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AEI Income & Growth Fund 26 LLC 10-Q --12-31 1738006 0 false 0001326321 Yes No Smaller Reporting Company No 2018 Q1 2018-03-31

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt;"> <font style="font-weight: bold;">(1)</font><font>  The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements.  The adjustments made to these condensed statements consist only of normal recurring adjustments.  Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10K.</font> </div><br/></div>

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <font>(2) Organization – </font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>The terms of the offering called 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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/></div>

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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.

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.

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <font>(3)  Recently Adopted Accounting Pronouncements – </font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers.  This standard was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Entities are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle.  Those steps include the following:  (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>Management has concluded that all of the Company’s material revenue streams fall outside of the scope of this guidance.  The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption.  During 2018, the Company selected the modified retrospective transition method as of the date of adoption effective January 1, 2018.  Management has concluded that the majority of total revenues consist of rental income from leasing arrangements, which are specifically excluded from the standard.  The Company analyzed its remaining revenue streams, inclusive of gains and losses on real estate sales, and concluded there are no changes in revenue recognition with the adoption of the new standard.  As such, adoption of the standard did not result in a cumulative adjustment recognized as of January 1, 2018, and the standard did not have a material impact on the Company’s financial statements.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted, and is required to be applied prospectively to any transactions occurring within the period of adoption.  We expect the new standard will result in all of our real estate acquisitions being considered asset acquisitions, whereby substantially all acquisition costs related to our real estate acquisitions will be capitalized.  Prior to the adoption of the new standard, all of our real estate acquisitions completed after January 1, 2009, were considered acquisitions of businesses, whereby all acquisition-related costs were expensed as incurred.  During 2018, the Company has adopted the accounting pronouncement effective January 1, 2018, and applied this guidance prospectively.  The adoption did not have a material effect on its financial statements.</font> </div><br/></div>

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt;"><font>In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers.  This standard was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Entities are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle.  Those steps include the following:  (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>Management has concluded that all of the Company’s material revenue streams fall outside of the scope of this guidance.  The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption.  During 2018, the Company selected the modified retrospective transition method as of the date of adoption effective January 1, 2018.  Management has concluded that the majority of total revenues consist of rental income from leasing arrangements, which are specifically excluded from the standard.  The Company analyzed its remaining revenue streams, inclusive of gains and losses on real estate sales, and concluded there are no changes in revenue recognition with the adoption of the new standard.  As such, adoption of the standard did not result in a cumulative adjustment recognized as of January 1, 2018, and the standard did not have a material impact on the Company’s financial statements.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted, and is required to be applied prospectively to any transactions occurring within the period of adoption.  We expect the new standard will result in all of our real estate acquisitions being considered asset acquisitions, whereby substantially all acquisition costs related to our real estate acquisitions will be capitalized.  Prior to the adoption of the new standard, all of our real estate acquisitions completed after January 1, 2009, were considered acquisitions of businesses, whereby all acquisition-related costs were expensed as incurred.  During 2018, the Company has adopted the accounting pronouncement effective January 1, 2018, and applied this guidance prospectively.  The adoption did not have a material effect on its financial statements.</font></div></div>

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <a name="_GoBack"></a><font>(4)  Real Estate Investments – </font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>The Company owns a 40% interest in the Sports Authority store in Wichita, Kansas. On March 2, 2016, the tenant, TSA Stores, Inc., and its parent company, The Sports Authority, Inc., the guarantor of the lease, filed for Chapter 11 bankruptcy reorganization.  In June 2016, the tenant filed a motion with the bankruptcy court to reject the lease for this store effective June 30, 2016, at which time the tenant returned possession of the property to the owners.  As of March 31, 2018, the tenant owed $19,366 of past due rent, which was not accrued for financial reporting purposes.  The owners listed the property for lease with a real estate broker in the Wichita area.  While the property is vacant, the Company is responsible for its 40% share of real estate taxes and other costs associated with maintaining the property.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>On September 21, 2017, the Company entered into a lease agreement with a primary term of 10 years with Biomat USA, Inc. (“Biomat”) as a replacement tenant for 28% of the square footage of the property.  The tenant will operate a Biomat USA Plasma Center in the space.  The Company’s 40% share of annual rent is $37,071 and is expected to commence on June 18, 2018.  Biomat has agreed to pay for the costs to divide the building into two separate spaces, the costs of tenant improvements to remodel the Biomat space and 28% of the cost to replace the roof.  The Company will be responsible for paying its 40% share of the remaining cost to replace the roof, which is expected to be approximately $113,000.  At December 31, 2017, the Company accrued its 40% share of lease commissions due to real estate brokers totaling $54,293 that were owed as part of the lease transaction.  This amount was capitalized and will be amortized over the term of the lease.  The Company is continuing to pursue additional tenants for the remaining space.</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>On March 31, 2017, the lease term ended for the Starbucks store in Bluffton, Indiana.  Effective April 1, 2017, the Company entered into a lease agreement with a primary term of six years with The Cellular Connection LLC, a cell phone retailer that was subleasing the property from Starbucks Corporation.  The tenant is scheduled to pay annual rent of $39,156 during the base lease term.  As part of the lease transaction, the Company paid a tenant improvement allowance of $30,000 that was capitalized and will be depreciated.</font> </div><br/></div>

On September 21, 2017, the Company entered into a lease agreement with a primary term of 10 years with Biomat USA, Inc. (“Biomat”) as a replacement tenant for 28% of the square footage of the property.

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Effective April 1, 2017, the Company entered into a lease agreement with a primary term of six years with The Cellular Connection LLC, a cell phone retailer that was subleasing the property from Starbucks Corporation.

39156

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<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <font>(5) Payable to AEI Fund Management, Inc. – </font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>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.</font> </div><br/></div>

<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <font>(6)  Members’ Capital –</font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>For the three months ended March 31, 2018 and 2017, the Company declared distributions of $170,104 and $170,103, respectively.  The Limited Members received distributions of $165,001 and $165,000 and the Managing Members received distributions of $5,103 and $5,103 for the periods, respectively.  The Limited Members' distributions represented $0.09 and $0.09 per LLC Unit outstanding using 1,738,006 and 1,744,006 weighted average Units in 2018 and 2017, respectively.  The distributions represented $0.03 per Unit of Net Income and $0.06 per Unit of return of contributed capital for both years.</font> </div><br/></div>

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<div style="font-family: Times New Roman; font-size: 12.0pt; "> <div style="text-align: justify; font-size: 12.0pt; font-weight: bold;"> <font>(7) Fair Value Measurements – </font> </div><br/><div style="text-align: justify; font-size: 12.0pt;"> <font>As of March 31, 2018 and December 31, 2017, the Company had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.</font> </div><br/></div>