10-K 1 if18-01.txt CNL INCOME FUND XVIII, LTD. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-24095 CNL INCOME FUND XVIII, LTD. (Exact name of registrant as specified in its charter) Florida 59-3295394 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 450 South Orange Avenue Orlando, Florida 32801-3336 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 540-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered: None Not Applicable Securities registered pursuant to Section 12(g) of the Act: Units of limited partnership interest ($10 per Unit) (Title of class) 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Aggregate market value of the voting stock held by nonaffiliates of the registrant: The registrant registered an offering of units of limited partnership interest (the "Units") on Form S-11 under the Securities Act of 1933, as amended. Since no established market for such Units exists, there is no market value for such Units. Each Unit was originally sold at $10 per Unit. DOCUMENTS INCORPORATED BY REFERENCE: None PART I Item 1. Business CNL Income Fund XVIII, Ltd. (the "Registrant" or the "Partnership") is a limited partnership which was organized pursuant to the laws of the State of Florida on February 10, 1995. The general partners of the Partnership are Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation (the "General Partners"). Beginning on September 20, 1996, the Partnership offered for sale up to $35,000,000 of limited partnership interests (the "Units") (3,500,000 Units at $10 per Unit) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended, effective August 11, 1995. The offering terminated on February 6, 1998, at which date the maximum offering proceeds of $35,000,000 had been received from investors who were admitted to the Partnership as limited partners (the "Limited Partners"). The Partnership was organized to acquire both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed (the "Properties"), which are leased primarily to operators of national and regional fast-food, family-style and casual dining restaurant chains (the "Restaurant Chains"). As of December 31, 1998, net proceeds to the Partnership from its offering of Units, after deduction of organizational and offering expenses, totalled $30,810,000. During 1998, the Partnership had invested approximately $29,859,000 of the proceeds to acquire 24 Properties (which included one Property owned by a joint venture in which the Partnership is a co-venturer) and to pay acquisition fees and certain acquisition expenses. In February 1999, the Partnership invested in a joint venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., an affiliate of the General Partners to hold and purchase one Property and used the remaining amounts to establish a working capital reserve for Partnership purposes. In December 1999, the Partnership sold one Property in Atlanta, Georgia. In June 2000, the Partnership reinvested the net sales proceeds from the sale of the Property in Atlanta, Georgia in a joint venture arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., each an affiliate of the General Partners, to purchase one Property in Homestead, Pennsylvania. In January 2001, the Partnership sold a portion of its interest in TGIF Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., a Florida limited partnership and an affiliate of the General Partners, for approximately $500,000. The Partnership used the net sales proceeds to pay liabilities of the Partnership and to meet the Partnership's working capital needs. During 2001, the Partnership sold its Properties in Timonium, Maryland and Henderson, Nevada and reinvested the majority of these net sales proceeds in a Property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the General Partners. In addition, in December 2001, the Partnership sold its Property in Santa Rosa, California. As a result of the above transactions, as of December 31, 2001, the Partnership owned 19 Properties directly, and had interests in four additional Properties indirectly through joint venture or tenancy in common arrangements. In January 2002 the Partnership reinvested a portion of the net sales proceeds from the sale of the Property in Santa Rose, California in a Property in Houston, Texas. In addition, in January 2002, the Partnership reinvested the remaining net sales in a Property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., a Florida limited partnership and an affiliate of the General Partners. The Properties are generally leased on a triple-net basis with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. 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 capital appreciation, net cash flow and federal income tax considerations. Certain lessees also have been granted options to purchase Properties, generally at the Property's then fair market value after a specified portion of the lease term has elapsed. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under property purchase options granted to certain lessees. Description of Leases The leases of the Properties provide for initial terms ranging from 15 to 20 years (the average being 18 years) and expire between 2012 and 2019. The leases are generally on a triple-net basis, with the lessee responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases provide for minimum base annual rental payments (payable in equal monthly installments) ranging from approximately $58,400 to $259,900. The majority of the leases provide for percentage rent based on sales in excess of a specified amount. In addition, the majority of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase. Generally, the leases provide for two to five five-year renewal options subject to the same terms and conditions as the initial lease. Lessees of 17 of the Partnership's 23 Properties also have been granted options to purchase the Properties after a specified portion of the lease term has elapsed. The option purchase price is equal to the Partnership's original cost of the Property (including acquisition costs), plus a specified percentage of the Property's fair market value at the time the purchase option is exercised, whichever is greater. Fair market value will be determined through an appraisal by an independent appraisal firm. The leases also generally provide that, in the event the Partnership wishes to sell the Properties, the Partnership first must offer the lessees the right to purchase the Properties on the same terms and conditions, and for the same price, as any offer which the Partnership has received for the sale of the Properties. In July 2001, the Partnership reinvested the majority of the net sales proceeds it received from the sale of the Properties in Timonium, Maryland and Henderson, Nevada, in a Property located in Denver, Colorado with CNL Income Fund VIII, Ltd., as tenants-in-common, as described below in "Joint Venture and Tenancy in Common Arrangements." The lease terms for this Property are substantially the same as the Partnership's other leases, as described above. In January 2002, the Partnership reinvested a portion of the net sales proceeds it received from the sale of the Property in Santa Rosa, California, in a Property located in Austin, Texas, with CNL Income Fund X, Ltd., as tenants-in-common, as described below in "Joint Venture and Tenancy in Common Arrangements." In addition, in January 2002, the Partnership reinvested the remaining net sales proceeds in a Property located in Houston, Texas. The lease terms for these Properties are substantially the same as the Partnership's other leases, as described above. Major Tenants During 2001, four lessees of the Partnership, Golden Corral Corporation, Jack in the Box Inc., IHOP Properties, Inc., and S&A Properties Corporation and Steak and Ale of Colorado, Inc. (under common control of Metromedia Restaurant Group, hereinafter referred to as Metromedia Restaurant Group), each contributed more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate). As of December 31, 2001, Golden Corral Corporation was the lessee under leases relating to four restaurants, Jack in the Box Inc. was the lessee relating to three leases, Metromedia Restaurant Group was the lessee relating to two leases and IHOP Properties, Inc. was the lessee relating to one lease. It is anticipated that based on the minimum rental payments required by the leases, Golden Corral Corporation, Jack in the Box Inc. and Metromedia Restaurant Group will each continue to contribute more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) in 2002. In addition, four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Jack in the Box, Bennigan's, and IHOP, each accounted for more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) for 2001. In 2002, it is anticipated that Golden Corral, Jack in the Box and Bennigan's will each contribute more than ten percent of the Partnership's rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) to which the Partnership is entitled under the terms of the leases. Any failure of such lessees or Restaurant Chains could materially adversely affect the Partnership's income if the Partnership is not able to re-lease the Properties in a timely manner. As of December 31, 2001, Golden Corral Corporation leased Properties with an aggregate carrying value in excess of 20% of the total assets of the Partnership. Joint Venture and Tenancy in Common Arrangements In August 1998, the Partnership entered into a joint venture arrangement, Columbus Joint Venture, with CNL Income Fund XII, Ltd. and CNL Income Fund XVI, Ltd., affiliates of the General Partners, to construct and hold one Property. Each of the affiliates is a limited partnership organized pursuant to the laws of the State of Florida. The joint venture arrangement provides for the Partnership and its joint venture partners to share in all costs and benefits associated in the joint venture in proportion to each partner's percentage interest in the joint venture. The Partnership has a 39.93% interest in Columbus Joint Venture. The Partnership and its joint venture partners are also jointly and severally liable for all debts, obligations and other liabilities of the joint venture. In addition, in February 1999, the Partnership entered into a joint venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., an affiliate of the General Partners, to purchase and hold one Property. The affiliate is a limited partnership organized pursuant to the laws of the State of Florida. The joint venture agreement provides for the Partnership and its joint venture partner to share in all costs and benefits associated with the joint venture in proportion to each partner's percentage interest in the joint venture. The Partnership owns a 57.2% interest in the joint venture. In addition, in June 2000, the Partnership entered into a joint venture arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL Income Fund XV, Ltd. and CNL Income Fund XVI, Ltd., affiliates of the General Partners, to purchase and hold one Property. Each of the affiliates is a limited partnership organized pursuant to the laws of the State of Florida. The joint venture agreement provides for the Partnership and its joint venture partners to share in all costs and benefits associated with the joint venture in proportion to each partner's percentage interest in the joint venture. In January 2001, the Partnership sold a portion of its interest in TGIF Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., a Florida limited partnership and an affiliate of the General Partners, for approximately $500,000. As of December 31, 2001, the Partnership owned a 19.78% interest in the joint venture. The Partnership used the net sales proceeds to pay liabilities of the Partnership and to meet the Partnership's working capital needs. Each joint venture has an initial term of 20 years and, after the expiration of the initial term, continues in existence from year to year unless terminated at the option of any of the joint venturers or by an event of dissolution. Events of dissolution include the bankruptcy, insolvency or termination of any joint venturer, sale of the Property owned by the joint venture and mutual agreement of the Partnership and its joint venture partners to dissolve the joint venture. The Partnership shares management control equally with affiliates of the General Partners for each of the joint ventures. The joint venture agreements restrict each venturer's ability to sell, transfer or assign its joint venture interest without first offering it for sale to its joint venture partners, either upon such terms and conditions as to which the venturers may agree or, in the event the venturers cannot agree, on the same terms and conditions as any offer from a third party to purchase such joint venture interest. Net cash flow from operations of Columbus Joint Venture, CNL Portsmouth Joint Venture and TGIF Pittsburgh Joint Venture are distributed 39.93%, 57.2% and 19.78%, respectively, to the Partnership and the balance is distributed to the respective joint venture partners in accordance with its respective percentage interest in the joint venture. Any liquidation proceeds, after paying joint venture debts and liabilities and funding reserves for contingent liabilities, will be distributed first to the joint venture partners with positive capital account balances in proportion to such balances until such balances equal zero, and thereafter in proportion to each joint venture partner's percentage interest in the joint venture. In addition to the above joint venture agreements, in July 2001, the Partnership entered into an agreement to hold a Property as tenants-in-common, with CNL Income Fund VIII, Ltd., an affiliate of the General Partners. The agreement provides for the Partnership and the affiliate to share in the profits and losses of the Property in proportion to each co-tenant's percentage interest. The Partnership owns an 80.7% interest in this Property. CNL Income Fund VIII, Ltd. is a limited partnership organized pursuant to the laws of the State of Florida. The tenancy in common agreement restricts each co-tenant's ability to sell, transfer, or assign its interest in the tenancy in common's Property without first offering it for sale to the remaining co-tenant. In addition, in January 2002, the Partnership reinvested a portion of the sales proceeds from the 2001 sale of the Property in Santa Rosa, California in a Property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., a Florida limited partnership and an affiliate of the General Partners. The Partnership entered into a separate long-term, triple-net lease with terms substantially the same as its other leases for each property. The use of joint venture and tenancy in common arrangements allows the Partnership to fully invest its available funds at times at which it would not have sufficient funds to purchase an additional property, or at times when a suitable opportunity to purchase an additional property is not available. The use of joint venture and tenancy in common arrangements also provides the Partnership with increased diversification of its portfolio among a greater number of properties. Management Services CNL APF Partners, LP, an affiliate of the General Partners, provides certain services relating to the management of the Partnership and its Properties pursuant to a management agreement with the Partnership. Under this agreement, CNL APF Partners, LP (the "Advisor") is responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices and providing information to the Partnership about the status of the leases and the Properties. The Advisor also assists the General Partners in negotiating the leases. For these services, the Partnership has agreed to pay the Advisor an annual fee of one percent of the sum of gross rental revenues from Properties wholly owned by the Partnership, plus the Partnership's allocable share of gross revenues of joint ventures in which the Partnership is a co-venturer, but not in excess of competitive fees for comparable services. Effective July 1, 2000, CNL Fund Advisors, Inc. assigned its rights in, and its obligations under, the management agreement with the Partnership to the Advisor. All of the terms and conditions of the management agreement, including the payment of fees, as described above, remain unchanged. The management agreement continues until the Partnership no longer owns an interest in any Properties unless terminated at an earlier date upon 60 days' prior notice by either party. Competition The fast-food family-style and casual dining restaurant business is characterized by intense competition. The restaurants on the Partnership's Properties compete with independently owned restaurants, restaurants which are part of local or regional chains, and restaurants in other well-known national chains, including those offering different types of food and service. Employees The Partnership has no employees. The officers of CNL Realty Corporation and the officers and employees of CNL American Properties Fund, Inc., the parent company of the Advisor, perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Financial Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership. Item 2. Properties As of December 31, 2001, the Partnership owned 23 Properties. Of the 23 Properties, 19 are owned by the Partnership in fee simple, three are owned through joint venture arrangements and one is owned through a tenancy in common arrangement. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. Description of Properties Land. As of December 31, 2001, the Partnership's Property sites ranged from approximately 24,400 to 148,500 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. The following table lists the Properties owned by the Partnership as of December 31, 2001 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation for the year ended December 31, 2001. State Number of Properties Arizona 1 California 1 Colorado 1 Florida 2 Illinois 1 Kentucky 1 Minnesota 1 North Carolina 3 New York 1 Ohio 2 Pennsylvania 1 Tennessee 1 Texas 6 Virginia 1 -------------- TOTAL PROPERTIES 23 ============== Buildings. Each of the Properties owned by the Partnership as of December 31, 2001, includes a building that is one of a Restaurant Chain's approved designs. The buildings generally are rectangular and constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 2,100 to 9,700 square feet. All buildings on Properties acquired by the Partnership are freestanding and surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. As of December 31, 2001, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using a depreciable life of 40 years for federal income tax purposes. As of December 31, 2001, the aggregate cost of the Properties owned by the Partnership and joint ventures for federal income tax purposes was $23,240,960 and $6,205,016, respectively. The following table lists the Properties owned by the Partnership as of December 31, 2001 by Restaurant Chain. Restaurant Chain Number of Properties Arby's 2 Bennigan's 2 Boston Market 3 Burger King 1 Chevy's Fresh Mex 1 Golden Corral 4 Ground Round 1 IHOP 1 Jack in the Box 3 NI's International Buffet 1 On the Border 1 Taco Bell 1 T.G.I. Friday's 1 Wendy's 1 -------------- TOTAL PROPERTIES 23 ============== The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations. The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property. Leases. The Partnership leases the Properties to operators of selected national and regional fast-food, family-style and casual dining restaurant chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. Generally, a lessee is required, under the terms of its lease agreement, to make such capital expenditures as may be reasonably necessary to refurbish buildings, premises, signs and equipment so as to comply with the lessee's obligations, if applicable, under the franchise agreement to reflect the current commercial image of its Restaurant Chain. These capital expenditures are required to be paid by the lessee during the term of the lease. The terms of the leases of the Properties owned by the Partnership are described in Item 1. Business - Leases. At December 31, 2001, 2000, 1999, 1998 and 1997 the Properties were 83%, 80%, 96%, 96% and 100% occupied, respectively. The following is a schedule of the average rent per Property for each of the years ended December 31:

