10-Q 1 q262-09.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2009 Commission File Number: 000-51823 AEI INCOME & GROWTH FUND 26 LLC (Exact name of registrant as specified in its charter) State of Delaware 41-2173048 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 East 7th Street, Suite 1300, St. Paul, Minnesota 55101 (Address of principal executive offices) (651) 227-7333 (Registrant's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No AEI INCOME & GROWTH FUND 26 LLC INDEX Part I - Financial Information Item 1. Financial Statements: Balance Sheet as of June 30, 2009 and December 31, 2008 Statements for the Periods ended June 30, 2009 and 2008: Income Cash Flows Changes in Members' Equity (Deficit) Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits AEI INCOME & GROWTH FUND 26 LLC BALANCE SHEET JUNE 30, 2009 AND DECEMBER 31, 2008 ASSETS 2009 2008 CURRENT ASSETS: Cash $ 308,934 $ 388,653 Receivables 47,832 2,283 ----------- ----------- Total Current Assets 356,766 390,936 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 5,294,367 5,294,367 Buildings and Equipment 7,851,416 7,851,416 Accumulated Depreciation (654,215) (497,187) ----------- ----------- 12,491,568 12,648,596 Real Estate Held for Sale 2,126,435 2,126,435 ----------- ----------- Net Investments in Real Estate 14,618,003 14,775,031 ----------- ----------- Total Assets $14,974,769 $15,165,967 =========== =========== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 14,860 $ 28,015 Distributions Payable 236,177 247,987 Unearned Rent 15,598 25,796 ----------- ----------- Total Current Liabilities 266,635 301,798 ----------- ----------- MEMBERS' EQUITY (DEFICIT): Managing Members (23,165) (21,717) Limited Members, $10 per Unit; 10,000,000 Units authorized; 1,832,736 Units issued and outstanding 14,731,299 14,885,886 ----------- ----------- Total Members' Equity 14,708,134 14,864,169 ----------- ----------- Total Liabilities and Members' Equity $14,974,769 $15,165,967 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND 26 LLC STATEMENT OF INCOME FOR THE PERIODS ENDED JUNE 30 Three Months Ended Six Months Ended 6/30/09 6/30/08 6/30/09 6/30/08 RENTAL INCOME $ 238,383 $ 209,508 $ 470,308 $ 375,091 EXPENSES: LLC Administration - Affiliates 39,543 43,309 84,495 86,278 LLC Administration and Property Management - Unrelated Parties 4,825 6,676 16,697 18,382 Depreciation 78,514 70,858 157,028 128,954 ---------- ---------- ---------- ---------- Total Expenses 122,882 120,843 258,220 233,614 ---------- ---------- ---------- ---------- OPERATING INCOME 115,501 88,665 212,088 141,477 OTHER INCOME: Interest Income 546 20,620 1,213 72,024 ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 116,047 109,285 213,301 213,501 Income from Discontinued Operations 48,570 45,723 99,686 96,739 ---------- ---------- ---------- ---------- NET INCOME $ 164,617 $ 155,008 $ 312,987 $ 310,240 ========== ========== ========== ========== NET INCOME ALLOCATED: Managing Members $ 4,939 $ 4,650 $ 9,390 $ 9,307 Limited Members 159,678 150,358 303,597 300,933 ---------- ---------- ---------- ---------- $ 164,617 $ 155,008 $ 312,987 $ 310,240 ========== ========== ========== ========== NET INCOME PER LLC UNIT: Continuing Operations $ .06 $ .06 $ .12 $ .11 Discontinued Operations .03 .02 .05 .05 ---------- ---------- ---------- ---------- Total $ .09 $ .08 $ .17 $ .16 ========== ========== ========== ========== Weighted Average Units Outstanding 1,832,736 1,832,736 1,832,736 1,832,736 ========== ========== ========== ========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND 26 LLC STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 312,987 $ 310,240 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 157,028 128,954 (Increase) Decrease in Receivables (45,549) 3,814 Decrease in Payable to AEI Fund Management, Inc. (13,155) (69,729) Increase (Decrease) in Unearned Rent (10,198) 33,687 ----------- ----------- Total Adjustments 88,126 96,726 ----------- ----------- Net Cash Provided By Operating Activities 401,113 406,966 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate 0 (3,602,642) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions Paid to Members (480,832) (481,582) ----------- ----------- NET DECREASE IN CASH (79,719) (3,677,258) CASH, beginning of period 388,653 4,249,562 ----------- ----------- CASH, end of period $ 308,934 $ 572,304 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Capitalized Construction Costs Payable at Period End $ 0 $ 123,008 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND 26 LLC STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30 Limited Member Managing Limited Units Members Members Total Outstanding BALANCE, December 31, 2007 $ (9,975) $15,265,564 $15,255,589 1,832,736.0 Distributions Declared (14,879) (481,096) (495,975) Net Income 9,307 300,933 310,240 -------- ----------- ----------- ----------- BALANCE, June 30, 2008 $(15,547) $15,085,401 $15,069,854 1,832,736.0 ======== =========== =========== =========== BALANCE, December 31, 2008 $(21,717) $14,885,886 $14,864,169 1,832,736.0 Distributions Declared (10,838) (458,184) (469,022) Net Income 9,390 303,597 312,987 -------- ----------- ----------- ----------- BALANCE, June 30, 2009 $(23,165) $14,731,299 $14,708,134 1,832,736.0 ======== =========== =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND 26 LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 (1) The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant's latest annual report on Form 10-K. (2) Organization - AEI Income & Growth Fund 26 LLC ("Company"), a Limited Liability Company, was formed on March 14, 2005 to acquire and lease commercial properties to operating tenants. The Company's operations are managed by AEI Fund Management XXI, Inc. ("AFM"), the Managing Member. Robert P. Johnson, the President and sole director of AFM, serves as the Special Managing Member. 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 Company. The terms of the offering call for a subscription price of $10 per LLC Unit, payable on acceptance of the offer. The Company commenced operations on April 3, 2006 when minimum subscriptions of 150,000 LLC Units ($1,500,000) were accepted. The offering terminated October 19, 2007, when the extended offering period expired. The Company received subscriptions for 1,832,736 Units. Under the terms of the Operating Agreement, the Limited Members and Managing Members contributed funds of $18,327,360 and $1,000, respectively. The Company shall continue until December 31, 2055, unless dissolved, terminated and liquidated prior to that date. During operations, any Net Cash Flow, as defined, which the Managing Members determine to distribute will be distributed 97% to the Limited Members and 3% to the Managing Members. Distributions to Limited Members will be made pro rata by Units. Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the Managing Members determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Members and 1% to the Managing Members until the Limited Members receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 6.5% 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 Members and 10% to the Managing Members. Distributions to the Limited Members will be made pro rata by Units. AEI INCOME & GROWTH FUND 26 LLC NOTES TO FINANCIAL STATEMENTS (Continued) (2) Organization - (Continued) For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated 97% to the Limited Members and 3% to the Managing Members. Net losses from operations will be allocated 99% to the Limited Members and 1% to the Managing Members. For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Operating Agreement as follows: (i) first, to those Members with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Members and 1% to the Managing Members until the aggregate balance in the Limited Members' capital accounts equals the sum of the Limited Members' Adjusted Capital Contributions plus an amount equal to 6.5% 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 Members and 10% to the Managing Members. Losses will be allocated 99% to the Limited Members and 1% to the Managing Members. The Managing Members are not required to currently fund a deficit capital balance. Upon liquidation of the Company or withdrawal by a Managing Member, the Managing Members will contribute to the Company an amount equal to the lesser of the deficit balances in their capital accounts or 1.01% of the total capital contributions of the Limited Members over the amount previously contributed by the Managing Members. (3) Investments in Real Estate - On December 17, 2007, the Company purchased a 27% interest in a parcel of land in Fredericksburg, Virginia for $1,374,913. The Company obtained title to the land in the form of an undivided fee simple interest in the 27% interest purchased. Simultaneous with the purchase of the land, the Company entered into a Project Construction and Development Financing Agreement under which the Company advanced funds to Silver-Honaker Development Company, LLC ("Silver") for the construction of a Dick's Sporting Goods store on the site. The Company's share of the total acquisition costs, including the cost of the land, was $3,126,603. The remaining interests in the property were purchased by AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 25 LLC, affiliates of the Company. The property is leased to Dick's Sporting Goods, Inc. under a Lease Agreement with a primary term of 10 years and initial annual rent of $219,445 for the interest purchased. Pursuant to the Lease, the tenant commenced paying rent on May 8, 2008. Pursuant to the development agreement, for the period from December 17, 2007 through May 7, 2008, Silver paid the Company interest at a rate of 6.75% on the purchase price of the land and the amounts advanced for construction of the store. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property of the Company. AEI INCOME & GROWTH FUND 26 LLC NOTES TO FINANCIAL STATEMENTS (Continued) (3) Investments in Real Estate - (Continued) On January 31, 2008, the Company purchased a 30% interest in a Best Buy store in Eau Claire, Wisconsin for $2,021,162. The property is leased to Best Buy Stores, L.P. under a Lease Agreement with a remaining primary term of 10 years and initial annual rent of $142,222 for the interest purchased. The remaining interests in the property were purchased by AEI Income & Growth Fund XXI Limited Partnership and AEI Income & Growth Fund 23 LLC, affiliates of the Company. (4) Payable to AEI Fund Management, Inc. - AEI Fund Management, Inc. performs the administrative and operating functions for the Company. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business. (5) Discontinued Operations - The Company is attempting to sell the Sports Authority store in Wichita, Kansas. At June 30, 2009 and December 31, 2008, the property was classified as Real Estate Held for Sale with a carrying value of $2,126,435. The financial results for this property are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations for the periods ended June 30: Three Months Ended Six Months Ended 6/30/09 6/30/08 6/30/09 6/30/08 Rental Income $ 51,166 $ 51,166 $ 102,332 $ 102,332 Property Management Expenses (2,596) (5,443) (2,646) (5,593) -------- -------- --------- --------- Income from Discontinued Operations $ 48,570 $ 45,723 $ 99,686 $ 96,739 ======== ======== ========= ========= (6) Fair Value Measurements - In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS 157"). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. In February 2008, the FASB issued Staff Position (FSP) No. 157-2, which deferred the effective date of SFAS 157 for one year relative to certain nonfinancial assets and liabilities. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008 and for certain nonfinancial assets and liabilities on January 1, 2009. The Company has no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis that would require disclosure under this pronouncement. AEI INCOME & GROWTH FUND 26 LLC NOTES TO FINANCIAL STATEMENTS (Continued) (7) Subsequent Events - The Company has evaluated subsequent events through August 11, 2009, the date which the financial statements were available to be issued. Subsequent events, if any, were disclosed in the appropriate note in the Notes to Financial Statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward- looking statements, should be evaluated in the context of a number of factors that may affect the Company's financial condition and results of operations, including the following: Market and economic conditions which affect the value of the properties the Company owns and the cash from rental income such properties generate; the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for Members; resolution by the Managing Members of conflicts with which they may be confronted; the success of the Managing Members 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 Company operate. Application of Critical Accounting Policies The preparation of the Company'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 Company as opposed to other funds they manage. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) Prior to January 1, 2009, the Company purchased properties and recorded them in the financial statements at cost (including capitalized acquisition expenses). For acquisitions completed on or after January 1, 2009, acquisition-related transaction costs will be expensed as incurred as a result of the adoption of Statement of Financial Accounting Standards No. 141(R), "Business Combinations". The Company tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Company will hold and operate, management determines whether impairment has occurred by comparing the property's probability- weighted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property's estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the realizable value, an impairment loss is recorded to reduce the carrying value of the property to its realizable value. Changes in these assumptions or analysis may cause material changes in the carrying value of the properties. AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund's affairs. They also allocate expenses at the end of each month that are not directly related to a fund's operations based upon the number of investors in the fund and the fund's capitalization relative to other funds they manage. The Company reimburses these expenses subject to detailed limitations contained in the Operating Agreement. Management of the Company has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing member of the Company. Results of Operations For the six months ended June 30, 2009 and 2008, the Company recognized rental income from continuing operations of $470,308 and $375,091, respectively. In 2009, rental income increased due to additional rent received from two property