CNL Lifestyle Properties (CLLY) 424B3 Prospectus supplement

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-128662

CNL INCOME PROPERTIES, INC.

Supplement No. Two dated July 28, 2006

to Prospectus dated April 4, 2006

This Supplement is part of, and should be read in conjunction with, the prospectus dated April 4, 2006. This Prospectus Supplement replaces all prior Supplements to the prospectus.Capitalized terms used in this Prospectus Supplement have the same meaning as in the prospectus unless otherwise stated herein. The terms “we,” “our,” “us” and “CNL Income Properties” include CNL Income Properties, Inc. and its subsidiaries.

Information as to the number and types of properties we have acquired and loans we have made is presented as of July 26, 2006, and all references to property acquisitions and loans should be read in that context. Properties for which we enter into initial commitments to acquire, as well as properties we acquire and loans we make after July 26, 2006, will be reported in a subsequent supplement.

RECENT DEVELOPMENTS

At July 26, 2006, we had a portfolio of 18 lifestyle properties, including interests in retail and commercial properties at seven resort villages, one merchandise mart, two waterpark resorts, two outdoor waterparks, one sky lift attraction, one dealership, two golf courses and two ski properties. In addition, we have made four loans. All of the properties in which we own an interest are, or will be, leased on a long-term basis to either affiliated or third-party tenants and managed by third-party operators that we consider to be significant industry leaders.

On June 23, 2006, we acquired the Bretton Woods Mountain Resort, a ski destination located in northern New Hampshire, for a purchase price of $45.0 million, excluding closing costs. The Bretton Woods property includes the Bretton Woods Ski Area, the Bretton Woods Ski Lodge, tennis facilities, the four-season National Historic Landmark Mount Washington Hotel, The Bretton Arms Country Inn, The Lodge at Bretton Woods and a freestanding 4,500 square-foot restaurant. The ski area includes 434 skiable acres, 62 miles of groomed trails and 9 chairlifts. We entered into two long-term, triple-net leases with BW Resort Management Company, an entity formed by Celebration Associates and Crosland, Inc., that has engaged National Resort Management Group, LLC, a resort management company, to market and operate the resort. Celebration Associates is a developer of mixed-use, master-planned communities and villages, and Crosland, Inc. is a diversified real estate company.

On June 9, 2006, we acquired Raven Golf Club at South Mountain™ in Phoenix, Arizona from Intrawest Golf Holdings, Inc., a subsidiary of Intrawest Corporation, for a purchase price of $12.75 million. The property includes an 18-hole golf course with a practice facility and a 4,600 square-foot clubhouse with a pro shop, locker rooms and a restaurant. We entered into a long-term, triple-net lease with a subsidiary of I.R.I. Golf Group, LLC, a golf course investment and management company, to operate the club.

On May 30, 2006, we acquired the Cypress Mountain ski area in British Columbia, Canada for a purchase price of $27.5 million from a subsidiary of Boyne USA, Inc. The property is located on land owned by the Province of British Columbia, which has issued a permit allowing use and operation of a ski area until 2034. Cypress Mountain will host the freestyle skiing and snowboarding competitions during the 2010 Winter Olympics. The ski area has been consistently ranked as the second most-visited ski resort in British Columbia and features 358 skiable acres, 38 downhill runs, 12 miles of groomed trails, five chairlifts, a base lodge and an elaborate system of multi-purpose trails. The property will benefit from an estimated $10.3 million in improvements expected to be made to the property and paid for by the Vancouver Olympic Committee. The improvements for these events will include the installation of an additional chairlift, snowmaking equipment, an aerial jump site, a mogul course and a snowboard half-pipe. We have entered into a long-term, triple-net lease with a Boyne USA, Inc. subsidiary to operate the ski area.

On April 27, 2006, we acquired Palmetto Hall Plantation Club in Hilton Head, South Carolina for a purchase price of $7.6 million. The property includes two 18-hole golf courses designed by Arthur Hills and Robert Cupp, a 14,000 square-foot clubhouse with a pro shop, a golf maintenance center, two tennis courts and a swimming

pool. We entered into a long-term, triple-net lease with a subsidiary of Heritage Golf Group, LLC, a nationwide owner and operator of golf properties, to operate the club.

Also on April 27, 2006, we acquired the Route 66 Harley-Davidson dealership in Tulsa, Oklahoma for a purchase price of $6.5 million. The 46,000 square-foot facility includes merchandise, parts and service departments, a 50’s-style5 & Diner restaurant and conference and event facilities. The Route 66 Harley-Davidson dealership was named the 2006 Grand Prize Winner among Dealernews Top 100 powersport retailers in the country. We entered into a twenty-year, triple-net lease with Route 66 Real Estate, LLC, the prior owner of the property, to operate the dealership.

On April 21, 2006, we acquired two Hawaiian Falls-branded outdoor waterparks near Dallas, Texas for an aggregate purchase price of $12.1 million. The properties are located in the towns of The Colony and Garland, Texas on municipally owned land. The waterparks feature a variety of slide, tube, wave pool and lazy river attractions, as well as special children’s areas. We entered into long-term, triple-net sub-leases with HFE Horizon, LP, a waterpark owner and operator, to operate the waterparks. HFE Horizon, LP has entered into a licensing and merchandising agreement with Big Idea, Inc. in 2006 for daily appearances at the parks by certain VeggieTales characters.

Our board of directors declared distributions of $0.0458 per share to stockholders of record on April 1, May 1 and June 1, 2006, which were paid by June 30, 2006. Our board of directors also declared distributions of $0.0458 per share to stockholders of record on July 1, 2006 and $0.0466 per share to stockholders of record on August 1, 2006, both of which will be paid by September 30, 2006.

COVER PAGE

The following paragraph updates the legends on the cover page of the prospectus:

We will only use proceeds from this offering for the purposes stated in the “Use of Proceeds” section of the prospectus. Subscription funds will initially be held in an interest-bearing escrow account for our benefit.

THE OFFERING

As of May 31, 2006, we had received subscriptions from this offering of $23.0 million (2,297,712 shares). As of that same date, we had received aggregate offering proceeds totaling $543.7 million in connection with our initial offering and this offering, including $8.2 million for 861,840 shares purchased through our reinvestment plan. This amount excludes $200,000 for 20,000 shares purchased by our Advisor preceding the commencement of the initial offering and $1.2 million for 117,708 restricted common shares issued to CNL Financial Group, Inc. in December 2004.

RISK FACTORS

REAL ESTATEAND OTHER INVESTMENT RISKS

The following risk factorheading is added to the last paragraph on page 20 of the prospectus under the section titled “There are risks associated with lending:”

Borrower defaults may be costly for us due to litigation expenses of recovering funds and the possibility that borrowers are unable to pay their debt to us.

The following risk factor is added after the first full risk factor on page 17 of the prospectus:

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; maintenance of our Investment Company Act exemption imposes limits on our operations. We are not registered as an investment company under the Investment Company Act of 1940, as amended, based on exclusions that we believe are available to us. We have conducted our operations and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We believe that there are a number of exemptions under the Investment Company Act that may be applicable to us.

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If we fail to maintain an exemption or other exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid registering as an investment company or (b) to register as an investment company. If we were registered as an investment company, we would have to comply with a variety of substantive requirements that would:

• place limits on our capital structure;

• impose restrictions on specified investments;

• prohibit transactions with affiliates;

• require us to change the composition of our board of directors; and

• require us to comply with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

In order to maintain our exemption from regulation under the Investment Company Act, we must engage primarily in the business of buying real estate assets or real estate related assets. These investments must be made within a year after the offering ends. If we are unable to invest a significant portion of the proceeds of this offering in real estate assets within one year of terminating the offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns. Doing so would likely reduce the cash available for distribution to you.

Further, to maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. To avoid regulation as an investment company, we must be engaged primarily in a business other than that of owning, holding, trading or investing in securities. We may invest in assets that are determined to be securities rather than interests in, or liens upon, real estate. If a sufficient amount of our assets were determined to be securities instead of interests in, or liens upon, real estate, we would be required to register as an investment company.

If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business. Also, because affiliate transactions are prohibited under the Investment Company Act, failure to maintain our exemption would force us to terminate our Advisory Agreement and all other agreements with affiliates. Any of these results would be likely to have a material adverse effect on our business, our financial results and our ability to make distributions to stockholders.

The following risk factor is added after the first full risk factor on page 19 of the prospectus.

Compliance with the Americans with Disabilities Act may reduce our expected distributions. Under the Americans with Disabilities Act, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we intend to acquire properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.

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The following risk factor is added on page 23 of the prospectus:

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.Terrorist attacks may negatively affect our operations and your investment. We may acquire real estate assets located in areas that are susceptible to attack. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.

More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy, all of which could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

BUSINESS

PROPERTY ACQUISITIONS

The following information updates and replaces the first two sentences in the section relating to “Merchandise Marts” under the heading “Dallas Market Center Property” beginning on page 67 of the prospectus:

Dallas Market Center Property

Through a partnership with the Dallas Market Center (“DMC”), a Dallas company affiliated with Crow Holdings, Inc., we own an 80% interest in the Dallas Market Center (the “DMC Partnership”). We acquired our initial interest in the DMC Partnership and the Dallas Market Center through a series of three investments contributing approximately $71.1 million in equity.

The following information updates and replaces the first sentence in the section relating to “Destination Retail and Entertainment Centers” under the heading “Intrawest Resort Village Properties” beginning on page 69 of the prospectus:

Intrawest Resort Village Properties

In December 2004, we acquired an 80% interest, through unconsolidated entities (the “Intrawest Partnership”), and invested approximately $41.9 million in retail and commercial properties at seven resort villages in the U.S. and Canada (the “Resort Village Properties”), six of which are located near ski resorts and one of which is located near a beach and golf resort.