(1) Rental income includes the Partnership's share of rental income from the Properties owned through joint venture and tenancy in common arrangements. Rental revenues have been adjusted, as applicable, for any amounts for which the Partnership has established an allowance for doubtful accounts. (2) Excludes Properties that were vacant at December 31, and did not generate rental revenues during the year ended December 31. The following is a schedule of lease expirations for leases in place as of December 31, 2001 for the next ten years and thereafter.

(1) Excludes four Properties which were vacant at December 31, 2001. Leases with Major Tenants. The terms of each of the leases with the Partnership's major tenants, as of December 31, 2001 (See Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business - Description of Leases. Golden Corral Corporation leases four Golden Corral restaurants. The initial term of each lease is 15 years (expiring in 2012 to 2013) and the average minimum base annual rent is approximately $164,400 (ranging from approximately $156,700 to $178,200). Jack in the Box Inc. leases three Jack in the Box restaurants. The initial term of each lease is 18 years (expiring in 2015) and the average minimum base annual rent is approximately $113,000 (ranging from approximately $77,900 to $132,200). Metromedia Restaurant Group leases two Bennigan's restaurants. The initial term of one lease is 11 years (expiring in 2019) and the initial term of the other lease is ten years (expiring in 2018) and the average minimum base annual rent is approximately $218,400 (ranging from approximately $200,200 to $236,600). IHOP Properties, Inc. leases one IHOP restaurant. The initial term of the lease is 18 years (expiring in 2017) and the minimum base annual rent is approximately $144,100. Item 3. Legal Proceedings On August 10, 1998, DJD Partners VII, LLC served a lawsuit filed on or about July 28, 1998 against Finest Foodservice, LLC and CNL Income Fund XVIII, Ltd., DJD Partners VII, LLC v. Finest Foodservice, LLC, et al, Case No. CT 98-014942, in the District Court of the Fourth Judicial District of Hennepin County, Minnesota, alleging a breach of a contract entered into by Finest Foodservice, LLC and assigned to CNL Income Fund XVIII, Ltd. in connection with the construction of a Boston Market property in Minnetonka, Minnesota. In October 1998 Finest Foodservice, LLC filed for bankruptcy and rejected its lease, causing the obligations of the contract to become the responsibility of CNL Income Fund XVIII, Ltd. On May 4, 2001, the District Court awarded a judgment of approximately $85,400 to the plaintiff. CNL Income Fund XVIII, Ltd. is appealing the judgment. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) As of March 15, 2002, there were 1,559 holders of record of the Units. There is no public trading market for the Units, and it is not anticipated that a public market for the Units will develop. During 2001, Limited Partners who wished to sell their Units may have offered the Units for sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners who wished to have their distributions used to acquire additional Units (to the extent Units were available for purchase), may have done so pursuant to such Plan. The General Partners have the right to prohibit transfers of Units. The price paid for any Unit transferred pursuant to the Plan through December 31, 2001 range from $8.57 to $9.50 per Unit. The price paid for any Unit transferred other than pursuant to the Plan was subject to negotiation by the purchaser and the selling Limited Partner. The Partnership will not redeem or repurchase Units. The following table reflects, for each calendar quarter, the high, low and average sales prices for transfers of Units during 2001 and 2000 other than pursuant to the Plan, net of commissions.

(1) A total of 22,500 and 10,290 Units were transferred other than pursuant to the Plan for the years ended December 31, 2001 and 2000, respectively. (2) No transfer of Units took place during the quarter other than pursuant to the Plan. The capital contribution per Unit was $10. All cash available for distribution will be distributed to the partners pursuant to the provisions of the Partnership Agreement. For each of the years ended December 31, 2001 and 2000, the Partnership declared cash distributions of $2,800,000 to the Limited Partners. Distributions of $700,000 were declared at the close of each of the Partnership's calendar quarters during 2001 and 2000, to the Limited Partners. These amounts include monthly distributions made in arrears for the Limited Partners electing to receive such distributions on this basis. No amounts distributed to partners for the years ended December 31, 2001 and 2000, are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. No distributions have been made to the General Partners to date. The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis, although some Limited Partners, in accordance with their election, receive monthly distributions for an annual fee. (b) Not applicable. Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the financial statements and related notes in Item 8. hereof.

