UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended:  June 30, 2011





Commission File Number:  000-29274





AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


(Exact name of registrant as specified in its charter)





State of Minnesota

41-1789725(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)30 East 7th Street, Suite 1300

St. Paul, Minnesota 55101

(651) 227-7333(Address of principal executive offices)

(Registrant’s telephone number)





Not Applicable(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes    o No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o Yes    o No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





o Large accelerated filer
o Accelerated filero Non-accelerated filer
x Smaller reporting company





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o Yes    x No











AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP





INDEX








PagePart I – Financial InformationItem 1.
Financial Statements (unaudited):Balance Sheet as of June 30, 2011 and December 31, 2010
3Statements for the Periods ended June 30, 2011 and 2010:Income
4Cash Flows
5Changes in Partners’ Capital
6Notes to Financial Statements
7 - 10Item 2.
Management's Discussion and Analysis of FinancialCondition and Results of Operations
11 - 15Item 3.
Quantitative and Qualitative Disclosures About Market Risk
15Item 4.
Controls and Procedures
15 - 16Part II – Other InformationItem 1.
Legal Proceedings
16Item 1A.
Risk Factors
16Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16Item 3.
Defaults Upon Senior Securities
16Item 5.
Other Information
16Item 6.
Exhibits
17Signatures
17





Page 2 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


BALANCE SHEET





ASSETS





June 30,


December 31,2011


2010Current Assets:Cash

$
1,433,351


$
514,889Real Estate Held for Investment:Land


4,413,700



4,413,700Buildings and Equipment


12,286,382



12,286,382Accumulated Depreciation


(2,202,613
)


(1,956,885
)Real Estate Held for Investment, Net


14,497,469



14,743,197Real Estate Held for Sale


785,099



1,328,815Total Real Estate


15,282,568



16,072,012Total Assets

$
16,715,919


$
16,586,901





LIABILITIES AND PARTNERS' CAPITAL





June 30,


December 31,2011


2010Current Liabilities:Payable to AEI Fund Management, Inc.

$
18,302


$
24,527Distributions Payable


293,938



294,949Unearned Rent


62,820



27,010Total Current Liabilities


375,060



346,486Partners’ Capital:General Partners


3,662



2,613Limited Partners, $1,000 per Unit;

24,000 Units authorized and issued;

22,674 Units outstanding


16,337,197



16,237,802Total Partners' Capital


16,340,859



16,240,415Total Liabilities and Partners' Capital

$
16,715,919


$
16,586,901

















The accompanying Notes to Financial Statements are an integral part of this statement.




Page 3 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


STATEMENT OF INCOME








Three Months Ended June 30,


Six Months Ended June 30,2011


2010


2011


2010Rental Income

$
326,463


$
299,876


$
652,598


$
596,212Expenses:Partnership Administration – Affiliates


58,583



56,121



115,381



112,815Partnership Administration and Property

Management – Unrelated Parties


13,325



9,770



25,599



21,699Depreciation


122,864



111,434



245,728



222,868Total Expenses


194,772



177,325



386,708



357,382Operating Income


131,691



122,551



265,890



238,830Other Income:Interest Income


2,479



4,000



3,567



6,374Income from Continuing Operations


134,170



126,551



269,457



245,204Income from Discontinued Operations


17,156



125,311



418,864



242,452Net Income

$
151,326


$
251,862


$
688,321


$
487,656Net Income Allocated:General Partners

$
1,558


$
3,770


$
6,928


$
6,270Limited Partners


149,768



248,092



681,393



481,386Total

$
151,326


$
251,862


$
688,321


$
487,656Income per Limited Partnership Unit:Continuing Operations

$
5.86


$
5.50


$
11.77


$
10.66Discontinued Operations


.75



5.39



18.28



10.47Total

$
6.61


$
10.89


$
30.05


$
21.13Weighted Average Units Outstanding –

Basic and Diluted


22,674



22,779



22,674



22,779











The accompanying Notes to Financial Statements are an integral part of this statement.




Page 4 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


STATEMENT OF CASH FLOWS








Six Months Ended June 30,2011


2010Cash Flows from Operating Activities:Net Income

$
688,321


$
487,656Adjustments to Reconcile Net Income

To Net Cash Provided by Operating Activities:Depreciation


245,728



222,958Gain on Sale of Real Estate


(366,278
)


(158,594
)(Increase) Decrease in Receivables


0



10,734Increase (Decrease) in Payable to

AEI Fund Management, Inc.