The following table replaces the table on pages 76 and 77 of the prospectus:

The following table presents the historical operating data of the Resort Village Properties including average occupancy rates and effective annual rents per square foot for the past five years or the period during which the property has been in operation, whichever is longer.

Location	Fiscal year (1)	Average occupancy rate		Effective annual rent per square foot(2)
Blue Mountain	2005	97	%	$	30.60	(3)
	2004	95	%		19.87	(3)
	2003	100	%		23.73	(3)
	2002	—	(4)		—	(4)

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Location	Fiscal year (1)	Average occupancy rate		Effective annual rent per square foot(2)
Whistler Creekside	2005	93	%	$	31.15	(3)
	2004	86	%		8.46	(3)(5)
	2003	100	%		—	(5)
	2002	100	%		—	(5)
	2001	100	%		—	(5)
Copper(6)	2005	94	%	$	18.93
	2004	73	%		18.42
	2003	82	%		19.94
	2002	81	%		15.21
Mammoth	2005	95	%	$	37.15
	2004	86	%		25.40
	2003	0	%		—	(7)
Sandestin(8)	2005	100	%	$	25.19
	2004	100	%		36.24
	2003	100	%		20.54
	2002	0	%		—	(8)
Snowshoe	2005	95	%	$	25.34
	2004	86	%		22.22
	2003	83	%		21.72
	2002	91	%		21.50
	2001	91	%		—
Stratton	2005	99	%	$	19.72
	2004	100	%		25.35
	2003	100	%		15.97
	2002	100	%		21.55
	2001	100	%		10.67

FOOTNOTES:

(1) Data presented for 2005 is for the calendar year ended December 31 and data presented for 2001-2004 is for fiscal year ended June 30.

(2) The effective annual rent per square foot for each Resort Village Property was calculated by dividing the total annual rent by the total leasable square footage in the Resort Village Property at year end (including vacant spaces), subject to adjustment per notes 1, and 4-6.

(3) Amount converted from Canadian dollars to U.S. dollars as of the applicable year-end date. The exchange rate at December 31, 2005 was $0.858 Canadian dollars for $1.00 U.S. dollar. The exchange rate at June 30, 2004 was $0.744 Canadian dollars for $1.00 U.S. dollar. The exchange rate at June 30, 2003 was $0.743 Canadian dollars for $1.00 U.S. dollar.

(4) Construction of the first building was completed in fiscal year 2002; however, no tenants occupied the space until fiscal year 2003. A new building was completed during fiscal year 2003 and was under lease-up during fiscal year 2004.

(5) The annual revenue used to calculate the effective annual rent per square foot does not reflect rent for Intrawest and its related party tenants who were not charged rent during the periods prior to the sale of the Canadian Resort Village Properties. The occupancy rate, however, reflects the occupancy of all commercial space at Whistler Creekside that is included in this transaction, including commercial space occupied by Intrawest and its affiliates.

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(6) Annual revenue used to calculate the effective annual rent per square foot does not reflect rent for Intrawest and its related party tenants who were not charged rent during the periods prior to the sale of the U.S. Resort Village Properties. The underlying square footage data used to calculate the occupancy excludes the retail and commercial space occupied by Intrawest and its related party tenants who were not charged rent.

(7) Construction of the retail and commercial space was completed in fiscal year 2003; however, no tenants occupied the space until fiscal year 2004.

(8) Construction of the retail and commercial space was completed on the first building in fiscal year 2002; however, no tenants occupied the space until fiscal year 2003.

The fifth paragraph on page 78 of the “Other Attractions” section of the prospectus is deleted.

The following information supplements the Property Acquisitions section, which begins on page 67 of the prospectus:

SKI PROPERTIES

Cypress Mountain

On May 30, 2006, we acquired the Cypress Mountain ski area in British Columbia, Canada (the “Cypress Mountain Property”) for a purchase price of $27.5 million from Cypress Bowl Recreations Limited Partnership (“Boyne – Cypress”), a subsidiary of Boyne USA, Inc. (“Boyne”). The property is located approximately 13 miles north of Vancouver, British Columbia and 42 miles from the U.S./Canadian border on land owned by the Province of British Columbia, which has issued a permit allowing use and operation of a ski area until 2034. Due to certain legal and tax requirements, we acquired the land permit and real property at the Cypress Mountain Property through a trust (the “Trust”) and the personal property assets through a separately capitalized Canadian entity (the “Personal Property Owner”). Boyne has the option to repurchase the property at a price that will result in a fixed return to us. The option is exercisable by Boyne beginning in the seventh year through the 25th year following the acquisition.

Cypress Mountain will host the freestyle skiing and snowboarding competitions during the 2010 Winter Olympics. Consistently ranked the second most-visited ski resort in British Columbia, the property features 38 downhill runs, five chairlifts, a base lodge and an elaborate system of multi-purpose trails. Cypress Mountain has an average annual snowfall of 20 feet, 358 skiable acres and a vertical rise of 1,712 feet. The ski area offers downhill skiing, snowboarding and cross-country skiing activities for more than 2,000 skiers per day on 12 miles of groomed trails. The Cypress Mountain Property, which is primarily a family-oriented, day-ski venue, offers night skiing/riding, snowsport instruction, a cafeteria, lounge facilities and an equipment retail, rental and repair shop. The property will benefit from an estimated $10.3 million in improvements expected to be made to the property and paid for by the Vancouver Olympic Committee. The improvements for these events will include the installation of an additional chairlift, snowmaking equipment, an aerial jump site, a mogul course and a snowboard half-pipe.

The approximate federal income tax basis of the depreciable portion of the property is $27,500,000. We believe the property is adequately insured, and there are currently no major capital expenditures, other than the Olympic improvements, planned for the ski area.

Leases. At the time of the acquisition, the Trust and the Personal Property Owner each entered into long-term, triple-net leases with Boyne – Cypress as tenant. Each of the leases has a term of 20 years with four 5-year renewal options and is cross-defaulted with the lease covering the Gatlinburg Sky Lift Property. The combined minimum annual rent in the initial year is annualized at approximately $2.9 million and will increase during the term of the lease to a maximum of $3.7 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. These U.S. dollar amounts have been converted from Canadian dollars based on an exchange rate of $0.907 per $1.00 U.S dollar as of June 2, 2006. Boyne has guaranteed the tenant’s payment of minimum annual rent under the leases for the first four years. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.”

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The following table contains information on historical ski revenue for the Cypress Mountain Property.

Season	Revenue per skier
2004-2005	$	61.81
2003-2004	$	45.95
2002-2003	$	51.29

Boyne USA, Inc. For information on this operator, see the section entitled Business-Property Acquisitions-Other Attractions-Gatlinburg Sky Lift Attraction-Boyne USA, Inc.” on page 82 of the prospectus.

Competition.Cypress Mountain is located in British Columbia and generally competes with 36 other ski and snowboard areas. Whistler and Blackcomb Mountains, Grouse Mountain and Mount Seymour are the closest in proximity to Cypress Mountain. Whistler and Blackcomb Mountains are located two hours from Vancouver, British Columbia. Whistler Mountain has an average annual snowfall of 30 feet, 4,757 skiable acres, over 100 trails, eight restaurants, a peak elevation of 7,160 feet and 16 chairlifts. Blackcomb Mountain has an average annual snowfall of 30 feet, 3,414 skiable acres, over 100 trails, nine restaurants, a peak elevation of 7,494 feet and 17 chairlifts. In addition, Grouse Mountain and Mount Seymour, located 15 minutes from downtown Vancouver, compete directly with Cypress Mountain for day-skier visits. Grouse Mountain offers a summit elevation of 4,100 feet, a vertical drop of 1,260 feet, 212 skiable acres, nine chairlifts, 24 trails and has an average annual snowfall of ten feet. Mount Seymour has a summit elevation of 4,134 feet, a vertical drop of 1,115 feet, 600 skiable acres, 5 chairlifts, 24 trails and an average annual snowfall of over 14 feet.

Bretton Woods Resort

On June 23, 2006 (the “Closing Date”), we acquired the Bretton Woods Mountain Resort, a ski destination located in northern New Hampshire (the “Bretton Woods Property”), from MWH Preservation Limited Partnership (“MWH”) for a purchase price of $45.0 million, excluding closing costs. We paid $38.5 million of the purchase price on the Closing Date and issued a note for $6.5 million bearing interest at 5.8% per annum due on the fourth anniversary of the Closing Date. The total amount anticipated to be due to MWH on the fourth anniversary of the Closing Date is $8.0 million.

The Bretton Woods Property includes the Bretton Woods Ski Area, the Bretton Woods Ski Lodge, tennis facilities, the four-season National Historic Landmark Mount Washington Hotel, The Bretton Arms Country Inn, The Lodge at Bretton Woods and a freestanding 4,500 square-foot restaurant. The Bretton Woods Ski Area includes 434 skiable acres, 62 miles of groomed trails and 9 chairlifts. The lodging facilities on the property provide a total of 284 rooms. BW Land Holdings, LLC (“BW Holdings”), an entity formed by Celebration Associates and Crosland, Inc., acquired the remaining 900 acres of the resort, which includes two golf courses, equine stables, the Nordic Ski Center, utilities and undeveloped land that may allow for the future development of real estate units and other amenities (the “BW Holdings Property”). BW Holdings has agreed to give us a right of first offer to purchase any portion of commercially developed BW Holdings Property prior to marketing it for sale.