(1) Revenues include equity in earnings of joint ventures. (2) Represents the weighted average number of Units outstanding during the period the Partnership was operational. (3) Net income for the years ended December 31, 2001, 2000, and 1998, includes $708,377, $993,178 and $197,466, respectively, from provisions for write-down of assets. (4) Net income for the years ended December 31, 2001 and 1999, include $429,072 and $46,300 from gains on sale of assets. (5) Net income for the year ended December 31, 2000, includes $100,000 from lease termination income. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership was organized on February 10, 1995, to acquire for cash, either directly or through joint venture arrangements, both newly constructed and existing restaurant Properties, as well as land upon which restaurants were to be constructed, which are leased primarily to operators of selected national and regional fast-food, family-style and casual dining Restaurant Chains. The leases are generally triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. As of December 31, 2001, the Partnership owned 23 Properties, either directly or through joint venture or tenancy in common arrangements. Capital Resources Currently, the Partnership's primary source of capital is cash from operations (which includes cash received from tenants, interest received and distributions from joint ventures, less cash paid for expenses). Cash from operations was $1,684,911, $2,310,051, and $2,797,040, for the years ended December 31, 2001, 2000, and 1999, respectively. The decrease in cash from operations during 2001 and 2000, each as compared to the previous year, was primarily a result of changes in income and expenses as described in "Results of Operations" below. Other sources and uses of capital included the following during the years ended December 31, 2001, 2000, and 1999. In February 1999, the Partnership entered into a joint venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., a Florida limited partnership and an affiliate of the General Partners, to own and lease one restaurant Property. As of December 31, 2001, the Partnership had contributed approximately $330,500 to the joint venture and owned a 57.2% interest in this joint venture. In December 1999, the Partnership sold its Property in Atlanta, Georgia, and received net sales proceeds of $688,997, resulting in a gain of $46,300. In June 2000, the Partnership reinvested the net sales proceeds from this sale into a joint venture arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., each of which is a Florida limited partnership and an affiliate of the General Partners, to own and lease one restaurant Property. As of December 31, 2000, the Partnership had contributed approximately $1,001,600 to the joint venture. In January 2001, the Partnership sold a portion of its interest in TGIF Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., for approximately $500,000. Because the Partnership sold 50% of its interest in TGIF Pittsburgh Joint Venture at its current carrying value, no gain or loss was recognized. As of December 31, 2001, the Partnership had a remaining investment of approximately $501,500 in the joint venture representing a 19.78% interest in this joint venture. The Partnership used the net sales proceeds to pay liabilities of the Partnership and to meet the Partnership's working capital needs. In June 2001, the Partnership sold its Property in Timonium, Maryland to an unrelated third party for $875,000 and received net sales proceeds of approximately $848,600, resulting in a loss of $18,855. In July 2001, the Partnership reinvested the majority of these sales proceeds in a Property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., as described below. In July 2001, the Partnership sold its Property in Henderson, Nevada to an unrelated third party for approximately $1,314,700 and received net sales proceeds of approximately $1,278,000 resulting in a gain of approximately $177,900. In July 2001, the Partnership reinvested the majority of these sales proceeds in a Property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the General Partners. As of December 31, 2001, the Partnership had contributed approximately $1,766,400 for an 80.7% interest in the profits and losses of the Property. In addition, in December 2001, the Partnership sold its Property in Santa Rosa, California to an unrelated third party for approximately $1,718,800 and received net sales proceeds of approximately $1,664,800 resulting in a gain of approximately $270,100. In January 2002, the Partnership reinvested a portion of these net sales proceeds in a Property in Houston, Texas and reinvested the remaining net sales proceeds in a Property in Austin, Texas, as tenants-in-common with CNL Income Fund X, Ltd., a Florida limited partnership and an affiliate of the General Partners. In 2001, the Partnership entered in a promissory note with the corporate General Partner for a loan in the amount of $75,000 in connection with the operations of the partnership. The loan was uncollateralized, non-interest bearing and due on demand. As of December 31, 2001, the Partnership had repaid the loan in full to the corporate General Partner. None of the Properties owned or to be acquired by the Partnership, or the joint ventures in which the Partnership owns an interest, is or may be encumbered. Subject to certain restrictions on borrowing, however, the Partnership may borrow funds but will not encumber any of the Properties in connection with any such borrowing. The Partnership will not borrow for the purpose of returning capital to the Limited Partners or under arrangements that would make the Limited Partners liable to creditors of the Partnership. The General Partners further have represented that they will use their reasonable efforts to structure any borrowing so that it will not constitute "acquisition indebtedness" for federal income tax purposes and also will limit the Partnership's outstanding indebtedness to three percent of the aggregate adjusted tax basis of its Properties. Affiliates of the General Partners from time to time incur certain expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest. In November 2001, the Partnership entered into an agreement with an unrelated third party to sell the On the Border property in San Antonio, Texas. As of March 15, 2002 the sale had not occurred. Currently, rental income from the Partnership's Properties is invested in money market accounts or other short-term, highly liquid investments such as demand deposit accounts at commercial banks, money market accounts and certificates of deposit with less than a 90 day maturity date, pending the Partnership's use of such funds to pay Partnership expenses or to make distributions to the partners. At December 31, 2001, the Partnership had $226,136 invested in such short-term investments, as compared to $479,603 at December 31, 2000. As of December 31, 2001, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately 3.1% annually. The funds remaining at December 31, 2001 will be used to pay distributions and other liabilities of the Partnership. In January 2002, the Partnership entered into a promissory note with the corporate General Partner for a loan in the amount of $125,000 in connection with the operations of the partnership. The loan was uncollateralized, non-interest bearing and due on demand. As of March 15, 2002, the Partnership had repaid the loan in full to the corporate General Partner. Short-Term Liquidity The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The Partnership's investment strategy of acquiring Properties for cash and leasing them generally under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The General Partners believe that the leases will generate cash flow in excess of operating expenses. Due to low operating expenses and ongoing cash flow, the General Partners do not believe that working capital reserves are necessary at this time. In addition, because all of the leases for the Partnership's Properties are generally on a triple-net basis, it is not anticipated that a permanent reserve for maintenance and repairs is necessary at this time. To the extent, however, that the Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. The General Partners have the right to cause the Partnership to maintain reserves if, in their discretion, they determine such reserves are required to meet the Partnership's working capital needs. The General Partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership. The Partnership generally distributes cash from operations remaining after the payment of the operating expenses of the Partnership, to the extent that the General Partners determine that such funds are available for distribution. Based on current and anticipated future cash from operations, and for the year ended December 31, 2001 loans from the corporate General Partner, as described above in "Capital Resources," the Partnership declared distributions to the Limited Partners of $2,800,000, $2,800,000, and $2,799,998, for the years ended December 31, 2001, 2000, and 1999, respectively. This represents distributions of $0.80 per Unit, for each of the years ended December 31, 2001, 2000 and 1999. No distributions were made to the General Partners for the years ended December 31, 2001, 2000, or 1999. No amounts distributed or to be distributed to the Limited Partners for the years ended December 31, 2001, 2000 or 1999, are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis, although some Limited Partners, in accordance with their election, receive monthly distributions, for an annual fee. During 2000, the General Partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the General Partners' capital accounts as of December 31, 1999. Accordingly, the General Partners were not allocated any net income and did not receive any distributions during the years ended December 31, 2001 and 2000. As of December 31, 2001 and 2000, the Partnership owed $20,273 and $53,181, respectively, to related parties for operating expenses and accounting and administrative services. As of March 15, 2002, the Partnership had reimbursed the affiliates all such amounts. Other liabilities, including distributions payable, increased to $821,605 at December 31, 2001, as compared to $758,119 at December 31, 2000. Liabilities at December 31, 2001, to the extent they exceed cash and cash equivalents at December 31, 2001, will be paid from anticipated future cash from operations, loans from the General Partners, or from future General Partners contributions. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. Critical Accounting Policies The Partnership's leases are accounted for under the provisions of Statement of Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and have been accounted for as operating leases. FAS 13 requires management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant. In addition, management assumes that all payments to be received under its leases are collectible. Changes in management's estimates or assumption regarding collectibility of lease payments could result in a change in accounting for the lease at the inception of the lease. The Partnership accounts for its unconsolidated joint ventures using the equity method of accounting. Under generally accepted principles, the equity method of accounting is appropriate for entities that are partially owned by the Partnership, but for which operations of the investee are shared with other partners. The Partnership's joint ventures agreement requires the consent of all partners on all key decisions affecting the operations of the underlying Property. Management reviews its Properties and investments in unconsolidated entities periodically (no less than once per year) for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. Management determines whether impairment in value has occurred by comparing the estimated future undiscounted cash flows, including the residual value of the Property, with the carrying cost of the individual Property. If an impairment is indicated, the assets are adjusted to their fair value. Results of Operations During 1999, the Partnership owned and leased 25 wholly owned Properties (including one Property which was sold in 1999). During 2000 and 2001, the Partnership owned and leased 22 wholly owned Properties (including three Properties which were sold in 2001). In addition, during 1999, the Partnership was a co-venturer in two joint ventures, that each owned and leased one Property. During 2000 and 2001, the Partnership was a co-venturer in one additional joint venture that owned and leased one Property, and during 2001, the Partnership owned and lease one Property with an affiliate, as tenants-in-common. As of December 31, 2001, the Partnership owned, either directly or through joint venture or tenancy in common arrangements, 23 Properties, which are generally subject to long-term triple-net leases. The leases of the Properties provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $58,400 to $259,900. The majority of the leases provide for percentage rent based on sales in excess of a specified amount. In addition, the majority of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase. For a further description of the Partnership's leases and Properties, see Item 1. Business - Leases and Item 2. Properties. During the years ended December 31, 2001, 2000, and 1999, the Partnership earned $2,465,515, $2,772,490, and $3,071,229, respectively, in rental income from operating leases and earned income from direct financing leases. The decrease in rental and earned income during 2001 and 2000, each as compared to the previous year, was partially due to the fact that the tenants of three Boston Market Properties, Boston Chicken, Inc., Finest Foodservice, L.L.C. and WMJ Texas, Inc., filed for bankruptcy in 1998. During 1998, one of these tenants in bankruptcy rejected its lease and ceased making rental payments to the Partnership for this lease. The Partnership continued receiving rental payments relating to the leases that were not rejected until June 2000, at which time the other two tenants rejected the leases relating to two remaining Properties and ceased making rental payments. In June 2001, the Partnership sold the Property in Timonium, Maryland, as described in "Capital Resources." The Partnership will not recognize any rental and earned income from the remaining vacant Properties in Minnetonka, Minnesota and San Antonio, Texas until new tenants for the Properties are located, or until the Properties are sold and the proceeds from such sales are reinvested in additional Properties. The lost revenues resulting from the remaining vacant Properties, could have an adverse affect on the results of operations of the Partnership if the Partnership is not able to re-lease these Properties in a timely manner. The General Partners are currently seeking either new tenants or purchasers for these vacant Properties. Rental and earned income also decreased during 2001 and 2000, each as compared to the previous year, due to the fact that in October 2000, the Partnership terminated the lease with the tenant of the Boston Market Property in Raleigh, North Carolina, due to financial difficulties the tenant was experiencing. In connection therewith, the Partnership received $100,000 in lease termination income in consideration for the Partnership releasing the tenant from its obligations under the lease. The Partnership will not recognize any rental income relating to this Property until a new tenant for the Property is located or until the Property is sold and the proceeds from such sale are reinvested in an additional Property. The Partnership is currently seeking a new tenant or purchaser for this Property. Rental and earned income also decreased during 2001 and 2000, each as compared to the previous year, due to the fact that in June 2000, the tenant of the On the Border Property in San Antonio, Texas defaulted under the terms of its lease, vacated the Property and discontinued making rental payments. As a result, in 2000, the Partnership reclassified the asset from net investment in direct financing leases to land and buildings on operating leases. In accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases," the Partnership recorded the reclassified assets at the lower of original cost, present fair value, or present carrying value. No loss on termination of direct financing leases was recorded. The Partnership will not recognize any rental income relating to this Property until a new tenant for the Property is located or until the Property is sold and the proceeds from such sale are reinvested in an additional Property. The Partnership is currently seeking a new tenant or purchaser for this Property. The decrease in rental income during 2001 and 2000, was also partially due to the 2001 sale of the Property in Henderson, Nevada, and the 1999 sale of the Property in Atlanta, Georgia, as described in "Capital Resources." In June 2000, the Partnership reinvested the net sales proceeds from the 1999 sale of the Property in Atlanta, Georgia, in a joint venture arrangement, TGIF Pittsburgh Joint Venture, and in July 2001, the Partnership reinvested the net sales proceeds from the 2001 sale of the Property in Henderson, Nevada, in a Property in Denver, Colorado, with an affiliate of the General Partners as tenants-in-common. Rental and earned income are expected to remain at reduced amounts while equity in earnings of joint ventures is expected to increase due to the fact that the Partnership reinvested these net sales proceeds in a joint venture and a Property with an affiliate of the General Partners, as tenants-in-common. During the years ended December 31, 2001, 2000 and 1999, the Partnership also earned $197,012, $112,863 and $61,656, respectively, attributable to net income earned by joint ventures in which the Partnership is a co-venturer. The increase in net income earned by joint ventures during 2001, as compared to 2000, was primarily due to the Partnership reinvesting the net sales proceeds from the sale of the Property in Henderson, Nevada, in a Property in Denver, Colorado, during 2001, with an affiliate of the General Partners, as tenants-in-common, as described in "Capital Resources". The increase in net income earned by joint ventures during 2000, as compared to 1999, was primarily attributable to the Partnership entering into TGIF Pittsburgh Joint Venture during 2000 and CNL Portsmouth Joint Venture in February 1999, as described above in "Capital Resources." During 2001, four lessees of the Partnership, Golden Corral Corporation, Jack in the Box Inc., IHOP Properties, Inc. and Metromedia Restaurant Group, each contributed more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate). As of December 31, 2001, Golden Corral Corporation was the lessee under leases relating to four restaurants, Jack in the Box Inc. was the lessee relating to three leases, Metromedia Restaurant Group was the lessee relating to two leases and IHOP Properties, Inc. was the lessee relating to one lease. It is anticipated that based on the minimum rental payments required by the leases, Golden Corral Corporation, Jack in the Box Inc. and Metromedia Restaurant Group will each continue to contribute more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) in 2002. In addition, four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Jack in the Box, Bennigan's, and IHOP, each accounted for more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) for 2001. In 2002, it is anticipated that Golden Corral, Jack in the Box and Bennigan's will each contribute more than ten percent of the Partnership's rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the Property held as tenants-in-common with an affiliate) to which the Partnership is entitled under the terms of the leases. Any failure of such lessees or Restaurant Chains could materially adversely affect the Partnership's income if the Partnership is not able to re-lease the Properties in a timely manner. During the years ended December 31, 2001, 2000 and 1999, the Partnership earned $18,756, $35,772, and $59,486, respectively, in interest and other income. The decrease in interest and other income during 2001 and 2000, each as compared to the previous year, was primarily attributable to the decrease in the amount of funds invested in cash and cash equivalents due to the acquisition of an additional Property in 1999 and the investment in joint venture arrangements during 2000 and 1999. Operating expenses, including depreciation and amortization expense and provisions for write-down on assets, were $1,941,590, $1,819,055, and $723,315, during the years ended December 31, 2001, 2000 and 1999, respectively. The increase in operating expenses during 2001 and 2000, each as compared to the previous year, was partially due to the fact that the Partnership recorded a provision for write-down of assets of $387,138 and $553,317 during the years ended December 31, 2001 and 2000, respectively, relating to the Boston Market Properties in Timonium, Maryland; Raleigh, North Carolina; and San Antonio, Texas. The tenant of the Timonium and San Antonio, Properties declared bankruptcy and rejected the leases relating to these Properties. The tenant of the Raleigh Property terminated its lease with the Partnership and ceased restaurant operations. The provisions represented the difference between each of the Properties' carrying values and the General Partners' estimated net realizable value of each of the Properties. No such provision was established during the year ended December 31, 1999. In June 2001, the Partnership sold the Timonium, Maryland Property, as described in "Capital Resources." In addition, during the year ended December 31, 2000, the Partnership recorded a provision for write-down of assets in the amount of $299,849 relating to the On the Border Property in San Antonio, Texas. The tenant of this Property defaulted under the terms of its lease, vacated the Property and ceased operation during 2000. The provision represented the difference between the carrying value of the asset at December 31, 2000, and the General Partners' estimated net realizable value for this Property. During 2001, the Partnership recognized an additional provision for write-down of assets relating to this Property of $321,239. The total provision represented the difference between the carrying value of the Property at December 31, 2001 and the estimated net sales proceeds from the anticipated sale of the Property based on a purchase and sales contract with an unrelated third party. As of March 15, 2002, the sale had not occurred. No such provision was established during the year ended December 31, 1999. The increase in operating expenses during 2001, as compared to 2000, was partially attributable to the fact that during 2001, the Partnership incurred approximately $85,400 pursuant to a judgment entered against the Partnership in a lawsuit relating to the Property in Minnetonka, Minnesota. The General Partners are appealing the judgment. In addition, the increase in operating expenses during 2001 and 2000, each as compared to the previous year, was partially due to the fact that the Partnership incurred expenses such as insurance, repairs and maintenance, legal fees and real estate taxes relating to the vacant Properties described above. The Partnership will continue to incur such costs until the Partnership finds replacement tenants or purchasers for the remaining vacant Properties. The increase in operating expenses during 2001, as compared to 2000, was also partially attributable to the fact that during 2000, the tenant of the On the Border Property in San Antonio, Texas, in which the Partnership only owns the building portion, subject to a ground lease, vacated the Property and ceased restaurant operations. In accordance with an agreement executed in conjunction with the execution of the initial lease, the ground lessor, the tenant and the Partnership agreed that the Partnership would be provided certain rights to help protect its interest in the building in the event of a default by the tenant under the terms of the initial lease. As a result of the default by the tenant and in order to preserve its interest in the building, during the year ended December 31, 2001 and 2000, the Partnership incurred approximately $135,900 and $31,400, respectively, in rent expense relating to the ground lease of the Property. No such expense was recorded during the year ended December 31, 1999. The Partnership will continue to incur such expense until the Partnership finds a replacement tenant for this Property. The increase in operating expenses during 2001, as compared to 2000, was also partially attributable to an increase in the costs incurred for administrative expenses for servicing the Partnership and its Properties, as permitted by the Partnership agreement. In addition, the increase in operating expenses during 2001, as compared to 2000, was partially due to the fact that the Partnership incurred additional state taxes due to changes in the tax laws of a state in which the Partnership conducts business. The increase in operating expenses during 2000, as compared to 1999, was partially attributable to an increase in depreciation expense as the result of the fact that the Properties acquired during 1999, and the fact that during 2000, the Partnership reclassified the lease relating to the Property in San Antonio, Texas from direct financing lease to operating lease. The increase in operating expenses during 2001 and 2000, was partially offset by a decrease in the amount of transaction costs the Partnership incurred relating to the General Partners retaining financial and legal advisors to assist them in evaluating and negotiating the proposed and terminated Merger with APF, as described below in "Termination of Merger." As a result of the sales of three Properties, as described above in "Capital Resources," the Partnership recognized total gains of $429,072 for the year ended December 31, 2001. As a result of the sale of the Property in Atlanta, Georgia, as described above in "Capital Resources," the Partnership recognized a gain of $46,300 for the year ended December 31, 1999. No Properties were sold during 2000. The lease termination refund to tenant of $84,873 during 2000, was due to lease termination negotiations related to the 1999 sale of the Property in Atlanta, Georgia, as described in "Capital Resources." No such amounts were incurred during 2001 or 1999. The Partnership does not anticipate incurring any additional costs related to the sale of this Property. The restaurant industry, as a whole, has been one of the many industries affected by the general slowdown in the economy. While the Partnership has experienced some losses due to the financial difficulties of a limited number of restaurant operators, the General Partners remain confident in the overall performance of the fast-food and family style restaurants, the concepts that comprise the Partnership's portfolio. Industry data shows that these restaurant concepts continue to outperform and remain more stable than higher-end restaurants, those that have been more adversely affected by the slowing economy. The Partnership's leases are on a triple-net basis and contain provisions that management believes will mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Inflation, overall, has had a minimal effect on the results of operations of the Partnership. Continued inflation may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties. In December 1999, the Securities and Exchange Commission released SAB 101, which provides the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 requires the Partnership to defer recognition of certain percentage rental income until certain defined thresholds are met. The Partnership adopted SAB 101 beginning January 1, 2000. Implementation of SAB 101 did not have a material impact on the Partnership's results of operations. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142). The Partnership has reviewed both statements and has determined that both FAS 141 and FAS 142 do not apply to the Partnership as of December 31, 2001. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The adoption of FAS 144 did not have any effect on the partnership's recording of impairment losses as this Statement retained the fundamental provisions of FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Termination of Merger On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. Subsequent to entering into the Merger agreement, the General Partners received a number of comments from brokers who sold the Partnership's units concerning the loss of passive income treatment in the event the Partnership merged with APF. On June 3, 1999, the General Partners, on behalf of the Partnership, and APF agreed that it would be in the best interests of the Partnership and APF that APF not attempt to acquire the Partnership in the acquisition. Therefore in June 1999, APF entered into a termination agreement with the General Partners of the Partnership. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) CONTENTS Page Report of Independent Certified Public Accountants 18 Financial Statements: Balance Sheets 19 Statements of Income 20 Statements of Partners' Capital 21 Statements of Cash Flows 22-23 Notes to Financial Statements 24-42 Report of Independent Certified Public Accountants To the Partners CNL Income Fund XVIII, Ltd. In our opinion, the accompanying balance sheets and the related statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of CNL Income Fund XVIII, Ltd. (a Florida limited partnership) at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Orlando, Florida February 8, 2002 CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) BALANCE SHEETS