(6,225
)


(40,680
)Increase (Decrease) in Unearned Rent


35,810



16,537Total Adjustments


(90,965
)


50,955Net Cash Provided By

Operating Activities


597,356



538,611Cash Flows from Investing Activities:Proceeds from Sale of Real Estate


909,994



860,167Cash Flows from Financing Activities:Distributions Paid to Partners


(588,888
)


(589,894
)Net Increase (Decrease) in Cash


918,462



808,884Cash, beginning of period


514,889



1,008,743Cash, end of period

$
1,433,351


$
1,817,627





























The accompanying Notes to Financial Statements are an integral part of this statement.




Page 5 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


STATEMENT OF CHANGES IN PARTNERS' CAPITAL








General Partners


Limited Partners


Total


Limited Partnership Units OutstandingBalance, December 31, 2009

$
1,319


$
16,565,712


$
16,567,031



22,779.11Distributions Declared


(5,899
)


(583,996
)


(589,895
)Net Income


6,270



481,386



487,656Balance, June 30, 2010

$
1,690


$
16,463,102


$
16,464,792



22,779.11Balance, December 31, 2010

$
2,613


$
16,237,802


$
16,240,415



22,673.61Distributions Declared


(5,879
)


(581,998
)


(587,877
)Net Income


6,928



681,393



688,321Balance, June 30, 2011

$
3,662


$
16,337,197


$
16,340,859



22,673.61

































































The accompanying Notes to Financial Statements are an integral part of this statement.




Page 6 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


NOTES TO FINANCIAL STATEMENTS


JUNE 30, 2011





(1)  The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements.  The adjustments made to these condensed statements consist only of normal recurring adjustments.  Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.





(2)  Organization –





AEI Income & Growth Fund XXI Limited Partnership (“Partnership”) was formed to acquire and lease commercial properties to operating tenants.  The Partnership's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner.  Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner.  AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder.  AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Partnership.





The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer.  The Partnership commenced operations on April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted.  On January 31, 1997, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached.  Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively.





During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum.  Distributions to Limited Partners will be made pro rata by Units.





Page 7 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


NOTES TO FINANCIAL STATEMENTS


(Continued)





(2)  Organization – (Continued)





Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 10% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow;  (ii) any remaining balance will be distributed 90% to the Limited Partners and 10% to the General Partners.  Distributions to the Limited Partners will be made pro rata by Units.





For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year.  Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed.  Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners.





For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 10% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Partners and 10% to the General Partners.  Losses will be allocated 98% to the Limited Partners and 2% to the General Partners.





The General Partners are not required to currently fund a deficit capital balance.  Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions.





(3)  Reclassification –





Certain items related to discontinued operations in the prior year’s financial statements have been reclassified to conform to 2011 presentation.  These reclassifications had no effect on Partners’ capital, net income or cash flows.





Page 8 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


NOTES TO FINANCIAL STATEMENTS


(Continued)





(4)  Investments in Real Estate –





On October 20, 2010, the Partnership purchased a 39% interest in a Scott & White Clinic in College Station, Texas for $1,433,468.  The Partnership incurred $31,422 of acquisition expenses related to the purchase that were expensed.  The property is leased to Scott & White Healthcare under a Lease Agreement with a remaining primary term of 9.7 years (as of the date of purchase) and initial annual rent of $120,120 for the interest purchased.  The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership and AEI Income & Growth Fund 25 LLC, affiliates of the Partnership.





(5)  Payable to AEI Fund Management, Inc. –





AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership.  The payable to AEI Fund Management represents the balance due for those services.  This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.





(6)  Discontinued Operations –





During 2010, the Partnership sold 33.6699% of the KinderCare daycare center in Ballwin, Missouri, in three separate transactions, to unrelated third parties.  The Partnership received total net sale proceeds of $674,196, which resulted in a net gain of $265,907.  The cost and related accumulated depreciation of the interests sold was $511,034 and $102,745, respectively.  For the six months ended June 30, 2010, the net gain was $170,578.





On March 25, 2011, the Partnership sold its remaining 44.5116% interest in the KinderCare daycare center in Ballwin, Missouri, in two separate transactions, to unrelated third parties.  The Partnership received total net sale proceeds of $902,133, which resulted in a net gain of $362,374.  The cost and related accumulated depreciation of the interests sold was $675,587 and $135,828, respectively.  At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $539,759.





In December 2009, the Partnership entered into an agreement to sell the Tumbleweed restaurant in Fort Wayne, Indiana to an unrelated third party.  On March 12, 2010, the sale closed with the Partnership receiving net sale proceeds of $428,016, which resulted in a net loss of $11,984.  At the time of sale, the cost and related accumulated depreciation was $727,476 and $287,476, respectively.





On January 19, 2011, the Partnership sold its remaining .1534% interest in the Champps Americana restaurant in Livonia, Michigan to an unrelated third party.  The Partnership received net sale proceeds of $7,861, which resulted in a net gain of $3,904.  The cost and related accumulated depreciation of the interest sold was $6,366 and $2,409, respectively.  At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $3,957.