The approximate federal income tax basis of the depreciable portion of the Bretton Woods Property is $40,500,000. We believe the Bretton Woods Property is adequately insured, and we have agreed to fund an additional $17.5 million for improvements to be made to the property over the next three years.

Lease.We have entered into two long-term, triple-net leases with BW Resort Management Company, an entity formed by Celebration Associates and Crosland, Inc., that has engaged National Resort Management Group, LLC, a resort management company, to market and operate the Bretton Woods Property. Celebration Associates is a developer of mixed-use, master-planned communities and villages, and Crosland, Inc. is a diversified real estate company. The leases each have a term of 10 years with four 5-year renewal options. The combined minimum annual rent in the initial year is approximately $3.3 million and will increase during the term of the lease to a maximum of $4.5 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property net cash flow. Crosland, Inc. has guaranteed the payment of all rent up to a total amount $5.0 million for the first four years of the lease period. The general terms of the lease are described in the section of the prospectus entitled “Business – Description of Property Leases.”

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The following table contains information on historical ski revenue for the Bretton Woods Property.

Season	Revenue per skier
2004-2005	$	51.28
2003-2004	$	48.18
2002-2003	$	47.11

The following table contains information on the historical average occupancy rates, ADR and RevPar for the Bretton Woods Property. See description of RevPAR in the “Other Attractions – Great Wolf Waterpark Resorts” section that begins on page 78 of the prospectus.

Year	Average occupancy rate		ADR		RevPar
2005	47.8	%	$	191.63	$	91.60
2004	46.2	%	$	183.84	$	84.93

Celebration Associates & Crosland, Inc. Celebration Associates is a nationally recognized developer and operator of award-winning, master-planned, mixed-use communities and villages. Crosland, Inc. is one of the Southeast’s leading and most diversified real estate companies. Prior to our making a commitment to acquire the Bretton Woods Property, none of Celebration Associates, Crosland nor their subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.

Competition. Stratton Mountain, Stowe Mountain, Loon Mountain, and Waterville Valley are the closest competitors in terms of similarity of product and experience within a 150-mile radius. While not a destination ski area, Mount Wachusett is also a competitor of Bretton Woods Mountain Resort for the Boston ski market and is located one hour outside of Boston. The lodging operations at the Bretton Woods Resort currently compete regionally with non-ski resort properties such as The Balsams, Wentworth by the Sea, Woodstock Inn, Equinox Resort & Spa and The Sagamore.

GOLF COURSES

Palmetto Hall Plantation Club

On April 27, 2006, we acquired Palmetto Hall Plantation Club in Hilton Head, South Carolina (the “Palmetto Hall Property”) for a purchase price of $7.6 million. The property includes two 18-hole golf courses designed by Arthur Hills and Robert Cupp, a 14,000 square-foot clubhouse with a pro shop, a golf maintenance center, two tennis courts and a swimming pool.

The approximate federal income tax basis of the depreciable portion (the building and equipment portion) of the property is $6,840,000. We believe the property is adequately insured, and there are currently no major capital expenditures planned for the golf courses.

Lease. At the time of the acquisition, we entered into a long-term, triple-net lease with a subsidiary of Heritage Golf Group, LLC, a nationwide owner and operator of golf properties (“Heritage”), to operate the property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent in the initial year is approximately $640,000, increasing during the term of the lease to approximately $720,000. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease are described in the section of the prospectus entitled “Business – Description of Property Leases.”

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The following table contains information on historical golf revenue for the Palmetto Hall Property.

Year	Revenue per round
2005	$	99.15
2004	$	85.98
2003	$	87.74

Heritage Golf Group, LLC. Heritage began operations in 1999. The company has acquired and developed a portfolio of well-known and acclaimed high-end, daily fee, resort and private golf facilities in California, Texas, Georgia, Florida, and South Carolina. Heritage currently operates 99 of the 261 holes available for public play on Hilton Head Island. Prior to our acquisition of the Palmetto Hall Property, neither Heritage nor its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.

Competition. There are currently 24 golf courses located on Hilton Head Island and more than half of these courses are available for public play, including Palmetto Hall Plantation Club. There are 22 other golf courses located in the nearby off-Island area.

Raven Golf Club at South Mountain™

On June 9, 2006, we acquired Raven Golf Club at South Mountain™ in Phoenix, Arizona (the “South Mountain Property”) from Intrawest Golf Holdings, Inc., a subsidiary of Intrawest Corporation, for a purchase price of $12.75 million. The property, which was built in 1995 on 160 acres, includes an 18-hole golf course with a practice facility and a 4,600 square-foot clubhouse with a pro shop, locker room and a restaurant. We have licensed the use of the Raven brand from Intrawest for uses specific to this property for up to four years.

The approximate federal income tax basis of the depreciable portion of the property is $7,175,000. We believe the property is adequately insured. We have agreed to invest approximately $500,000 in improvements to the property.

Lease. At the time of acquisition, we entered into a long-term, triple-net lease with a subsidiary of I.R.I. Golf Group, LLC, a golf course investment and management company (“IRI”), to operate the property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent in the initial year is approximately $1.1 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreement are described in the section of the prospectus entitled “Business – Description of Property Leases.”

The following table contains information on historical golf revenue for the South Mountain Property.

Year	Revenue per round
2005	$	82.12
2004	$	78.60
2003	$	80.96

I.R.I. Golf Group, LLC. IRI was founded in 1991 by Jeff Silverstein. Since 1996, IRI has broadened its geographical scope in the Southwest, developing four facilities in Texas and Nevada. I.R.I. has extensive golf management experience, owning and operating 19 golf facilities in Arizona, Nevada, North Carolina, South Carolina, Texas and Washington. Prior to the consummation of our acquisition of the South Mountain Property, neither IRI nor its subsidiaries nor affiliates was related to us, affiliated with us or a partner in our business.

Competition. The Phoenix metropolitan area has more than 200 golf courses. The South Mountain course competes with a limited number of high-end, daily-fee golf courses located near downtown Phoenix. The property’s

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two principal competitors are the Legacy Golf Resort and Whirlwind Golf Club, which charge similar rates per round to the South Mountain course. The other nearby courses charge lower rates per round.

DEALERSHIPS

Route 66 Harley-Davidson Dealership

On April 27, 2006, we acquired the Route 66 Harley-Davidson dealership in Tulsa, Oklahoma (the “Route 66 Harley-Davidson Property”) from Route 66 Real Estate, LLC for a purchase price of $6.5 million. The 46,000 square-foot facility includes merchandise, parts and service departments, a 50’s-style5 & Diner restaurant and conference and event facilities. The Route 66 Harley-Davidson dealership was named the 2006 Grand Prize Winner among Dealernews Top 100 powersport retailers in the country.

The approximate federal income tax basis of the depreciable portion of the property is $5,850,000. We believe the property is adequately insured, and there are currently no major capital expenditures planned for the dealership.

Lease. At the time of the acquisition, we entered into a long-term, triple-net lease with Route 66 Real Estate, LLC to operate the property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent in the initial year is approximately $560,000, increasing during the term of the lease to approximately $1.0 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreement are described in the section of the prospectus entitled “Business – Description of Property Leases.”

The following table contains historical total revenue for the Route 66 Harley-Davidson Dealership Property.

Year	Revenue (millions)
2005	$	15.1
2004	$	12.5
2003	$	10.7

Route 66 Real Estate, LLC. Route 66 Real Estate, LLC acquired the Harley-Davidson dealership in December of 1998. The dealership was re-branded with Route 66 as a new prototype dealership. Route 66 Real Estate, LLC is owned by Dr. Larry Wofford, a former Professor of Finance and Real Estate at the University of Tulsa. Prior to our acquisition of the Route 66 Harley-Davidson Property, neither Route 66 Real Estate, LLC nor its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.

Competition.The Route 66 Harley-Davidson dealership in Tulsa competes directly with one other Harley-Davidson dealership and two Honda dealerships. The competing Harley-Davidson dealership, Myers-Duren Harley-Davidson, is of similar size to the Route 66 Harley-Davidson dealership, but it does not have a restaurant and its revenues are driven primarily from motorcycle sales and servicing. Nationally, Honda is generally recognized as the biggest Harley-Davidson competitor in the big-twin motorcycle category, a style of motorcycle for which Harley-Davidson is most known. Also competing indirectly with the Route 66 Harley-Davidson dealership are two Kawasaki dealerships and two Suzuki dealerships, both of which are within 12 miles of Tulsa. There is also a Big Dog Motorcycles dealership in Tulsa that may impact the local market. Big Dog Motorcycles is a relatively new manufacturer that mass-produces specialized custom-look, big-twin motorcycles.

OTHER ATTRACTIONS

Hawaiian Falls Waterparks

On April 21, 2006, we acquired two Hawaiian Falls-branded outdoor waterparks near Dallas, Texas for an aggregate purchase price of $12.1 million. The properties are located in the towns of The Colony and Garland, Texas on municipally owned land. The waterparks feature a variety of slide, tube, wave pool and lazy river attractions, as well as special children’s areas. We entered into long-term, triple-net sub-leases with HFE Horizon,

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LP (“HFE Horizon”) to operate the waterparks. HFE Horizon, LP has entered into a licensing and merchandising agreement with Big Idea, Inc. in 2006 for daily appearances at the parks by certain VeggieTales characters.

The Hawaiian Falls in The Colony, Texas (the “Hawaiian Falls Colony Property”) is located on 7.5 acres 30 miles north of Dallas. The waterpark opened in May of 2004 and operates from May through September each year, recording over 152,000 visitors in 2005. The population within a 15-mile radius of the property, which includes the Texas cities of Plano, Frisco, Addison, Lewisville, Carrolton and Little Elm, is estimated to be 1.46 million. The property operates under a ground lease with the local municipality that expires in December 2043 and has two 5-year extension options.