See accompanying notes to financial statements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2001, 2000, and 1999 1. Significant Accounting Policies: Organization and Nature of Business - CNL Income Fund XVIII, Ltd. (the "Partnership") is a Florida limited partnership that was organized for the purpose of acquiring both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed, which are leased primarily to operators of national and regional fast-food, family-style and casual dining restaurant chains. Under the terms of a registration statement filed with the Securities and Exchange Commission, the Partnership was authorized to sell a maximum of 3,500,000 units ($35,000,000) of limited partnership interest. A total of 3,500,000 units ($35,000,000) of limited partnership interest had been sold as of December 31, 1998. The general partners of the Partnership are CNL Realty Corporation (the "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the Corporate General Partner. The general partners have responsibility for managing the day-to-day operations of the Partnership. Real Estate and Lease Accounting - The Partnership records the acquisition of land and buildings at cost, including acquisition and closing costs. Land and buildings are leased to unrelated third parties generally on a triple-net basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using the direct financing or operating methods. Such methods are described below: Direct financing method - The leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the asset) (see Note 4). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the leases. Operating method - Land and building leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and depreciation is charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives of 30 years. When scheduled rentals (including rental payments, if any, required during the construction of a property) vary during the lease term, income is recognized on a straight-line basis CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 1. Significant Accounting Policies - Continued: so as to produce a constant periodic rent over the lease term commencing on the date the property is placed in service. Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. In contrast, deferred rental income represents the aggregate amount of scheduled rental payments to date (including rental payments due during construction and prior to the property being placed in service) in excess of income recognized on a straight-line basis over the lease term commencing on the date the property is placed in service. Whenever a tenant defaults under the terms of its lease, or events or changes in circumstance indicate that the tenant will not lease the property through the end of the lease term, the Partnership either reserves or reverses the cumulative accrued rental income balance. When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, are removed from the accounts and gains or losses from sales are reflected in income. The general partners of the Partnership review properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. The general partners determine whether an impairment in value has occurred by comparing the estimated future undiscounted cash flows, including the residual value of the property, with the carrying cost of the individual property. If an impairment is indicated, the assets are adjusted to the fair value. Although the general partners have made their best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term which could adversely affect the general partners' estimate of net cash flows expected to be generated from its properties and the need for asset impairment write-downs. When the collection of amounts recorded as rental or other income is considered to be doubtful, an adjustment is made to increase the allowance for doubtful accounts, which is netted against receivables, although the Partnership continues to pursue collection of such amounts. If amounts are subsequently determined to be uncollectible, the corresponding receivable and allowance for doubtful accounts are decreased accordingly. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 1. Significant Accounting Policies - Continued: Investment in Joint Ventures - The Partnership's investments in Columbus Joint Venture, CNL Portsmouth Joint Venture and TGIF Pittsburgh Joint Venture and the property in Denver Colorado, which is held as tenants-in-common, are accounted for using the equity method since the joint venture agreement requires the consent of all partners on all key decisions affecting the operations of the underlying property. Cash and Cash Equivalents - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds (some of which are backed by government securities). Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash accounts maintained on behalf of the Partnership in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Partnership has not experienced any losses in such accounts. Income Taxes - Under Section 701 of the Internal Revenue Code, all income, expenses and tax credit items flow through to the partners for tax purposes. Therefore, no provision for federal income taxes is provided in the accompanying financial statements. The Partnership is subject to certain state taxes on its income and property. Additionally, for tax purposes, syndication costs are included in Partnership equity and in the basis of each partner's investment. For financial reporting purposes, syndication costs are netted against partners' capital and represent a reduction of Partnership equity and a reduction in the basis of each partner's investment. See "Income Taxes" footnote for a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 1. Significant Accounting Policies - Continued: Rents Paid in Advance - Rents paid in advance by lessees for future periods are deferred upon receipt and are recognized as revenues during the period in which the rental income is earned. Rents paid in advance include "interim rent" payments required to be paid under the terms of certain leases for construction properties equal to a pre-determined rate times the amount funded by the Partnership during the period commencing with the effective date of the lease to the date minimum annual rent becomes payable. Once minimum annual rent becomes payable, the "interim rent" payments are amortized and recorded as income either (i) over the lease term so as to produce a constant periodic rate of return for leases accounted for using the direct financing method, or (ii) over the lease term using the straight-line method for leases accounted for using the operating method, whichever is applicable. Use of Estimates - The general partners of the Partnership have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Reclassification - Certain items in the prior years' financial statements have been reclassified to conform to 2001 presentation. These reclassifications had no effect on total partners' capital or net income. Staff Accounting Bulletin No. 101 ("SAB 101") - In December 1999, the Securities and Exchange Commission released SAB 101, which provides the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 requires the Partnership to defer recognition of certain percentage rental income until certain defined thresholds are met. The Partnership adopted SAB 101 beginning January 1, 2000. Implementation of SAB 101 did not have a material impact on the Partnership's results of operations. Statement of Financial Accounting Standards No. 141 ("FAS 141") and Statement of Financial Accounting Standards No. 142 ("FAS 142") - - In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142). The Partnership has reviewed both statements and has determined that both FAS 141 and FAS 142 do not apply to the Partnership as of December 31, 2001. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 1. Significant Accounting Policies - Continued: Statement of Financial Accounting Standards No. 144 ("FAS 144") - In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The adoption of FAS 144 did not have any effect on the partnership's recording of impairment losses as this Statement retained the fundamental provisions of FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". 2. Leases: The Partnership leases its land and buildings to operators of national and regional fast-food and family-style restaurants. The leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases." Some of the Partnership's leases are classified as operating leases and some of the leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of the majority of the leases are operating leases. The leases have initial terms of 15 to 20 years and the majority of the leases provide for minimum and contingent rentals. In addition, the tenant generally pays all property taxes and assessments, fully maintains the interior and exterior of the building and carries insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow the tenants to renew the leases for two to five successive five-year periods subject to the same terms and conditions as the initial lease. Most leases also allow the tenant to purchase the property at fair market value after a specified portion of the lease has elapsed. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 3. Land and Buildings on Operating Leases: Land and buildings on operating leases consisted of the following at December 31:

