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AEI INCOME & GROWTH FUND 25 LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 14, 2014

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

- Market and economic conditions which affect the value of the properties the Company owns and the cash from rental income such properties generate; - the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for Members; - resolution by the Managing Members of conflicts with which they may be confronted; - the success of the Managing Members of locating properties with favorable risk return characteristics; - the effect of tenant defaults; and - the condition of the industries in which the tenants of properties owned by the Company operate. Page 12 of 21



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

Application of Critical Accounting Policies

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). Preparing the financial statements requires management to use judgment in the application of these accounting policies, including making estimates and assumptions. These judgments will affect the reported amounts of the Company's assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and will affect the reported amounts of revenue and expenses during the reporting periods. It is possible that the carrying amount of the Company's assets and liabilities, or the results of reported operations, will be affected if management's estimates or assumptions prove inaccurate.

Management of the Company evaluates the following accounting estimates on an ongoing basis, and has discussed the development and selection of these estimates and the management discussion and analysis disclosures regarding them with the managing member of the Company.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Company records them in the financial statements at cost. The purchase price is allocated to tangible assets, consisting of land and building, and to identified intangible assets and liabilities, which may include the value of above market and below market leases and the value of in-place leases. The allocation of the purchase price is based upon the fair value of each component of the property. Although independent appraisals may be used to assist in the determination of fair value, in many cases these values will be based upon management's assessment of each property, the selling prices of comparable properties and the discounted value of cash flows from the asset.

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods. The above market and below market lease values will be capitalized as intangible lease assets or liabilities. Above market lease values will be amortized as an adjustment of rental income over the remaining term of the respective leases. Below market leases will be amortized as an adjustment of rental income over the remaining terms of the respective leases, including any bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.

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

The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management's consideration of current market costs to execute a similar lease. These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

The determination of the fair values of the assets and liabilities acquired will require the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount and capitalization rates, interest rates and other variables. If management's estimates or assumptions prove inaccurate, the result would be an inaccurate allocation of purchase price, which could impact the amount of reported net income.

Carrying Value of Properties

Properties are carried at original cost, less accumulated depreciation and amortization. The Company tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. For properties the Company will hold and operate, management determines whether impairment has occurred by comparing the property's probability-weighted 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.

Allocation of Expenses

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

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

Results of Operations

For the three months ended March 31, 2014 and 2013, the Company recognized rental income from continuing operations of $553,134 and $508,536, respectively. In 2014, rental income increased due to additional rent received from one property acquisition in 2013 and rent increases on three properties. Based on the scheduled rent for the properties owned as of April 30, 2014, the Company expects to recognize rental income from continuing operations of approximately $2,215,000 in 2014.

For the three months ended March 31, 2014 and 2013, the Company incurred LLC administration expenses from affiliated parties of $83,064 and $81,330, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Members. During the same periods, the Company incurred LLC administration and property management expenses from unrelated parties of $14,626 and $11,623, 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 three months ended March 31, 2014 and 2013, the Company recognized interest income of $1,072 and $2,328, respectively.

In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This topic amends the requirements for reporting discontinued operations. The Company has early adopted this standard effective January 1, 2014 and has applied the provisions prospectively. As a result, the Company anticipates that properties will not be considered discontinued operations when the properties are sold after January 1, 2014, with the exception of properties that were classified as Real Estate Held for Sale at December 31, 2013.

Prior to January 1, 2014, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Company included the operating results and sale of the property in discontinued operations. In addition, the Company reclassified the prior periods' operating results of the property to discontinued operations. For the three months ended March 31, 2014, the Company recognized income from discontinued operations of $122,850, representing rental income less property management expenses of $48,906 and income from an equity method investment held for sale of $73,944. For the three months ended March 31, 2013, the Company recognized income from discontinued operations of $102,596, representing rental income less property management expenses and depreciation.

On August 2, 2013, the Company sold its 21% interest in the Scott & White Clinic in College Station, Texas to an unrelated third party. The Company received net sale proceeds of $981,338, which resulted in a net gain of $276,140. At the time of sale, the cost and related accumulated depreciation was $771,868 and $66,670, respectively.

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

The tenant of the Johnny Carino's restaurants is experiencing financial difficulties and has closed the restaurants in Pueblo, Colorado (October 2013) and Lake Charles, Louisiana (January 2014). The tenant is behind on the rent for both properties, having paid rent through October 2013. On March 27, 2014, the tenant filed for Chapter 11 bankruptcy reorganization. Shortly thereafter, the tenant filed a motion with the bankruptcy court to reject the leases and returned possession of the properties to the Company. As of the date of the bankruptcy filing, the tenant owed $97,680 of past due rent, which was not accrued for financial reporting purposes. While the properties are vacant, the Company is responsible for the real estate taxes and other costs associated with maintaining the properties.