The Hawaiian Falls in Garland, Texas (the “Hawaiian Falls Garland Property”) is located on 10 acres of the 129-acre W. Cecil Winters Regional Park, 15 miles north of Dallas. The waterpark opened in May of 2003 and operates from May through September each year, and recorded approximately 138,000 visitors in 2005. The population within a 15-mile radius of the property is estimated to be 2.02 million. The property operates under a ground lease with the local municipality that expires in May 2033.

The approximate federal income tax basis of the depreciable portion of the Hawaiian Falls Colony Property is $5,820,000. The approximate federal income tax basis of the depreciable portion of the Hawaiian Falls Garland Property is $6,305,000. We believe the properties are adequately insured, and there are currently no major capital expenditures planned for the waterparks.

Leases. At the time of the acquisition, we entered into two long-term, triple-net sub-leases with HFE Horizon to operate the properties. The leases each have a term of 27 years with no renewal options. The minimum annual rent for the Hawaiian Falls Colony Property is approximately $570,000 in the initial year, increasing during the term of the lease to approximately $640,000. The minimum annual rent for the Hawaiian Falls Garland Property is approximately $615,000 in the initial year, increasing during the term of the lease to approximately $700,000. Total percent rent in each lease is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.”

The following table contains information on historical attendance and revenue for the Hawaiian Falls Colony Property.

Year	Revenue per capita
2005	$	13.82
2004(1)	$	14.64

FOOTNOTES:

(1) Property opened late in season 2004.

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The following table contains information on historical attendance and revenue for the Hawaiian Falls Garland Property.

Year	Revenue per capita
2005	$	14.52
2004	$	14.96
2003(1)	$	14.84

FOOTNOTES:

(1) Property opened late in 2003.

HFE Horizon, LP. HFE Horizon, formerly a division of Herschend Family Entertainment (“HFE”), focuses its business on micro-waterparks. The principals of HFE Horizon have been involved in the ownership and operation of theme parks, waterparks and family entertainment centers since 1972. Prior to our acquisition of the waterparks, neither HFE Horizon nor its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.

Competition.Nationally, Palace Entertainment and Six Flags waterparks compete with smaller waterparks such as the Hawaiian Falls Colony Property and the Hawaiian Falls Garland Property. Locally, the Dallas-Fort Worth summer entertainment market for visitors and residents is served primarily by regional waterparks including Water Works Waterpark, Wet Zone and NRH2O Waterpark, which compete with the properties. The major amusement park in the area is Six Flags Over Texas and its Six Flags Hurricane Harbor waterpark, which competes directly with the properties in the Dallas market.

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SELECTED FINANCIAL DATA

The following selected financial data for CNL Income Properties replaces the Selected Financial Data charts beginning on page 100 of the prospectus and should be read in conjunction with “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” commencing on page 102 and the Financial Information commencing on page F-1:

	Quarter Ended March 31,						Year Ended December 31,
	2006			2005(1)			2005(1)			2004(1)			2003(1)
Operating Data:
Revenues	$	1,266,467		$	—		$	226,666		$	—		$	—
Operating loss		(1,007,041	)		(847,746	)		(4,983,770	)		(1,280,470	)		—
Net income (loss)		4,278,563			992,168			6,583,431			(683,263	)		—
Net income (loss) per share		0.10			0.09			0.33			(0.17	)		—
Weighted average number of shares outstanding (basic and diluted)		44,318,153			10,775,650			19,795,649			4,075,979			20,000
Cash distributions declared and paid(2)		5,813,301			1,280,706			10,096,429			1,172,688			—
Cash distributions declared and paid per share(2)		0.14			0.13			0.54			0.26			—
Cash provided by (used in) operating activities		4,244,468			140,519			4,616,474			754,656			(199,000	)
Cash used in investing activities		21,662,041			64,043,135			199,063,392			41,780,499			—
Cash provided by financing activities		125,022,585			40,944,658			251,541,482			77,734,960			200,000
	Quarter Ended March 31,						Year Ended December 31,
	2006			2005(1)			2005(1)			2004(1)			2003(1)
Balance Sheet Data:
Real estate investment properties	$	20,783,247		$	—		$	20,952,902		$	—		$	—
Investment in unconsolidated entities		170,696,589			110,158,446			207,150,838			41,913,212			—
Mortgages and other notes receivable		56,472,143			—			3,000,000			—			—
Cash		201,409,693			13,752,159			93,804,681			36,710,117			1,000
Total assets		467,617,428			132,295,810			336,795,107			85,956,427			1,311,797
Total liabilities		19,726,455			19,537,495			12,163,277			11,004,049			1,111,797
Stockholders’ equity		447,890,973			112,758,315			324,631,830			74,952,378			200,000
Other Data:
Funds from operations (“FFO”)(3)		6,770,992			1,743,929			14,170,298			(579,129	)		—
FFO per share		0.15			0.16			0.72			(0.14	)		—
Properties owned by unconsolidated entities at end of period		10			8			10			7			—
Properties owned directly at end of period		1			—			1			—			—
Investments in mortgages and other notes receivable at end of period		4			—			1			—			—

FOOTNOTES:

(1) Operations commenced on June 23, 2004 when we received minimum offering proceeds of $2.5 million and funds were released from escrow. We completed our first investment in December 2004. The results of operations for the years ended December 31, 2005 and 2004 are not necessarily indicative of future performance due to the limited time during which we were operational, our incurrence of organizational costs, and having not completed our first investment until December 2004. The results from operations for the quarter ended March 31, 2005 includes equity in earnings of our unconsolidated entities, interest income and general operating and administrative expense. Selected financial data for 2003 covers the period August 11, 2003 (date of inception) through December 31, 2003.

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(2) Cash distributions are declared by the board of directors and generally are based on various factors, including expected and actual net cash from operations and our general financial condition, among others. Approximately, 93.3%, 8.5%, 51.9%, 24.0% and 0.0% of the distributions received by stockholders were considered to be ordinary income and approximately 6.7%, 91.5%, 48.1%, 76.0% and 0.0% were considered a return of capital for federal income tax purpose for the quarter ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003, respectively. We have not treated such amounts as a return of capital for purposes of calculating the stockholders’ return on their invested capital.

(3) We consider funds from operations (“FFO”) to be an indicative measure of operating performance due to the significant effect of depreciation of real estate assets on net income. FFO, based on the revised definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and as used herein, means net income determined in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. We believe that by excluding the effect of depreciation and amortization, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO (i) does not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income); (ii) is not necessarily indicative of cash flow available to fund cash needs; and (iii) should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO as presented may not be comparable to amounts calculated by other companies. Accordingly, we believe that in order to facilitate a clear understanding of the consolidated historical operating results, FFO should be considered in conjunction with our net income as reported in the accompanying consolidated financial statements and notes thereto.

Reconciliation of net income (loss) to FFO for the quarter ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003:

	Quarter End March 31,						Year Ended December 31,
	2006			2005			2005			2004			2003
Net income (loss)	$	4,278,563		$	992,168		$	6,583,431		$	(683,263	)	$	—
Adjustments:
Depreciation and amortization		169,655			—			17,224			—			—
Equity in earnings of unconsolidated entities		(3,963,868	)		(1,652,997	)		(10,289,841	)		(218,466	)		—
Pro-rata share of FFO from unconsolidated entities(a)		6,286,642			2,404,758			17,859,484			322,600			—
Total funds from operations	$	6,770,992		$	1,743,929		$	14,170,298		$	(579,129	)	$	—
Weighted average number of shares of common stock outstanding (basic and diluted)		44,318,153			10,775,650			19,795,649			4,075,979			20,000
FFO per share (basic and diluted)	$	0.15		$	0.16		$	0.72		$	(0.14	)	$	—

FOOTNOTE:

(a) In calculating our pro-rata share of FFO from unconsolidated entities, we first calculate FFO independently for each unconsolidated entity. We then determine our share of the FFO from each unconsolidated entity by multiplying the FFO for each such entity by the percentage of income that we recognize in our equity in earnings from the unconsolidated entity during the reporting period. The percentage of income that we recognize as equity in earnings for each unconsolidated entity is determined using the Hypothetical Liquidation at Book Value method of accounting.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis relates to the three months ended March 31, 2006 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 102 of the prospectus:

INTRODUCTION

The following discussion is based on the condensed consolidated financial statements as of March 31, 2006 and December 31, 2005 and for the quarters ended March 31, 2006 and 2005. Amounts as of December 31, 2005 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

STATEMENTREGARDINGFORWARDLOOKINGINFORMATION

The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as “may,” “will,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: conditions affecting the CNL brand name, increased direct competition, changes in general economic conditions, changes in government regulations, changes in local and national real estate conditions, terrorism, extended U.S. military combat operations, our ability to obtain additional lines of credit or permanent financing on satisfactory terms, availability of proceeds from our offering of shares changes in interest rates, our ability to identify suitable investments, our ability to close on identified investments, inaccuracies of our accounting estimates, our ability to locate suitable tenants and operators for our properties and borrowers for mortgage loans, and the ability of such tenants and borrowers to make payments under their respective leases or mortgage loans. Given these uncertainties, we caution you not to place undue reliance on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

GENERAL

CNL Income Properties, Inc. was organized pursuant to the laws of the State of Maryland on August 11, 2003. We were formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20 years, plus multiple renewal options), triple-net or gross basis to tenants or operators who are significant industry leaders. We may also make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments related to interests in real estate and may purchase equity and other interests in financings. We currently operate and have elected to be taxed as a real estate investment trust (a “REIT”) for federal income tax purposes beginning with the taxable year ended December 31, 2004. We have retained CNL Income Corp. (the “Advisor”) as our advisor to provide management, acquisition, advisory and administrative services.