During the year ended December 31, 2000, the Partnership recorded a provision for write-down of assets of $656,409 relating to the properties located in Raleigh, North Carolina and Timonium, Maryland. The tenant of the property in Raleigh, North Carolina terminated its lease. The tenant of the property in Timonium, Maryland filed for bankruptcy in October 1998 and rejected the lease relating to this property in June 2000. The provisions represented the difference between the net carrying value of the properties, including the accumulated accrued rental income balance, at December 31, 2000, and the general partners' estimated net realizable value for the properties. In June 2001, the Partnership sold this property to an unrelated third party for $875,000 and received net sales proceeds of approximately $848,600, resulting in an additional loss of $18,855. In July 2001, the Partnership reinvested the majority of these sales proceeds in a Bennigan's property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the general partners (see Note 5). In July 2001, the Partnership sold its property in Henderson, Nevada to an unrelated third party for approximately $1,314,700 and received net sales proceeds of approximately $1,278,000 resulting in a gain of approximately $177,900. In July 2001, the Partnership reinvested the majority of these sales proceeds in a Bennigan's property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the general partners (see Note 5). CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 3. Land and Buildings on Operating Leases - Continued: In December 2001, the Partnership sold its property in Santa Rosa, California for which the building was classified as a direct financing lease (see Note 4) to an unrelated third party for approximately $1,718,800 and received net sales proceeds of approximately $1,664,800 resulting in a gain of approximately $270,100. In January 2002, the Partnership reinvested a portion of these net sales proceeds in a property in Houston, Texas (see Note 14). In addition, in January 2002, the Partnership reinvested a portion of these net sales proceeds in a property in Austin, Texas, as tenants-in-common with CNL Income Fund X, Ltd. (see Note 14). During the years ended December 31, 2001 and 2000, the Partnership recorded a provision for write-down of assets of $387,138 and $36,920, respectively, relating to the Boston Market property in San Antonio, Texas. The tenant of this property filed for bankruptcy in October 1998, and during 2000, rejected the lease relating to the property. The provision represented the difference between the carrying value of the property, including the accumulated accrued rental income balance, and the general partners' estimated net realizable value of each property. In addition, the Partnership recorded a provision for write-down of assets of $321,239 relating to the On the Border property in San Antonio, Texas. The tenant of this property defaulted under the terms of its lease, vacated the property and ceased restaurant operations. The provision represented the difference between the carrying value of the property at December 31, 2001 and the estimated net sales proceeds from the anticipated sale of the property based on a purchase and sales contract with an unrelated third party (see Note 13). Generally, the leases provide for escalating guaranteed minimum rents throughout the lease term. Income from these scheduled rent increases is recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 2001, 2000 and 1999, the Partnership recognized $169,007, $95,700, and $196,020, respectively, of such rental income. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 3. Land and Buildings on Operating Leases - Continued: The following is a schedule of the future minimum lease payments to be received on the noncancellable operating leases at December 31, 2001: 2002 $1,791,340 2003 1,838,961 2004 1,850,564 2005 1,850,564 2006 1,851,747 Thereafter 15,692,440 ---------------- $24,875,616 ================ Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease term. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of tenant's gross sales. 4. Net Investment in Direct Financing Leases: The following lists the components of the net investment in direct financing leases at December 31:

CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 4. Net Investment in Direct Financing Leases - Continued: During 2000, the Partnership recorded a provision for write-down on assets of $299,849 relating to the On the Border property located in San Antonio, Texas. In June 2000, the tenant of this property defaulted under the terms of its lease, vacated the property and ceased operation. As a result, the Partnership reclassified the related assets from net investment in direct financing leases to land and building on operating leases. In accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases," the Partnership recorded the reclassified asset at the lower of original cost, present fair value, or present carrying value. No loss on termination of direct financing leases was recorded during 2001 and 2000. In December 2001, the Partnership sold its property in Santa Rosa, California for which building portion was classified as a direct financing lease. In connection with the sale, the gross investment (minimum lease payments receivable and the estimated residual value) and unearned income relating to the assets classified as a direct financing lease, were removed from the accounts (see Note 3). The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 2001: 2002 $ 354,046 2003 362,451 2004 362,451 2005 362,451 2006 362,451 Thereafter 4,019,444 ---------------- $5,823,294 ================ The above table does not include future minimum lease payments for renewal periods or for contingent rental payments that may become due in future periods (See Note 3). CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 5. Investment in Joint Ventures: In August 1998, the Partnership entered into a joint venture arrangement, Columbus Joint Venture, with CNL Income Fund XII, Ltd. and CNL Income Fund XVI, Ltd., each of which is a Florida limited partnership and an affiliate of the general partners, to construct and hold one restaurant property. During 1999 and 1998, the Partnership contributed $195,700 and $166,025, respectively, to purchase land and pay construction costs relating to the Property owned by the joint venture. As of December 31, 2001, the Partnership had a 39.93% interest in the profits and losses of the joint venture. In February 1999, the Partnership entered into a joint venture arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., a Florida limited partnership and an affiliate of the general partners, to own and lease one restaurant property. As of December 31, 2001, the Partnership had contributed approximately $330,500 to the joint venture and owned a 57.2% interest in this joint venture. In June 2000, the Partnership used the net sales proceeds from the 1999 sale of the property in Atlanta, Georgia, along with additional funds, to invest in a joint venture arrangement, TGIF Pittsburgh Joint Venture, with CNL Income Fund VII, Ltd., CNL Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., each a Florida limited partnership and affiliate of the general partners, to own and lease one restaurant property. As of December 31, 2000, the Partnership had contributed approximately $1,001,600 to the joint venture and owned a 39.5% interest in this joint venture. In January 2001, the Partnership sold a portion of its interest in TGIF Pittsburgh Joint Venture to CNL Income Fund VII, Ltd., for approximately $500,000. Because the Partnership sold 50% of its interest in TGIF Pittsburgh Joint Venture at its current carrying value, no gain or loss was recognized. As of December 31, 2001, the Partnership had a remaining investment of approximately $501,500 in the joint venture representing a 19.78% interest in this joint venture. In July 2001, the Partnership reinvested the sales proceeds it received from the sale of property in Henderson, Nevada, in an additional property in Denver, Colorado, as tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited partnership and affiliate of the general partners. As of December 31, 2001, the Partnership had contributed approximately $1,766,400 for an 80.7% interest in the profits and losses of the property. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 5. Investment in Joint Ventures - Continued: As of December 31, 2001, Columbus Joint Venture, CNL Portsmouth Joint Venture, TGIF Pittsburgh Joint Venture, and the Partnership and an affiliate, as tenants-in-common, each owned and leased one property, to operators of fast-food or family-style restaurants. The following presents the combined, condensed financial information for the joint ventures at December 31:

The Partnership recognized income totaling $197,012, $112,863 and $61,656 during the years ended December 31, 2001, 2000 and 1999, respectively, from these joint ventures. 6. Restricted Cash: As of December 31, 2001, the net sales proceeds of $1,664,829 from the sale of the property in Santa Rosa, California, less miscellaneous escrow fees of $2,628 were being held in an interest-bearing escrow account pending the release of funds by the escrow agent to acquire an additional property. These funds were released by the escrow agent in 2002 and were used to acquire a property in Houston, Texas and an interest in a property in Austin, Texas, with CNL Income Fund X, Ltd., a Florida limited partnership and an affiliate of the general partners' (see Note 14). CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 7. Allocations and Distributions: From inception through December 31, 1999, generally, distributions of net cash flow, as defined in the limited partnership agreement of the Partnership, were made 95% to the limited partners and five percent to the general partners; provided, however, that for any particular year, the five percent of net cash flow to be distributed to the general partners will be subordinated to receipt by the limited partners in that year of an eight percent noncumulative, noncompounded return on their aggregate invested capital contributions (the "Limited Partners' 8% Return"). From the inception through December 31, 1999, generally, net income (determined without regard to any depreciation and amortization deductions and gains and losses from the sale of properties) was allocated between the limited partners and the general partners first, in an amount not to exceed the net cash flow distributed to the partners attributable to such year in the same proportions as such net cash flow is distributed; and thereafter, 99% to the limited partners and one percent to the general partners. All deductions for depreciation and amortization were allocated 99% to the limited partners and one percent to the general partners. Net sales proceeds from the sale of a property not in liquidation of the Partnership generally were distributed first to the limited partners in an amount sufficient to provide them with the return of their invested capital contributions, plus their cumulative Limited Partners' 8% Return. The general partners then received a return of their capital contributions and, to the extent previously subordinated and unpaid, a five percent interest in all net cash flow distributions. Any remaining net sales proceeds were distributed 95% to the limited partners and five percent to the general partners. Any gain from the sale of a property not in liquidation of the Partnership was, in general, allocated in the same manner as net sales proceeds are distributable. Any loss was allocated first, on a pro rata basis to the partners with positive balances in their capital accounts; and thereafter, 95% to the limited partners and five percent to the general partners. Generally, net sales proceeds from a liquidating sale of properties, will be used in the following order (i) first to pay and discharge all of the Partnership's liabilities to creditors, (ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, (iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, (iv) fourth, after CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 7. Allocations and Distributions - Continued: allocations of net income, gains and/or losses, to the partners with positive capital account balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and (v) thereafter, any funds remaining shall then be distributed 95% to the limited partners and five percent to the general partners. Effective January 1, 2000, the general partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the general partners' capital account as of December 31, 1999. Accordingly, for years commencing January 1, 2000 and after, the Partnership's net income will be allocated entirely among the limited partners. However, if losses are allocated to the general partners in a year, an amount of income equal to the sum of such losses may be allocated to the general partner in succeeding years. Accordingly, the general partners were not allocated any net income and did not receive any distributions during the years ended December 31, 2000 and 2001. During the years ended December 31, 2001, 2000 and 1999, the Partnership declared distributions to the limited partners of $2,800,000, $2,800,000, and $2,799,998, respectively. No distributions have been made to the general partners to date. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 8. Income Taxes: The following is a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes for the years ended December 31:

CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 9. Related Party Transactions: One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Holdings, Inc. The other individual general partner, Robert A. Bourne, serves as President and Treasurer of CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc. CNL APF Partners, LP. (the "Advisor") is a wholly owned subsidiary of CNL American Properties Fund, Inc., ("APF"). CNL Fund Advisors, Inc., a majority owned subsidiary of CNL Financial Group, Inc. until it merged with and into APF effective September 1, 1999, served as the Partnership's advisor until it assigned its rights in and obligations under a management agreement with the Partnership to the Advisor effective July 1, 2000. The individual general partners are stockholders and directors of APF. The Advisor provides certain services relating to management of the Partnership and its properties pursuant to a management agreement with the Partnership. In connection therewith , the Partnership agreed to pay the Advisor an annual management fee of one percent of the sum of gross revenues from properties wholly owned by the Partnership and the Partnership's allocable share of gross revenues from joint ventures. The management fee, which will not exceed fees which are competitive for similar services in the same geographic area, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the management fee not taken as to any fiscal year shall be deferred without interest and may be taken in such other fiscal year as the Advisor shall determine. For the years ended December 31, 2001, 2000 and 1999, the Partnership incurred $24,943, $27,875, and $30,235, respectively, for such management fees. The Advisor is also entitle to receive a deferred, subordinated real estate disposition fee, payable upon the sale of properties, based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Advisor provides a substantial amount of services in connection with the sale. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fees will be incurred until such replacement property is sold and the net sales proceeds are distributed. The payment of the real estate disposition fee is subordinated to receipt by the limited partners of their aggregate Limited Partners' 8% Return, plus their invested capital contributions. No deferred, subordinated real estate disposition fees have been incurred since inception. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 9. Related Party Transactions - Continued: During the years ended December 31, 2001, 2000, and 1999, the Advisor and its affiliates provided various administrative services to the Partnership, including services related to accounting; financial, tax and regulatory compliance and reporting; lease and loan compliance; limited partners distributions and reporting; due diligence and marketing; and investor relations (including administrative services in connection with selling units of limited partnership interest), on a day-to-day basis, including services during 2000 and 1999 relating to the proposed and terminated merger. For the years ended December 31, 2001, 2000, and 1999, the Partnership incurred $207,702, $92,444, and $82,382, respectively, for such expenses. The amounts due to related parties at December 31, 2001 and 2000, totaled $20,273 and $53,181, respectively. 10. Concentration of Credit Risk: The following schedule presents total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the property held with an affiliate as tenants-in common) from individual lessees, each representing more than ten percent of the Partnership's total rental and earned income for each of the years ended December 31:

CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 10. Concentration of Credit Risk - Continued: In addition, the following schedule presents total rental and earned income (including the Partnership's share of total rental and earned income from joint ventures and the property held with an affiliate as tenants-in-common) from individual restaurant chains, each representing more than ten percent of the Partnership's total rental and earned income for each of the years ended December 31:

The information denoted by N/A indicates that for each period presented, the tenant or chain did not represent more than ten percent of the Partnership's total rental, earned income and interest income. Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any one of these lessees or restaurant chains could significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner. In 1998, Boston Chicken, Inc., Finest Foodservice, L.L.C., and WMJ Texas, Inc., the tenants of three of the Boston Market properties filed for bankruptcy and rejected the lease relating to one property. In 2000, the tenants rejected the two remaining leases. In June 2001, one of the properties with a rejected lease was sold. The Partnership will not recognize any rental income relating to the remaining vacant properties until new tenants for the properties are located, or until the properties are sold and the proceeds from such a sale are reinvested in additional properties. The lost revenues resulting from the remaining vacant properties, could have an adverse effect on the results of operations of the Partnership if the Partnership is unable to re-lease these Properties in a timely manner. The general partners are currently seeking either new tenants or purchasers for these Properties. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 11. Litigation Settlement: In July 1998, DJD Partners VII, LLC filed a lawsuit against Finest Foodservice, LLC and the Partnership, alleging a breach of contract that was originally entered into by Finest Foodservice, LLC and later assigned to the Partnership, in connection with the construction of a Boston Market property in Minnetonka, Minnesota. In October 1998, Finest Foodservice, LLC, the former tenant of the site in Minnetonka, Minnesota, filed for bankruptcy and rejected its lease, causing the obligations of the contract to become the responsibility of the Partnership. In May 2001, the District Court awarded a judgment of approximately $85,400 to DJD Partners VII, LLC against the Partnership, as a result of the breach of contract by Finest Foodservice, LLC. The Partnership accrued this amount as a general and administrative expense as of December 31, 2001. A motion for reconsideration and a new trial was filed and denied. The Partnership is appealing the District Court's judgment. 12. Selecting Data: The following table presents selected unaudited quarterly financial data for each full quarter during the years ended December 31, 2001 and 2000.

(1) Revenues include equity in earnings of unconsolidated joint ventures, lease termination income and interest and other income. (2) Revenues have been adjusted to reclassify any reversals of accrued rental income to provisions for write-down of assets. This reclassification had no effect on total net income. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2001, 2000, and 1999 13. Commitment: In November 2001, the Partnership entered into an agreement with an unrelated third party to sell the On the Border property in San Antonio, Texas. At December 31, 2001, the Partnership established a provision for write-down on assets related to the anticipated sale of this property (see Note 3). As of March 15, 2002 the sale had not occurred. 14. Subsequent Events: In January 2002, the Partnership reinvested a portion of the sales proceeds from the 2001 sale of the property in Santa Rosa, California in a property in Houston, Texas. In addition, in January 2002, the Partnership reinvested the remaining net sales proceeds in a property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., a Florida limited partnership and an affiliate of the general partners. The Partnership entered into a separate long-term, triple-net lease with terms substantially the same as its other leases for each property. In January 2002, the Partnership entered into a promissory note with the corporate general partner for a loan in the amount of $125,000 in connection with the operations of the Partnership. The loan is uncollateralized, non-interest bearing and due on demand. As of February 7, 2002, the Partnership had repaid the entire loan to the corporate general partner. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The General Partners of the Registrant are James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, a Florida corporation. 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 Partnership has available to it the services, personnel and experience of CNL Fund Advisors, Inc., CNL Financial Group, Inc. and their affiliates, all of which are affiliates of the General Partners. James M. Seneff, Jr., age 55. Since 1971, Mr. Seneff has been active in the acquisition, development, and management of real estate projects and, directly or through an affiliated entity, has served as a general partner or co-venturer in over 100 real estate ventures. These ventures have involved the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has served as Director and Chairman of the Board of CNL American Properties Fund, Inc. ("APF"), a public, unlisted real estate investment trust, since 1994. Mr. Seneff served as Chief Executive Officer of APF from 1994 through August 1999, and has served as Co-Chief Executive Officer of APF since December 2000. Mr. Seneff served as Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the Partnership's advisor, until it merged with a wholly-owned subsidiary of APF in September 1999, and in June 2000, was re-elected to those positions of CNL Fund Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial Group, Inc., a diversified real estate company, and has served as a Director, Chairman of the Board and Chief Executive Officer of CNL Financial Group, Inc. since its formation in 1980. CNL Financial Group, Inc. is the parent company, either directly or indirectly through subsidiaries, of CNL Real Estate Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL Securities Corp. Mr. Seneff also serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as well as, CNL Hospitality Corp., its advisor. In addition, he serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust and its advisor, CNL Retirement Corp. Since 1992, Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of Commercial Net Lease Realty, Inc., a public real estate investment trust that is listed on the New York Stock Exchange. Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of CNL Securities Corp. since 1979; CNL Investment Company since 1990; and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans, since 1990. Mr. Seneff formerly served as a Director of First Union National Bank of Florida, N.A., and currently serves as the Chairman of the Board of CNL Bank. Mr. Seneff previously served on the Florida State Commission on Ethics and is a former member and past Chairman of the State of Florida Investment Advisory Council, which recommends to the Florida Board of Administration investments for various Florida employee retirement funds. The Florida Board of Administration, Florida's principal investment advisory and money management agency, oversees the investment of more than $60 billion of retirement funds. Mr. Seneff received his degree in Business Administration from Florida State University in 1968. Robert A. Bourne, age 54. Mr. Bourne has participated as a general partner or co-venturer in over 100 real estate ventures involved in the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is Director of the Board of Directors of APF. Mr. Bourne served as President of APF from 1994 through February 1999. He also served as Treasurer from February 1999 through August 1999 and from May 1994 through December 1994. He also served in various executive positions with CNL Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of APF including, President from 1994 through September 1997, and Director from 1994 through August 1999. Mr. Bourne serves as President and Treasurer of CNL Financial Group, Inc.; Director, Vice Chairman of the Board, President and Treasurer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust; as well as, Director, Vice Chairman of the Board, President and Treasurer of CNL Hospitality Corp., its advisor. In addition, Mr. Bourne serves as Director, Vice Chairman of the Board, President and Treasurer of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust; as well as, a Director, Vice Chairman of the Board, President and Treasurer of its advisor, CNL Retirement Corp. Mr. Bourne also serves as a Director of CNL Bank. He has served as a Director since 1992, Vice Chairman of the Board since February 1996, Secretary and Treasurer from February 1996 through 1997, and President from July 1992 through February 1996, of Commercial Net Lease Realty, Inc., a public real estate investment trust listed on the New York Stock Exchange. Mr. Bourne also serves as Director, President and Treasurer for various affiliates of CNL Financial Group, Inc. including, CNL Investment Company, CNL Securities Corp. and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans. Mr. Bourne began his career as a certified public accountant employed by Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where he attained the position of Tax Manager in 1975. Mr. Bourne graduated from Florida State University in 1970 where he received a B.A. in Accounting, with honors. Curtis B. McWilliams, age 46. Mr. McWilliams has served as Co-Chief Executive Officer of APF since December 2000 and previously served as Chief Executive Officer from September 1999 through December 2000. Prior to the acquisition of CNL Fund Advisors, Inc., Mr. McWilliams served as President of APF from February 1999 until September 1999. From February 1998 to February 1999, he served as Executive Vice President of APF. Mr. McWilliams joined CNL Financial Group, Inc. in April 1997 and served as an Executive Vice President from October 1997 until September 1999. In addition, Mr. McWilliams served as President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc. from April 1997 until the acquisition of such entities by wholly-owned subsidiaries of APF in September 1999. From September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co. The majority of his career at Merrill Lynch & Co. was in the Investment Banking division where he served as a Managing Director. Mr. McWilliams received a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master of Business Administration degree with a concentration in finance from the University of Chicago in 1983. Steven D. Shackelford, age 38. Mr. Shackelford was promoted to Executive Vice President of APF in June 2000. He served as Senior Vice President from September 1999 until his promotion in June 2000. Mr. Shackelford has served as Chief Financial Officer since January 1997 and has served as Secretary and Treasurer of APF since September 1999. He also served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996 to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the national office of Price Waterhouse LLP where he was responsible for advising foreign clients seeking to raise capital and a public listing in the United States. From August 1992 to March 1995, he was a manager in the Paris, France office of Price Waterhouse, serving several multi-national clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor of Arts degree in Accounting, with honors, and a Master of Business Administration degree from Florida State University and is a certified public accountant. Item 11. Executive Compensation Other than as described in Item 13, the Partnership has not paid and does not intend to pay any executive compensation to the General Partners or any of their affiliates. There are no compensatory plans or arrangements regarding termination of employment or change of control. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 15, 2002, no person was known to the Registrant to be a beneficial owner of more than five percent of the Units. The following table sets forth, as of March 15, 2002, the beneficial ownership interests of the General Partners in the Registrant.