Page 9 of 17


AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP


NOTES TO FINANCIAL STATEMENTS


(Continued)





(6)  Discontinued Operations – (Continued)





The Partnership is attempting to sell its 20.4025% interest in the Winn-Dixie store in Panama City, Florida.  At June 30, 2011 and December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $785,099.





During the first six months of 2011 and 2010, the Partnership distributed net sale proceeds of $20,105 and $37,875 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $0.88 and $1.64 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.





The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements.  The following are the results of discontinued operations for the periods ended June 30:





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


2011


2010Rental Income

$
19,077


$
43,377


$
54,507


$
93,499Property Management Expenses


(1,921
)


(1,481
)


(1,921
)


(9,551
)Depreciation


0



(45
)


0



(90
)Gain on Disposal of Real Estate


0



83,460



366,278



158,594Income from Discontinued Operations

$
17,156


$
125,311


$
418,864


$
242,452





(7)  Fair Value Measurements –





As of June 30, 2011, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.





Page 10 of 17


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION AND RESULTS OF OPERATIONS.





This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters.  These, and other forward-looking statements, should be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following:





—
Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate;


—
the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for the Partners;


—
resolution by the General Partners of conflicts with which they may be confronted;


—
the success of the General Partners of locating properties with favorable risk return characteristics;


—
the effect of tenant defaults; and


—
the condition of the industries in which the tenants of properties owned by the Partnership operate.





Application of Critical Accounting Policies





The preparation of the Partnership’s financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of investments in real estate and the allocation by AEI Fund Management, Inc. of expenses to the Partnership as opposed to other funds they manage.





The Partnership purchases properties and records them in the financial statements at cost (not including acquisition expenses).  The Partnership tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable.  For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its current carrying value.  For properties held for sale, management determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value.  If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value.  Changes in these assumptions or analysis may cause material changes in the carrying value of the properties.





AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs.  They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage.  The Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement.




Page 11 of 17


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)





Management of the Partnership has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing partner of the Partnership.





Results of Operations





For the six months ended June 30, 2011 and 2010, the Partnership recognized rental income from continuing operations of $652,598 and $596,212, respectively.  In 2011, rental income increased mainly due to additional rent received from one property acquisition in 2010.  Based on the scheduled rent for the properties owned as of July 31, 2011, the Partnership expects to recognize rental income from continuing operations of approximately $1,312,000 in 2011.





For the six months ended June 30, 2011 and 2010, the Partnership incurred Partnership administration expenses from affiliated parties of $115,381 and $112,815, respectively.  These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communication with the Limited Partners.  During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $25,599 and $21,699, respectively.  These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs.





For the six months ended June 30, 2011 and 2010, the Partnership recognized interest income of $3,567 and $6,374, respectively.  In 2011, interest income decreased primarily due to the Partnership having less money invested in a money market account due to a property acquisition in October 2010.





Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations.  In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations.  For the six months ended June 30, 2011, the Partnership recognized income from discontinued operations of $418,864, representing rental income less property management expenses of $52,586 and a gain on disposal of real estate of $366,278.  For the six months ended June 30, 2010, the Partnership recognized income from discontinued operations of $242,452, representing rental income less property management expenses and depreciation of $83,858 and a gain on disposal of real estate of $158,594.





During 2010, the Partnership sold 33.6699% of the KinderCare daycare center in Ballwin, Missouri, in three separate transactions, to unrelated third parties.  The Partnership received total net sale proceeds of $674,196, which resulted in a net gain of $265,907.  The cost and related accumulated depreciation of the interests sold was $511,034 and $102,745, respectively.  For the six months ended June 30, 2010, the net gain was $170,578.





Page 12 of 17


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)





On March 25, 2011, the Partnership sold its remaining 44.5116% interest in the KinderCare daycare center in Ballwin, Missouri, in two separate transactions, to unrelated third parties.  The Partnership received total net sale proceeds of $902,133, which resulted in a net gain of $362,374.  The cost and related accumulated depreciation of the interests sold was $675,587 and $135,828, respectively.  At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $539,759.





In December 2009, the Partnership entered into an agreement to sell the Tumbleweed restaurant in Fort Wayne, Indiana to an unrelated third party.  On March 12, 2010, the sale closed with the Partnership receiving net sale proceeds of $428,016, which resulted in a net loss of $11,984.  At the time of sale, the cost and related accumulated depreciation was $727,476 and $287,476, respectively.





On January 19, 2011, the Partnership sold its remaining .1534% interest in the Champps Americana restaurant in Livonia, Michigan to an unrelated third party.  The Partnership received net sale proceeds of $7,861, which resulted in a net gain of $3,904.  The cost and related accumulated depreciation of the interest sold was $6,366 and $2,409, respectively.  At December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $3,957.