Beginning on April 16, 2004, we offered for sale up to $2.0 billion in shares of common stock (200 million shares of common stock at $10 per share) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended. We commenced active operations on June 23, 2004, when the minimum required offering proceeds were received and funds were released to us from escrow. The activities from August 11, 2003 (our inception) through June 23, 2004 were devoted to the organization of the company. As of March 31, 2006, we had received aggregate offering proceeds of approximately $520.7 million (52,108,344 shares) from 17,596 investors in connection with the inital offering, including approximately $8.2 million (861,879 shares) purchased through our distribution reinvestment plan. The shares sold and the gross offering proceeds received from such sales do not include the 20,000 shares purchased by the Advisor for $200,000 preceding the commencement of the initial offering or the $1.2 million (117,708 restricted common shares) issued in December 2004 to CNL Financial Group, Inc., a company affiliated with our Advisor and wholly-owned indirectly by our chairman of the board and his wife. As of

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March 31, 2006, we had also redeemed 50,664 shares at approximately $9.48 per share for a total of $480,164. We have and will continue to use proceeds from the initial offering to invest in properties, loans and other permitted investments.

On September 29, 2005, in anticipation of the end of our initial offering, we filed a registration statement on Form S-11 under the Securities Act of 1933, as amended. On March 31, 2006, we stopped selling shares of our common stock from the initial offering in preparation for this offering of $2.0 billion in shares of common stock (200 million shares of common stock at $10.00 per share) including up to $47.5 million in shares of common stock (5 million shares of common stock at $9.50) available for sale under the terms of our distribution reinvestment plan. On April 4, 2006, the registration statement was declared effective and we began selling shares of common stock under this offering.

We have and will continue to focus our investment activities on and use the proceeds of our offerings primarily for the acquisition, development and ownership of lifestyle properties that we believe:

• Are part of an asset class wherein the supply of developed, specific-use real estate is greater than the demand for the intended use of such real estate;

• Where a change in operational control is anticipated to improve value;

• Are part of an industry that is experiencing constraints on the availability of new capital, which we believe typically has the effect of lowering the purchase price of such properties; and/or

• Have the potential for long-term revenue generation based upon certain demographic data including an aging baby boomer population and associated concentrations of wealth.

We have invested in or intend to invest in properties in the following asset classes (in no order of priority):

• Dealership properties including, for example, automobile, motorcycle, recreational vehicle and boat dealerships;

• Campgrounds, recreational vehicle (“RV”) parks that rent lots and offer other services;

• Health clubs, athletic training facilities, wellness centers and spa facilities;

• Parking lots with monthly and daily parking space rentals in urban areas;

• Merchandise marts with showrooms and host tradeshows for merchandise manufacturers and wholesalers in major metropolitan areas;

• Destination retail and entertainment centers, that develop and lease properties featuring entertainment-oriented stores, restaurants and/or attractions;

• Marinas that offer recreational boat slip rentals and other services;

• Ski resorts, including real estate in and around ski resorts such as ski-in/ski-out alpine villages, townhouses, lodging and other related properties;

• Golf courses and golf resorts, including real estate in and around golf courses and golf resorts, such as retail villages, townhouses, lodges and other related properties;

• Amusement parks, waterparks and family entertainment centers, which may include lodging facilities;

• Real estate in and around lifestyle communities;

• Vacation ownership interests, which entitle a purchaser of the interests to exclusive use of resort accommodations at a resort property or properties for a particular period of time each year; and

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• Other attractions, such as sports-related venues and cultural facilities such as visual and performing arts centers, zoological parks or aquariums.

Although these are the asset classes in which we have invested or intend to invest in, we may acquire or invest in other types of properties which are not listed above that we believe have the potential for long-term revenue generation based upon underwriting criteria and models that we have developed and/or certain demographic criteria as described above.

We have elected to be taxed as a REIT for federal income tax purposes. As a REIT we generally will not be subject to federal income tax on income that we distribute annually to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is lost. Such an event could materially and adversely affect our net income, cash flows and our ability to make distributions to stockholders. However, we believe that we are organized and have operated in a manner to qualify for treatment as a REIT beginning with the year ended December 31, 2004. In addition, we intend to continue to be organized and to operate so as to remain qualified as a REIT for federal income tax purposes.

LIQUIDITYAND CAPITAL RESOURCES

General

Our principal demand for funds will be for property acquisitions, loans and other permitted investments and the payment of operating expenses and distributions to stockholders. Generally, our cash needs for items other than property acquisitions will be generated from operations, our investments or advances from affiliates, although our affiliates are not obligated to advance such funds. We have also entered into a revolving line of credit with a capacity of $20.0 million, which we use to bridge short-term liquidity needs that arise due to timing of cash receipts and payments.

We intend to continue to acquire properties, make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments with proceeds from our public offerings and permanent debt financing to be obtained. If sufficient capital is not raised, it would limit our ability to acquire additional properties, make or acquire loans or permitted investments. This could impact our ability to pay distributions or raise the distribution rate due to our limited income from operations, unless we choose to borrow to do so. Our ability to acquire properties is in part dependent upon our ability to locate and contract with suitable third-party tenants. The inability to locate suitable tenants may delay our ability to acquire certain properties. Not only are we experiencing increased competition in our targeted asset classes, we are also challenged due to the complex and expensive structures we must use to acquire properties due to the tax and legal requirements of being a REIT. Delays in acquiring properties or making or acquiring loans with the capital raised from our common stock offering dilute our ability to pay distributions to our existing stockholders.

We intend to continue to pay distributions to our stockholders on a quarterly basis. Operating cash flows are expected to be generated from properties, loans and other permitted investments to cover such distributions. In the event we are unable to acquire properties at the pace expected, we may not be able to continue to pay distributions to stockholders or may need to reduce the distribution rate or borrow to continue paying distributions, all of which may negatively impact a stockholder’s investment in the long term.

We believe that our current and anticipated capital resources, including cash on hand and the availability of funds from our line of credit are sufficient to meet our liquidity needs for the coming year.

Common Stock

As of March 31, 2006, we had received subscription proceeds in connection with our initial offering of approximately $520.7 million (52,108,344 shares) from 17,596 investors, excluding the 20,000 shares purchased by the Advisor for $200,000 preceding the commencement of our initial offering, the $1.2 million (117,708 restricted common shares) issued in December 2004 to CNL Financial Group, Inc., a company affiliated with our Advisor and wholly owned indirectly by our chairman of the board and his wife. As of March 31, 2006, we had also redeemed 50,664 shares at approximately $9.48 per share for a total of approximately $480,164. For the quarter ended March

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31, 2006, we received subscription proceeds in connection with our initial offering of approximately $142.9 million (14,243,502 shares) and raised an average of approximately $47.6 million per month during the quarter ended March 31, 2006. During the period April 1, 2006 through May 4, 2006, we received additional subscription proceeds of approximately $1.6 million (161,036 shares) in this offering. We primarily use the capital we raise to acquire properties, make or acquire loans and make other permitted investments and to pay fees and expenses in connection with our stock offerings and acquisitions.

Investments in and Distributions from Unconsolidated Entities

As of March 31, 2006, we had invested in properties at ten locations through our unconsolidated entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities. During the quarters ended March 31, 2006 and 2005, we received operating distributions of approximately $4.3 million and $0, respectively, from the operation of these entities. These distributions are generally received within 45 days after each quarter end. Distributions receivable from our unconsolidated entities as of March 31, 2006 and December 31, 2005 were approximately $5.4 million and $4.9 million, respectively.

Additionally, on March 1, 2006, the Wolf Partnership closed on a previously announced $63.0 million mortgage financing on two properties owned in a joint venture with Great Wolf Resorts, Inc. Pursuant to the Wolf Partnership agreement, we received approximately 70.0% of the net loan proceeds from the financing or approximately $43.5 million.

Borrowings

We intend to borrow money to acquire assets and to pay certain related fees. We have, and may continue to borrow money to pay distributions to stockholders. We also intend to encumber assets in connection with such borrowings. In general, the aggregate amount of permanent financing is not expected to exceed 50% of our total assets on an annual basis, however, it may likely exceed 50% for a limited period in our early acquisition stage. The maximum amount we may borrow is 300% of our net assets in the absence of a satisfactory showing that a higher level of borrowing is appropriate. In order to borrow an amount in excess of 300% of our net assets, a majority of the independent members of our board of directors must approve the borrowing, and the borrowing must be disclosed and explained to stockholders in our first quarterly report after such approval occurs.

We plan to obtain lines of credit, in an amount up to $100 million. The lines of credit may be increased at the discretion of our board of directors and may be repaid with offering proceeds, proceeds from the sale of assets, working capital or permanent financing. On March 24, 2006, we entered into an agreement for a $20.0 million revolving line of credit with Colonial Bank, N.A. The line replaced a previously existing $5.0 million line of credit with Branch Banking & Trust Company and will primarily be used for working capital needs, to temporarily fund distributions to stockholders and bridge financing on real estate investments. The line of credit is unsecured, bears interest at the 30-day LIBOR (approximately 4.83% on March 31, 2006) plus 2.25% and has a term of two years with monthly payments of interest only and principal due at maturity (March 24, 2008). As of March 31, 2006, borrowings outstanding under the line of credit were approximately $6.1 million. The balance outstanding on our previous line of credit at December 31, 2005 was approximately $4.5 million. The terms of the line of credit agreement require us to meet certain customary financial covenants and ratios including (a) a total permanent debt to total assets ratio of no more than 65%, (b) a tangible net worth of no less than $200.0 million and (c) a ratio of distributions to funds from operations of no more than 110%. We were in compliance with these covenants at March 31, 2006. Additionally, we are required to maintain a zero balance on the line of credit for a 30-day period during the first quarter of each year beginning in 2007.