Neither the General Partners, nor any of their affiliates, owns any interest in the Registrant, except as noted above. Item 13. Certain Relationships and Related Transactions The table below summarizes the types, recipients, methods of computation and amounts of compensation, fees and distributions paid or payable by the Partnership to the General Partners and their affiliates for the year ended December 31, 2001, exclusive of any distributions to which the General Partners or their affiliates may be entitled in the event they purchase Units.

PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report. 1. Financial Statements Report of Independent Certified Public Accountants Balance Sheets at December 31, 2001 and 2000 Statements of Income for the years ended December 31, 2001, 2000, and 1999 Statements of Partners' Capital for the years ended December 31, 2001, 2000, and 1999 Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 Notes to Financial Statements 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000, and 1999 Schedule III - Real Estate and Accumulated Depreciation at December 31, 2001 Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 2001 All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or notes thereto. 3. Exhibits **3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998-01, incorporated herein by reference.) **3.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-11, No. 33-90998-01 and incorporated herein by reference.) **4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **5.1 Opinion of Baker & Hostetler as to the legality of the securities being registered by CNL Income Fund XVIII, Ltd. (Filed as Exhibit 5.2 to Amendment No. Three to the Registrant's Registration Statements on Form S-11, No. 33-90998, incorporated herein by reference.) **8.1 Opinion of Baker & Hostetler regarding certain material tax issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.1 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.2 Opinion of Baker & Hostetler regarding certain material issues relating to the Distribution Reinvestment Plan of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.4 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.3 Amended Opinion of Baker & Hostetler regarding certain material issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.5 to Post-Effective Amendment No. Four to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.1 Management Agreement between CNL Income Fund XVIII, Ltd. and CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 20, 1997, and incorporated herein by reference.) **10.2 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Filed as Exhibit 10.2 to Form 10-Q filed with the Securities and Exchange Commission on August 9, 2001, and incorporated herein by reference.) **10.3 Form of Joint Venture Agreement for Joint Ventures with Unaffiliated Entities (Filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.4 Form of Joint Venture Agreement for Joint Ventures with Affiliated Programs (Filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.5 Form of Development Agreement (Filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.6 Form of Indemnification and Put Agreement (Filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.7 Form of Unconditional Guarantee of Payment and Performance (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.8 Form of Lease Agreement for Existing Restaurant (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.9 Form of Lease Agreement for Restaurant to be Constructed (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.10 Form of Premises Lease for Golden Corral Restaurant (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.11 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.12 Form of Cotenancy Agreement with Unaffiliated Entity (Filed as Exhibit 10.12 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.13 Form of Cotenancy Agreement with Affiliated Entity (Filed as Exhibit 10.13 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.14 Form of Registered Investor Advisor Agreement (Filed as Exhibit 10.14 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) (b) The Registrant filed no reports on Form 8-K during the period October 1, 2001 through December 31, 2001. (c) Not Applicable. (d) Other Financial Information The Partnership is required to file audited financial information of one of its tenants (Golden Corral Corporation) as a result of this tenant leasing more than 20% of the Partnership's total assets for the year ended December 31, 2001. Golden Corral Corporation is a privately-held company and its financial information is not available to the Partnership to include in this filing. The Partnership will file this financial information under cover of a Form 10-K/A as soon as it is available. **previously filed SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of March, 2002. CNL INCOME FUND XVIII, LTD. By: CNL REALTY CORPORATION General Partner /s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE, President By: ROBERT A. BOURNE General Partner /s/ Robert A. Bourne -------------------------- ROBERT A. BOURNE By: JAMES M. SENEFF, JR. General Partner /s/ James M. Seneff, Jr. ------------------------- JAMES M. SENEFF, JR. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2001, 2000, and 1999

(a) Deducted from receivables on the balance sheet. (b) Reduction of rental and other income. (c) Amounts written off as uncollectible. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001

CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (a) Transactions in real estate and accumulated depreciation during 2001, 2000, 1999, and 1998 are summarized as follows:

(b) Depreciation expense is computed for buildings and improvements based upon estimated lives of 30 years. (c) As of December 31, 2001, the aggregate cost of the Properties owned by the Partnership and the joint ventures for federal income tax purposes was $23,240,960 and $6,205,016, respectively. All of the leases are treated as operating leases for federal income tax purposes. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (d) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing leases. The cost of the building has been included in net investment in direct financing leases; therefore, depreciation is not applicable. (e) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease. The cost of the land and building has been included in net investment in direct financing leases; therefore, depreciation is not applicable. (f) For financial reporting purposes, certain components of the lease relating to land and building have been recorded as a direct financing lease. Accordingly, costs relating to these components of this lease are not shown. (g) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease. Accordingly costs relating to this component of this lease are not shown. (h) Amount represents site improvements and is included in total land value for this Property. (i) For financial reporting purposes, the undepreciated cost of the Property in Minnetonka, Minnesota, was written down to net realizable value due to an anticipated impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $197,466 at December 31, 1998. The tenant of this Property declared bankruptcy and rejected the lease relating to this Property. The impairment represented the difference between the Property's carrying value at December 31, 1998, and the General Partners' estimated net realizable value of the Property. The cost of the Property presented on this schedule is the net amount at which the Property was carried, including the provision for write-down of assets. No additional impairment was recorded for the years ended December 31, 2001 and 2000. (j) For financial reporting purposes, during 2000, the undepreciated cost of the Property in San Antonio, Texas, was written down to its estimated net realizable value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $299,849 at December 31, 2000. The tenant of this Property vacated the Property and ceased restaurant operations, resulting in a reclassification of the building portion of the lease to an operating lease. The building was recorded at net book value and depreciated over its remaining estimated life of approximately 27.1 years. During 2001, the Partnership recognized an additional provision for write-down of assets of $321,239. The total impairment represented the difference between the Property's carrying value and the estimated net sales proceeds from the anticipated sale of the Property based on a purchase and sales contract with an unrelated third party. The cost of the Property presented on this schedule is the net amount at which the Property was carried at December 31, 2001, including the provision for write-down of assets. (k) For financial reporting purposes, the undepreciated cost of the Property in Raleigh, North Carolina, was written down to net realizable value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $272,945 at December 31, 2000. The impairment represented the difference between the Property's carrying value and the General Partners' estimated net realizable value of the Property at December 31, 2000. The cost of the Property presented on this schedule is the net amount at which the Property was carried at December 31, 2001, including the provision for write-down of assets. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (l) For financial reporting purposes, the undepreciated cost of the Property in San Antonio, Texas, was written down to net realizable value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets in the amount of $387,138 at December 31, 2001. The tenant of this Property declared bankruptcy and rejected the lease relating to this Property. The impairment represented the difference between the Property's carrying value and the General Partners' estimated net realizable value of the Property at December 31, 2001. The cost of the Property presented on this schedule is the net amount at which the Property was carried at December 31, 2001, including the provision for write-down of assets.

CNL INCOME FUND XVIII LTD 10-K