acquisitions in 2008, a rent increase on one property and contingent rent, based on store sales, received from one property. For the six months ended June 30, 2009 and 2008, the Company incurred LLC administration expenses from affiliated parties of $84,495 and $86,278, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Members. During the same periods, the Company incurred LLC administration and property management expenses from unrelated parties of $16,697 and $18,382, respectively. These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs. For the six months ended June 30, 2009 and 2008, the Company recognized interest income of $1,213 and $72,024, respectively. In 2009 interest income decreased due to the Company having less money invested in a money market account due to property acquisitions and lower money market rates in 2009. In addition, the Company received $52,033 of interest income on construction advances in 2008. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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 Company includes the operating results and sale of the property in discontinued operations. In addition, the Company reclassifies the prior periods' operating results of the property to discontinued operations. For the six months ended June 30, 2009 and 2008, the Company recognized income from discontinued operations of $99,686 and $96,739, respectively, representing rental income less property management expenses. The Company is attempting to sell the Sports Authority store in Wichita, Kansas. At June 30, 2009 and December 31, 2008, the property was classified as Real Estate Held for Sale with a carrying value of $2,126,435. Management believes inflation has not significantly affected income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions. Liquidity and Capital Resources During the six months ended June 30, 2009, the Company's cash balances decreased $79,719 as a result of distributions paid to the Members in excess of cash generated from operating activities. During the six months ended June 30, 2008, the Company's cash balances decreased $3,677,258 as a result of cash used to purchase property and distributions paid to the Members in excess of cash generated from operating activities. Net cash provided by operating activities decreased from $406,966 in 2008 to $401,113 in 2009 as a result of net timing differences in the collection of payments from the tenants and the payment of expenses, which was partially offset by an increase in total rental and interest income in 2009 and a decrease in LLC administration and property management expenses in 2009. The major components of the Company's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the six months ended June 30, 2008, the Company expended $3,602,642 to invest in real properties (inclusive of acquisition expenses) as the Company continued to invest cash raised from the Unit offering. On December 17, 2007, the Company purchased a 27% interest in a parcel of land in Fredericksburg, Virginia for $1,374,913. The Company obtained title to the land in the form of an undivided fee simple interest in the 27% interest purchased. Simultaneous with the purchase of the land, the Company entered into a Project Construction and Development Financing Agreement under which the Company advanced funds to Silver-Honaker Development Company, LLC ("Silver") for the construction of a Dick's Sporting Goods store on the site. The Company's share of the total acquisition costs, including the cost of the land, was $3,126,603. The remaining interests in the property were purchased by AEI Income & Growth Fund 23 LLC, AEI Income & Growth Fund 24 LLC and AEI Income & Growth Fund 25 LLC, affiliates of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) The property is leased to Dick's Sporting Goods, Inc. under a Lease Agreement with a primary term of 10 years and initial annual rent of $219,445 for the interest purchased. Pursuant to the Lease, the tenant commenced paying rent on May 8, 2008. Pursuant to the development agreement, for the period from December 17, 2007 through May 7, 2008, Silver paid the Company interest at a rate of 6.75% on the purchase price of the land and the amounts advanced for construction of the store. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property of the Company. On January 31, 2008, the Company purchased a 30% interest in a Best Buy store in Eau Claire, Wisconsin for $2,021,162. The property is leased to Best Buy Stores, L.P. under a Lease Agreement with a remaining primary term of 10 years and initial annual rent of $142,222 for the interest purchased. The remaining interests in the property were purchased by AEI Income & Growth Fund XXI Limited Partnership and AEI Income & Growth Fund 23 LLC, affiliates of the Company. The Company's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Members. The Company 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 Company attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Members on a semi-annual basis. For the six months ended June 30, 2009 and 2008, the Company declared distributions of $469,022 and $495,975, respectively. The Limited Members received distributions of $458,184 and $481,096 and the Managing Members received distributions of $10,838 and $14,879 for the periods, respectively. In 2009, distributions were lower due to a decrease in the distribution rate per Unit, effective January 1, 2009. The Company may acquire Units from Limited Members who have tendered their Units to the Company. Such Units may be acquired at a discount. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company. The continuing rent payments from the properties should be adequate to fund continuing distributions and meet other Company obligations on both a short-term and long-term basis. The Economy and Market Conditions The impact of conditions in the current economy, including the turmoil in the credit markets, has adversely affected many real estate companies. However, the absence of mortgage financing on the Company's properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate companies. Nevertheless, a prolonged economic downturn may adversely affect the operations of the Company's tenants and their cash flows. If a tenant were to default on its lease obligations, the Company's income would decrease, its distributions would likely be reduced and the value of its properties might decline. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) The Company's plan was to periodically sell properties to generate capital gains that would be included in the Company's regular quarterly distributions and to make special distributions on occasion. Beginning in the fourth quarter of 2008, general economic conditions caused the volume of property sales to slow dramatically for all real estate sellers. In 2008, the Company did not complete any property sales and may have difficulty completing a property sale in 2009. Until property sales occur, quarterly distributions going forward will reflect the distribution of net core rental income and capital reserves, if any. Distribution rates in 2009 are expected to be variable and less than historical distribution rates until such time as economic conditions allow the Company to begin selling properties at acceptable prices and generating gains for distribution. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required for a smaller reporting company. ITEM 4. CONTROLS AND PROCEDURES. (a) Disclosure Controls and Procedures. Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing Member of the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the President and Chief Financial Officer of the Managing Member concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing Member, in a manner that allows timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting. During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Company is a party or of which the Company's property is subject. ITEM 1A. RISK FACTORS. Not required for a smaller reporting company. PART II - OTHER INFORMATION (Continued) ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) None. (b) Not applicable. (c) Pursuant to Section 7.7 of the Operating Agreement, each Limited Member has the right to present Units to the Company for purchase by submitting notice to the Managing Member during January or July of each year. The purchase price of the Units is equal to 85% of the net asset value per Unit, as of the first business day of January or July of each year, as determined by the Managing Member in accordance with the provisions of the Operating Agreement. The purchase price is equal to 100% of the net asset value per Unit in the case of Units of a deceased investor, who purchased the Units in the initial offering and who is a natural person, including Units held by an investor that is an IRA or other qualified plan for which the deceased person was the primary beneficiary, or Units held by an investor that is a grantor trust for which the deceased person was the grantor. Units tendered to the Company during January and July are redeemed on April 1st and October 1st, respectively, of each year subject to the following limitations. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company. During the period covered by this report, the Company did not purchase any Units. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. 31.1 Certification of Chief Executive Officer of Managing Member 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 Managing Member 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 Managing Member pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 11, 2009 AEI Income & Growth Fund 26 LLC By: AEI Fund Management XXI, Inc. Its: Managing Member By: /s/ ROBERT P JOHNSON Robert P. Johnson President (Principal Executive Officer) By: /s/ PATRICK W KEENE Patrick W. Keene Chief Financial Officer (Principal Accounting Officer)