See the section below titled “Off Balance Sheet and Other Arrangements – Borrowings of Our Unconsolidated Entities” for a description of the borrowings of our unconsolidated entities.

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Mortgages and Other Notes Receivable

The following is a summary of the four loans that we have made as of March 31, 2006:

Description	Date of Loan Agreement	Maturity date	Interest Rate		Loan Amount
Consolidated Conversion, LLC (hotel conversion)	9/29/2005	4/30/2007	15.0	%(1)	$	3,000,000
Plaza Partners, LLC (hotel conversion)	2/28/2006	2/28/2007	15.0	%(2)	$	16,800,000
Mizner Court Holdings, LP (condominium conversion)	3/10/2006	11/9/2007	LIBOR + 7.0	%(3)	$	15,000,000
Shorefox Development, LLC (lifestyle community development)	3/13/2006	3/10/2009	13.5	%(4)	$	20,000,000

FOOTNOTES:

(1) Pursuant to the loan agreement, the loan earns interest at a rate of 15.0% per year and requires monthly and interest payment based on an annual percentage rate of 8.5% with the remaining 6.5% becoming due and payable upon the loan’s maturity. The term of the loan is 18 months and may be extended by the borrower for up to three additional six-month periods. The loan is collateralized by a first mortgage on ten vacant acres of land adjacent to the hotel and a second priority mortgage on the remainder of the property which includes the hotel. Completion of the condominium conversion and related improvements is guaranteed by the principals of Consolidated Conversions, LLC. The loan may be prepaid at anytime, but in no event we will receive less than a 15% return for at least one year.

(2) Pursuant to the loan agreement, the loan earns interest at a rate of 15.0% per year and requires monthly and interest payment based on an annual percentage rate of 8.75% with remaining 6.25% becoming due and payable upon the loan’s maturity. The term of the loan is 12 months and may be extended by the borrower for up to two additional six-month periods. The loan is collateralized by a first mortgage on the property.

(3) The loan was purchased from Column Financial, Inc., as former lender, to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, LP. The initial term of the loan is 24 months and has 20 months remaining with a one year extension option. The interest rate is at one month LIBOR (approximately 4.83% on March 31, 2006) plus 7.0%. The mezzanine loan is collateralized by a pledge of all the partnership interests in Mizner Court, LP and is guaranteed as to interest payments and as to completion by Morris L. Stoltz II. The loan may not be prepaid before May 9, 2006.

(4) Pursuant to the loan agreement, we agreed to provide financing up to $40.0 million in connection to the development of the infrastructure of an Orvis branded lifestyle community in Granby, Colorado. As of March 31, 2006, we have contributed $20.0 million. The loan requires interest payments based on an annual interest rate of 9.5% paid monthly with the remaining 4.0% becoming due and payable upon the loan’s maturity. The term of the loan is 36 months and may be extended by the borrower up to 12 months. The loan may not be prepaid during the first year. The loan is collateralized by a first mortgage on a portion of the Granby property. The loan is personally guaranteed by the principals of Shorefox Development, LLC until $10.0 million in infrastructure is completed. Loan origination fees of $400,000 were paid to us in connection with making this loan. This amount was recorded as a reduction in the value of the note receivable on the accompanying condensed consolidated balance sheet and will be amortized into interest income over the initial term of the loan.

We record acquisition fees incurred in connection with making the loans as part of the note receivable balance and amortize the amounts as a reduction of interest income over the term of the notes.

Related Party Arrangements

In accordance with the advisory agreement, the Advisor and affiliates are entitled to receive certain fees and reimbursable expenses in connection with our offering. For the initial offering these fees and reimbursable expenses included: marketing and supporting fee of up to 2.5% and selling commission of 6.5% of gross offering proceeds, acquisition fees of 3.0% for services in the selection, purchase, development or construction of real property, debt acquisition fees of 3.0% for services in connection with the incurrence of debt, asset management fees of 0.08334% per month on our real estate asset value, and certain expense incurred on behalf of us in connection

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with the company’s organization, offering, acquisitions, and operating activities. For the quarters ended March 31, 2006 and 2005, we incurred approximately $21.1 million and $12.0 million, respectively, in certain fees and reimbursable expenses to our Advisor and its affiliates.

In connection with this offering, CNL Securities Corp., the managing dealer of our public offerings, will receive selling commissions of up to 7.0% of gross offering proceeds on all shares sold, a marketing support fee of up to 3.0% of gross proceeds, and reimbursement of actual expenses incurred up to 0.10% of proceeds in connection with due diligence of the offerings. A substantial portion of the selling commissions and marketing support fees are reallocated to third-party participating broker dealers.

As of March 31, 2006 and December 31, 2005, we owed our Advisor and certain of its affiliates approximately $12.8 million and $7.1 million, respectively, for certain organizational and offering expenses, acquisition fees, asset management fees, selling commissions, marketing support fees, due diligence expense reimbursements and operating expenses incurred on our behalf. In accordance with our amended and restated articles of incorporation, the total amount of certain offering, organizational and stock issuance costs we pay may not exceed 13% of the aggregate offering proceeds. Accordingly, approximately $1.1 million of these costs relating to the initial offering of our common stock has been capitalized and deferred as of March 31, 2006, with a corresponding amount due to our Advisor and certain of its affiliates. The deferred offering costs will be deducted from future offering proceeds and reimbursed to affiliates to the extent the aggregate costs are within the 13% limitation. We are not obligated to pay our Advisor or certain of its affiliates costs that exceed the 13% limitation at the end of each offering.

In addition, to the extent that operating expenses, in any four consecutive fiscal quarters (the “Expense Year”), exceed the greater of 2% of average invested assets or 25% of net income, the Advisor shall reimburse us the amount by which the total operating expenses paid or incurred exceed the greater of the 2% or 25% threshold (the “Expense Cap”). For the Expense Year ended March 31, 2006, operating expenses did not exceed the Expense Cap.

Distributions

We intend to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors, including expected and actual net cash from operations for the year, our financial condition, a balanced analysis of value creation reflective of both current and long-term stabilized cash flows from our properties, our objective of continuing to qualify as a REIT for federal income tax purposes, the actual operating results of each quarter, economic conditions, other operating trends, capital requirements and avoidance of volatility of distributions. Operating cash flows are expected to be generated from properties, loans and other permitted investments acquired or made by us. We declared and paid distributions of approximately $5.8 million ($0.1374 per share) and $1.3 million ($0.1272 per share) for the quarters ended March 31, 2006 and 2005, respectively. We temporarily funded the distribution payment of approximately $5.8 million for the quarter ended March 31, 2006 with proceeds from our line of credit in order to bridge the time from when we paid distributions to our shareholders until we received cash distributions from our unconsolidated entities, which usually occurs within 45 days of the end of each quarter. Distributions paid in the first quarter of 2005 were primarily funded with a temporary advance of approximately $1.3 million from an affiliate of the Advisor. The advance was repaid in the second quarter of 2005 upon receipt of our first quarter earnings from our unconsolidated entities.

The distributions declared and paid during the quarter ended March 31, 2006 exceeded net income for the quarter ended March 31, 2006 by approximately $1.5 million. Distributions to stockholders may be considered a return of capital to the extent the amount of such distributions exceeds net income calculated in accordance with generally accepted accounting principles (“GAAP”). Accordingly, for the quarter ended March 31, 2006, approximately 26.4% of the distributions represented a return of capital, if calculated using GAAP net income as the basis. Approximately 6.71% of the distributions for the three months ended March 31, 2006 constitutes a return of capital for federal income tax purposes. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the stockholders’ return on their invested capital. The characterization of distributions declared for the quarter ended March 31, 2006 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2006.

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Cash Flow Analysis

Our net cash flows provided by operating activities were approximately $4.2 million for the quarter ended March 31, 2006 and were comprised primarily of interest earned on uninvested offering proceeds, rental revenues, interest income on mortgages and other notes receivable and the receipt of distributions from our unconsolidated entities offset by payments made for operating expenses (including asset management fees to our Advisor), as compared to the net cash flow from operating activities of $140,519 for the quarter ended March 31, 2005, which was primarily attributable to interest earned on invested cash and payments made for operating expenses.

Cash flows used in investing activities were approximately $21.7 million for the quarter ended March 31, 2006 and consisted primarily of investments in mortgage loans of approximately $51.8 million offset by approximately $43.5 million in distributions from unconsolidated entities representing proceeds from debt financing through our partnership with Great Wolf Resorts. We also invested an additional $6.7 million in unconsolidated entities (primarily to expand the Dallas Market Center property), made deposits of $1.1 million on properties and paid $5.6 million in acquisition costs and fees. During the quarter ended March 31, 2005, we made contributions to acquire our interests in DMC Partnership of approximately $61.9 million and paid of acquisition fees and costs of approximately $2.1 million.

For the quarter ended March 31, 2006, the net cash flows provided by financing activities were approximately $125.0 million and were primarily attributable to the receipt of approximately $142.9 million of subscription proceeds, the payment of approximately $13.3 million in stock issuance costs in connection with the offering, distributions paid to stockholders of approximately $5.8 million, and net borrowings under our line of credit of approximately $1.6 million. The net cash flows provided by financing activities for the quarter ended March 31, 2005 were approximately $40.9 million and consisted primarily of subscriptions proceeds received of approximately $43.8 million, an advance from an affiliate of approximately $1.3 million, the payment of approximately $2.8 million in stock issuance costs and distributions paid to stockholders of approximately $1.3 million.