In September 2013, the Company decided to sell the Johnny Carino's restaurant in Pueblo and classified it as Real Estate Held for Sale. Based on its long-lived asset valuation analysis, the Company determined the Johnny Carino's restaurant was impaired. As a result, in the third quarter of 2013, a charge to discontinued operations for real estate impairment of $622,107 was recognized, which was the difference between the carrying value at September 30, 2013 of $1,672,107 and the estimated fair value of $1,050,000. Based on its long-lived asset valuation analysis, in the fourth quarter of 2013, the Company recognized an additional real estate impairment of $250,000 to decrease the carrying value to the estimated fair value of $800,000 as of December 31, 2013. The charges were recorded against the cost of the land and building.

In September 2013, the Company decided to sell its 50% interest in the Johnny Carino's restaurant in Lake Charles and classified it as Real Estate Held for Sale. In March 2014, the Company entered into an agreement to sell the property to an unrelated third party. The sale is subject to contingencies and may not be completed. If the sale is completed, the Company expects to receive net proceeds of approximately $550,000. If the sale is not completed, the Company will seek another buyer for the property and may not be able to negotiate a purchase agreement with similar economic terms.

Based on its long-lived asset valuation analysis, the Company determined the Johnny Carino's restaurant was impaired. As a result, in the fourth quarter of 2013, a charge to discontinued operations for real estate impairment of $235,125 was recognized, which was the difference between the carrying value at December 31, 2013 of $785,125 and the estimated fair value of $550,000. The charge was recorded against the cost of the land and building.

In the fourth quarter of 2013, the Company decided to sell its 45% interest in the CarMax Auto Superstore in Lithia Springs, Georgia. The remaining interests in the property are owned by three affiliated entities, AEI Income & Growth Fund XXI Limited Partnership, AEI Income & Growth Fund 24 LLC and AEI Private Net Lease Millennium Fund Limited Partnership. On March 7, 2014, to facilitate the sale of the property, the Company and affiliated entities contributed their respective interests in the property via a limited liability company to CM Lithia Springs DST ("CMLS"), a Delaware statutory trust ("DST") in exchange for Class B ownership interests in CMLS. In addition, a small amount of cash was contributed for working capital. A DST is a recognized mechanism for selling property to investors who are looking for replacement real estate to complete like-kind exchanges under Section 1031 of the Internal Revenue Code. As investors purchase Class A ownership interests in CMLS, the proceeds received will be used to redeem, on a one-for-one basis, the Class B ownership interests of the Partnership and affiliated entities. At December 31, 2013, the property was classified as Real Estate Held for Sale with a carrying value of $3,395,625.

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

The investment in CMLS is recorded using the equity method of accounting in the accompanying financial statements. Under the equity method, the investment in CMLS is stated at cost and adjusted for the Company's share of net income or losses and reduced by distributions received by the Partnership.

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 three months ended March 31, 2014, the Company's cash balances decreased $18,576 as a result of cash paid for an equity method investment held for sale, which was partially offset by cash generated from operating activities in excess of distributions paid to the Members. During the three months ended March 31, 2013, the Company's cash balances increased $75,604 as a result of cash generated from operating activities in excess of distributions paid to the Members.

Net cash provided by operating activities decreased from $620,549 in 2013 to $553,755 in 2014 as a result of a decrease in total rental and interest income in 2014, an increase in LLC administration and property management expenses in 2014, and net timing differences in the collection of payments from the tenants and the payment of expenses.

The major components of the Company's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the three months ended March 31, 2014 and 2013, the Company did not complete any property acquisitions or property sales. However, during the three months ended March 31, 2014, the Company paid cash for an equity method investment held for sale of $27,380.

On June 12, 2013, the Company purchased a 73% interest in a PetSmart store in Gonzales, Louisiana for $2,277,600. The property is leased to PetSmart, Inc. under a Lease Agreement with a remaining primary term of 9.6 years (as of the date of purchase) and annual rent of $170,836 for the interest purchased. The remaining interest in the property was purchased by AEI Income & Growth Fund 24 LLC.

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

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

For the three months ended March 31, 2014 and 2013, the Company declared distributions of $544,951 and $544,945, respectively. Pursuant to the Operating Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Members and 3% to the Managing Members. Distributions of Net Proceeds of Sale were allocated 99% to the Limited Members and 1% to the Managing Members. The Limited Members received distributions of $528,603 and $528,597 and the Managing Members received distributions of $16,348 and $16,348 for the periods, respectively.

In September 2013, the Company declared a special distribution of net sale proceeds of $106,768. The Limited Members received distributions of $105,700 and the Managing Members received distributions of $1,068. The Limited Members' distributions represented $2.53 per Unit. The Company anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Members in the future.

The Company may acquire Units from Limited Members who have tendered their Units to the Company. Such Units may be acquired at a discount. The Company will not be obligated to purchase in any year more than 2% of the total number of Units outstanding on January 1 of such year. In no event shall the Company be obligated to purchase Units if, in the sole discretion of the Managing Member, such purchase would impair the capital or operation of the Company. During the three months ended March 31, 2014 and 2013, the Company did not redeem any Units from the Limited Members.

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

The Economy and Market Conditions

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

Off-Balance Sheet Arrangements

As of March 31, 2014 and December 31, 2013, the Company had no material off-balance sheet arrangements that had or are reasonably likely to have current or future effects on its financial condition, results of operations, liquidity or capital resources.

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