The Partnership is attempting to sell its 20.4025% interest in the Winn-Dixie store in Panama City, Florida.  At June 30, 2011 and December 31, 2010, the property was classified as Real Estate Held for Sale with a carrying value of $785,099.





Management believes inflation has not significantly affected income from operations.  Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases.  Inflation also may cause the real estate to appreciate in value.  However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.





Liquidity and Capital Resources





During the six months ended June 30, 2011, the Partnership's cash balances increased $918,462 as a result of cash generated from the sale of property and cash generated from operating activities in excess of distributions paid to the Partners.  During the six months ended June 30, 2010, the Partnership's cash balances increased $808,884 as a result of cash generated from the sale of property, which was partially offset by distributions paid to the Partners in excess of cash generated from operating activities.





Net cash provided by operating activities increased from $538,611 in 2010 to $597,356 in 2011 as a result of an increase in total rental and interest income in 2011, a decrease in Partnership administration and property management expenses in 2011 and net timing differences in the collection of payments from the tenants and the payment of expenses.





Page 13 of 17


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)





The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate.  During the six months ended June 30, 2011 and 2010, the Partnership generated cash flow from the sale of real estate of $909,994 and $860,167, respectively.





On October 20, 2010, the Partnership purchased a 39% interest in a Scott & White Clinic in College Station, Texas for $1,433,468.  The property is leased to Scott & White Healthcare under a Lease Agreement with a remaining primary term of 9.7 years (as of the date of purchase) and initial annual rent of $120,120 for the interest purchased.  The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership and AEI Income & Growth Fund 25 LLC, affiliates of the Partnership.





The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners.  The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first week after the end of each quarter.  The Partnership attempts to maintain a stable distribution rate from quarter to quarter.  Redemption payments are paid to redeeming Partners in the fourth quarter of each year.





For the six months ended June 30, 2011 and 2010, the Partnership declared distributions of $587,877 and $589,895, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners.  The Limited Partners received distributions of $581,998 and $583,996 and the General Partners received distributions of $5,879 and $5,899 for the periods, respectively.





During the first six months of 2011 and 2010, the Partnership distributed net sale proceeds of $20,105 and $37,875 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $0.88 and $1.64 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.





The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership.  Such Units may be acquired at a discount.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.





Page 14 of 17


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)





During the first six months of 2011, the Partnership did not redeem any Units from the Limited Partners.  On October 1, 2010, six Limited Partners redeemed a total of 105.5 Partnership Units for $34,800 in accordance with the Partnership Agreement.  The Partnership acquired these Units using Net Cash Flow from operations.  In prior years, a total of 60 Limited Partners redeemed 1,220.89 Partnership Units for $958,469.  The redemptions increase the remaining Limited Partners' ownership interest in the Partnership.  As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $351 in 2010.





The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.





The Economy and Market Conditions





The impact of conditions in the current economy, including the turmoil in the credit markets, has adversely affected many real estate investment funds.  However, the absence of mortgage financing on the Partnership's properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate investment funds.  Nevertheless, a prolonged economic downturn may adversely affect the operations of the Partnership's tenants and their cash flows.  If a tenant were to default on its lease obligations, the Partnership's income would decrease, its distributions would likely be reduced and the value of its properties might decline.





ITEM 3.  QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not required for a smaller reporting company.





ITEM 4.  CONTROLS AND PROCEDURES.





(a)  Disclosure Controls and Procedures.





Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing General Partner, in a manner that allows timely decisions regarding required disclosure.





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ITEM 4.  CONTROLS AND PROCEDURES.  (Continued)





(b)  Changes in Internal Control Over Financial Reporting.





During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.








PART II – OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS.





There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject.





ITEM 1A.  RISK FACTORS.





Not required for a smaller reporting company.





ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES & USE OF PROCEEDS.





(a) None.





(b) Not applicable.





(c) Pursuant to Section 7.7 of the Partnership Agreement, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during September of each year.  The purchase price of the Units is based on a formula specified in the Partnership Agreement.  Units tendered to the Partnership are redeemed on October 1st of each year subject to the following limitations.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.  During the period covered by this report, the Partnership did not purchase any Units.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.





None.





ITEM 5.  OTHER INFORMATION.





None.




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ITEM 6.  EXHIBITS.





31.1
Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.





31.2
Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.





32
Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.











SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Dated:  August 12, 2011
AEI Income & Growth Fund XXILimited PartnershipBy:
AEI Fund Management XXI, Inc.Its:
Managing General PartnerBy:
/s/ROBERT P JOHNSONRobert P. JohnsonPresident(Principal Executive Officer)By:
/s/ PATRICK W KEENEPatrick W. KeeneChief Financial Officer(Principal Accounting Officer)








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