CRITICALACCOUNTINGPOLICIES

Consolidation.The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and entities in which we have a controlling interest in accordance with the provisions of Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (“SOP 78-9”) or are the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, (“FIN 46”). The application of FIN 46 and SOP 78-9 requires management to make significant estimates and judgments about our and our venture partners’ rights, obligations and economic interests in the related venture entities. The equity method of accounting is applied in the consolidated financial statements with respect to those investments in entities in which we are not the primary beneficiary under FIN 46 or have less than a controlling interest due to the significance of rights and obligations held by other parties under SOP 78-9.

Investments in unconsolidated entities. The equity method of accounting is applied with respect to investments in entities for which we have determined that consolidation is not appropriate under FIN 46 or SOP 78-9. We recognize equity in earnings from our unconsolidated entities under the hypothetical liquidation at book value (“HLBV”) method of accounting due to the capital structure of those entities and the rights and priorities of the partners. The HLBV method differs from other generally accepted accounting methods in which an investing partner recognizes the percentage of a venture’s net income or loss based upon the partner’s percentage of ownership. Under the HLBV method, we must estimate at the balance sheet date what we would receive or be obligated to pay in accordance with the governing agreements if our unconsolidated entities were to liquidate all of their assets, pay their debts and distribute the remaining equity at book value. As a result, we recognize income (equity in earnings) in each reporting period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. Under this method, in any given period we could be recording more or less income than actual cash distributions received and more or less than we may receive in the event of an actual liquidation.

Impairments. For real estate owned by us and accounted for under the equity method, we compare the estimated fair value of our investment to the carrying value at each reporting date. To the extent the fair value of the investment is less than the carrying amount, and the decline in value is determined to be other than a temporary decline, an impairment charge will be recorded.

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For real estate to be owned by us, we will monitor events and changes in circumstance that may indicate that the carrying amounts of the real estate assets may not be recoverable. When such events or changes in circumstances are present, we will assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we would recognize an impairment loss to adjust the carrying amount of the asset to the estimated fair value.

The determination of both the estimated fair value of our investment and the estimation of future cash flows to be generated over the life of the assets requires management to make significant estimates and judgments.

Mortgages and other notes receivable. Mortgage loans receivable are recorded at the lower of cost or market. Whenever future collection of a specific note appears doubtful, a valuation allowance will be established. The allowance represents the difference between the carrying value and the amount expected to be received. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in impairments and provisions on assets. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan, including an impaired loan, is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that collection of interest is doubtful. Subsequent interest is recorded as income when collected. At this time we have not established a valuation allowance on our loans as collection is expected to occur.

RESULTSOF OPERATIONS

The following table summarizes our operations for the quarter ended March 31, 2006 as compared to the quarter ended March 31, 2005.

	Quarters Ended
	March 31, 2006			March 31, 2005			$ Change			% Change
Revenue:
Rental income and FF&E reserve income	$	764,109		$	—		$	764,109		n/a	%
Interest income on mortgages and other notes receivable		502,358			—			502,358		n/a	%
Total revenue		1,266,467			—			1,266,467		—
Expenses:
Asset management fees to advisor		1,005,300			313,973			691,327		220.2	%
General and administrative		1,098,554			533,773			564,781		105.8	%
Depreciation and amortization		169,654			—			169,654		n/a	%
Total expenses		2,273,508			847,746			1,425,762		168.2	%
Operating loss		(1,007,041	)		(847,746	)		(159,295	)	18.8	%
Other income (expense):
Interest and other income		1,402,001			186,917			1,215,084		650.1	%
Interest expense and loan cost amortization		(80,265	)		—			(80,265	)	n/a	%
Equity in earnings of unconsolidated entities		3,963,868			1,652,997			2,310,871		139.8	%
Total other income		5,285,604			1,839,914			3,445,690		187.3	%
Net income	$	4,278,563		$	992,168		$	3,286,395		331.2	%

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Rental income and FF&E reserve income.The increase in rental income and FF&E reserve income for the quarter ended March 31, 2006 as compared to quarter ended March 31, 2005 was due to the acquisition of Gatlinburg Sky Lift in December 2005. The Gatlinburg Sky Lift is leased on a long-term triple-net basis to a third-party tenant. Prior to December 2005, we did not have any properties that we consolidated in our financial statements and all of our investments were owned through our unconsolidated entities where our primary source of income was generated from equity in earnings.

Interest income on mortgages and other notes receivable.During September 2005 through March 31, 2006, we made four loans to third-party borrowers, which resulted in interest income of approximately $0.5 million for the quarter ended March 31, 2006. We had not made any loans prior to September 2005.

Asset management fees to Advisor.Asset management fees of 0.08334% of invested assets are paid to the Advisor for acquisition of real estate asset and mortgage and other loans. For the quarters ended March 31, 2006 and 2005 asset management fees to our Advisor was approximately $1.0 million and $313,973, respectively. The increase in such fees is due to the acquisition of additional real estate properties and loans made subsequent to the first quarter 2005 through 2006.

General and administrative.For the quarters ended March 31, 2006 and 2005, general and administrative expenses were approximately $1.1 million and $533,773, respectively. The increase is primarily due to the overall increase in our operating activities.

Interest and other income.The increase in interest income is a result of greater average cash on hand from uninvested offering proceeds during the first quarter of 2006 as compared to 2005.

Equity in earnings. The overall increase of approximately $2.3 million from March 31, 2006 in comparison to the same period in 2005 is primarily due to the increase in the amount and number of our investments in our unconsolidated entities. For the quarter ended March 31, 2005, our equity in earnings reflects our investments in the retail and commercial properties at seven resort villages and activities on the acquisition of the World Trade Center at the Dallas Market Center from February 14, 2005 (acquisition date) through March 31, 2005. The quarter ended March 31, 2006, reflects equity in earnings from our interests in the retail and commercial properties at seven resort villages, the World Trade Center and two waterpark resorts, which were all owned during the entire quarter.

Equity in earnings from our unconsolidated entities is recognized under the hypothetical liquidation at book value method as discuss earlier in “Critical Accounting Policies.” The unconsolidated entities’ structure and agreements provide us a stated return on our investment in priority to any returns to our partners. Because our equity in earnings is calculated in this manner, our partners have historically been allocated significant losses which offset the earnings that we record from these entities. During 2006, our partners’ unreturned capital in certain of these entities is expected to be reduced to zero as a result of the losses they have recognized and the distributions that they have received from these entities. Once this occurs, we will no longer recognize significant amounts of income and may even recognize losses that these entities incur. While this method of recognizing earnings and losses from the unconsolidated entities is not expected to have an impact on the distributions we receive from them or our funds from operations (defined below), it will likely result in significant reductions in our net income (loss) and our earnings (loss) per share.

Our results of operations for the quarter ended March 31, 2006 are not necessarily indicative of what the results of operations will be for the year ending December 31, 2006 and in the future. The investments that we have acquired or will be acquiring have significant impact in our results of operation and our actual results could differ materially.

OTHER

Funds from Operations

We consider funds from operations (“FFO”) to be an indicative measure of operating performance due to the significant effect of depreciation of real estate assets on net income. FFO, based on the revised definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and as used herein, means net income determined in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. We believe that by excluding the effect of depreciation and amortization, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO (i) does not represent cash generated from operating activities determined in accordance with GAAP

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(which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income), (ii) is not necessarily indicative of cash flow available to fund cash needs and (iii) should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO as presented may not be comparable to amounts calculated by other companies.

Accordingly, we believe that in order to facilitate a clear understanding of the consolidated historical operating results, FFO should be considered in conjunction with our net income and cash flows as reported in the accompanying consolidated financial statements and notes thereto.

Reconciliation of net income to FFO for the quarter ended March 31, 2006 and 2005:

	Quarter Ended March 31,
	2006			2005
Net income	$	4,278,563		$	992,168
Adjustments:
Depreciation and amortization		169,655			—
Equity in earnings of unconsolidated entities		(3,963,868	)		(1,652,997	)
Pro-rata share of FFO from unconsolidated entities		6,286,642			2,404,758
Total funds from operations	$	6,770,992		$	1,743,929
Weighted average number of shares of common stock outstanding (basic and diluted)		44,318,153			10,775,650
FFO per share (basic and diluted)	$	0.15		$	0.16

Borrowings of Our Unconsolidated Entities

Our unconsolidated entities are subject to the following fixed rate debt:

Unconsolidated entity	Type of loan	Interest rate		Payment	Maturity date	Principal balance at March 31, 2006
Intrawest U.S. Venture	Mortgage loan	5.75	%	Monthly principal and interest payment of $289,389	5/20/2015	$	45,367,218
Intrawest Canadian Venture	Mortgage loan	5.83	%	Monthly interest only of $110,880(1)	12/11/2014		22,790,880	(1)
DMC Partnership	Mortgage loan	6.04	%	Monthly principal and interest payment of $889,145	9/1/2014		139,798,877
DMC Partnership	Mortgage loan	5.45	%	Monthly principal and interest payment of $110,663	9/1/2012		15,924,031
Wolf Partnership	Mortgage loan	6.08	%	Monthly interest only of $319,200(2)	3/1/2013		63,000,000	(2)
Total						$	286,881,006

FOOTNOTES:

(1) Amount was converted from Canadian dollars to U.S. dollars at an exchange rate of 0.856 Canadian dollars for $1.00 U.S. dollar as of March 31, 2006 and 0.858 Canadian dollars for $1.00 U.S. dollar as of December 31, 2005. Effective December 2006, monthly principal and interest payment of $134,350 are due until maturity.

