fund Management, Inc. relating to the Property at 1977 Thornton Road, Lithia Springs, Georgia (incorporated by reference to Exhibit 10.27 of Form 10-KSB filed March 18, 2005). ITEM 13. EXHIBITS. (Continued) 10.24 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 18, 2005). 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. ITEM 14. PRINCIPAL ACCOUNTANT 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, 2005 and 2004: Fee Category 2005 2004 Audit Fees $ 12,750 $ 11,745 Audit-Related Fees 682 498 Tax Fees 0 0 All Other Fees 0 0 --------- -------- Total Fees $ 13,432 $ 12,243 ========= ======== 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. 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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (Continued) 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. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 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 17, 2006 By: /s/ Robert P Johnson Robert P. Johnson, President and Director (Principal Executive Officer) In accordance with the Exchange Act, 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 17, 2006 Robert P. Johnson and Sole Director of Managing General Partner /s/ Patrick W Keene Chief Financial Officer and Treasurer March 17, 2006 Patrick W. Keene (Principal Accounting Officer)