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(2) Effective April 1, 2009, monthly principal and interest payment shall be payable on the loan based on a 30-year amortization schedule.

COMMITMENTS, CONTINGENCIESAND CONTRACTUAL OBLIGATIONS

The following table presents our contingent commitments and contractual obligations and the related payment periods as of March 31, 2006:

	Payments due in
	Less than 1 year		Years 1-3		Years 3-5		More than 5 years		Total
Line of credit — principal	$	—	$	6,137,669	$	—	$	—	$	6,137,669
Line of credit — interest		434,547		533,362		—		—		967,909
Contingent purchase consideration(1)		—		9,750,000		—		—		9,750,000
Loan funding commitments		—		20,000,000		—		—		20,000,000
DMC capital commitments(2)		7,721,959		—		—		—		7,721,959
Total contractual obligations	$	8,156,506	$	36,421,031	$	—	$	—	$	44,577,537

FOOTNOTES:

(1) In connection with the purchase of the resort village property located at Copper Mountain, Colorado, the Intrawest Partnership agreed to pay additional future purchase consideration contingent upon the Copper Mountain property achieving certain levels of financial performance, as specified in the purchase and sale agreement. The amount of the contingent purchase price will be determined as of December 31, 2008, and in no event, will the amount exceed $3.75 million. We have guaranteed the payment of the contingent purchase price to Intrawest on behalf of the Intrawest Partnership.

In connection with the purchase of the Wolf Dells Property and the Wolf Sandusky Property, Great Wolf may receive additional contingent purchase price of up to $3.0 million per waterpark resort if those properties achieve certain financial performance goals during 2007 and 2008. The amount of contingent purchase price will be determined during those years, and in no event will the amount exceed a total of $6.0 million for both properties.

(2) We have committed to fund our share of costs for development of the Trade Mart Expansion at the Dallas Market Center. This amount represents our remaining share of the approximately $17.0 million in total expected development costs. As of March 31, 2006, we had contributed approximately $9.3 million.

Subsequent to March 31, 2006, in connection with the acquisition of the Bretton Woods Property, we issued a note in the principal amount of $6.5 million bearing interest at 5.8% per annum due on the fourth anniversary of the Closing Date. The expected payment due on the fourth anniversary of the Closing Date is $8.0 million, including all interest. We also committed to invest approximately $500,000 in improvements to the South Mountain Property.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following information should be read in conjunction with the “Certain Relationships and Related Transactions” section beginning on page 124 of the prospectus:

Our managing dealer received selling commissions amounting to 6.5% of the total amount raised from the sale of shares in our initial offering, up to 6.0% of which was paid or has accrued and will be paid as commissions to other broker-dealers. Our managing dealer is entitled to receive selling commissions up to 7.0% of the total amount raised from the sale of shares from this offering, of which up to 6.5% may be paid as commissions to other broker-dealers. During the period January 1, 2006 through March 31, 2006, we incurred approximately $9.1 million of such fees in connection with our offerings, the majority of which has been or will be paid by CNL Securities Corp. as commissions to other broker-dealers.

In addition, our managing dealer was entitled to receive a marketing support fee equal to 2.5% of the total amount raised from the sale of shares in our initial offering, all or a portion of which was or may be reallowed to other broker-dealers. Our managing dealer is entitled to receive a marketing support fee of 3.0% of the total amount raised from the sale of shares from this offering, up to 2.5% of which may be reallowed to other broker-dealers who enter into a participating broker agreement with the managing dealer. During the period January 1, 2006 through March 31, 2006, we incurred approximately $3.5 million of such fees in connection with our offerings, the majority of which has been or will be reallowed to other broker-dealers.

In connection with our offerings, our advisor was and is entitled to receive Acquisition Fees for services provided in connection with the selection, purchase, development or construction of real property and the incurrence of debt from lines of credit and permanent financing that are used to acquire properties or to make or acquire loans and other permitted investments equal 3.0% of the total amount raised from the sale of shares in our offerings and 3.0% of loan proceeds from permanent financing; however, no Acquisition Fees will be paid on proceeds from any line of credit until such time as all Net Offering Proceeds have been invested. During the period January 1, 2006 through March 31, 2006, we incurred approximately $4.3 million of such fees in connection with our initial offering. For the period January 1, 2006 through March 31, 2006, we incurred Acquisition Fees totaling approximately $1.3 million as a result of permanent financing used to acquire certain properties.

We entered into an Advisory Agreement with our advisor pursuant to which our advisor receives a monthly asset management fee of 0.08334% of an amount equal to the total amount invested in our properties, loans and other permitted investments (exclusive of acquisition fees and expenses) as of the end of the preceding month. The asset 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 our advisor. All or any portion of the asset management fee not taken as to any fiscal year shall be deferred without interest and may be taken in such other fiscal year as our advisor shall determine. During the quarter ended March 31, 2006, we incurred approximately $1.0 million of such fees.

Our advisor and its Affiliates provide various general operating and administrative services to us, including services related to accounting, financial, tax and regulatory compliance reporting, stockholder distributions and reporting, due diligence and marketing, and investor relations (including administrative services in connection with the offering of shares) on a day-to-day basis. During the period commencing January 1, 2006 through March 31, 2006, we incurred $315,073 in fees for these services.

THE OFFERING

PLANOF DISTRIBUTION

The following paragraph replaces the last paragraph on page 161 of the prospectus:

In order to encourage purchases in excess of 500,000 shares, by the categories of investors described above, in addition to a discount equal to the 7.0% selling commissions and the 3.0% marketing support fee discount described above, if the investor is a “purchaser” (as defined below) and buys in excess of 500,000 shares, and all such shares were purchased through the same registered investment adviser, participating broker or the managing dealer, such purchase and any subsequent purchase will be subject to a reduced Acquisition Fee of 1.0% (as opposed to 3.0%). In such instance, the initial purchase price per share will be $8.80.

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The volume discount table is corrected by replacing the $0.60 in the first row in the last column with $0.65 on page 162 of the prospectus.

AFFILIATE LITIGATION

The following paragraph updates and replaces the corresponding paragraph on page 130 of the prospectus:

In 2004, stockholders in CNL Hotels & Resorts, Inc. (“CHR”) filed two class action complaints in the United States District Court for the Middle District of Florida against, among others, CHR, CNL Hospitality Corp. (“CHC”), certain affiliates of CHR and CHC, and certain of CHR’s directors and officers, including James M. Seneff, Jr., and Robert A. Bourne. Messrs. Seneff and Bourne are also members of our board of directors. Neither we, nor our advisor or our directors or officers, in their respective capacities with CNL Income Properties, are defendants in the CHR litigation. On November 10, 2004, the two complaints were consolidated (the “Consolidated CHR Litigation”). In the Consolidated CHR Litigation, plaintiffs seek money damages, rescission of their securities purchases, and various injunctions relating to the proposed merger of CHR and CHC. Plaintiffs allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act and Section 14(a), including Rule 14a-9 hereunder, and Section 20(a) of the Exchange Act.

On February 6, 2006, the parties to the litigation entered into a non-binding confidential memorandum of understanding which would resolve all claims in the litigation subject to certain conditions including but not limited to: the completion of confirmatory discovery, the parties’ ability to negotiate and enter into a final signed and binding agreement, a sufficient number of class members not opting out of the final signed agreement, and court approval. On April 3, 2006, the parties entered into and filed with the court a Stipulation of Settlement. The court entered an order approving the settlement on April 24, 2006 and notice was sent to the class in May 2006. At a hearing held on July 26, 2006, the court approved the final settlement subject to a determination of legal fees to be awarded to plaintiffs’ counsel.

DISTRIBUTION POLICY

DISTRIBUTIONS

The following table presents total distributions (in thousands) and distributions per share:

2004 Quarters	First			Second		Third		Fourth		Year
Total distributions declared		—			—	$	470,512	$	702,176	$	1,172,688
Distributions per share		—			—		0.1342		0.1251		0.2593
2005 Quarters	First			Second		Third		Fourth		Year
Total distributions declared	$	1,280,706		$	2,027,860	$	2,784,299	$	4,003,564	$	10,096,429
Distributions per share		0.1272	��		0.1334		0.1374		0.1374		0.5354
2006 Quarters	First			Second		Third		Fourth		Year
Total distributions declared	$	5,813,301		$	7,280,859		—		—	$	13,094,160
Distributions per share		0.1374			0.1374		—		—		0.2748

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EXPERTS

The following paragraph updates and replaces the corresponding paragraph which begins on page 167 of the prospectus:

The balance sheets of CNL Income Properties as of December 31, 2005 and 2004, the statements of operations, statements of stockholders’ equity and cash flows of CNL Income Properties for the years ended December 31, 2005 and 2004 and the period from August 11, 2003 (date of inception) through December 31, 2003, the consolidated financial statements of CNL Village Retail Partnership, LP and its Subsidiaries as of and for the year ended December 31, 2005 and the period from October 1, 2004 (date of inception) to December 31, 2004, the consolidated financial statements of CNL Dallas Market Center, LP and its Subsidiaries as of and for the period from February 14, 2005 (date of inception) to December 31, 2005, the consolidated financial statements of CNL Income GW Partnership, LLLP and its Subsidiaries as of and for the period from October 11, 2005 (date of inception) through December 31, 2005 included in this registration statement have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm given on the authority of said firm as experts in auditing and accounting.

The balance sheet of Gatlinburg Skylift LLC as of December 31, 2004 and December 31, 2003 and the related statement of operations, parent’s investment account and cash flows for the years ended December 31, 2004, 2003, and 2002 included in this registration statement have been audited by Moss Adams LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The balance sheet of Cypress-Bowl Recreations Limited Partnership as of December 31, 2005 and December 31, 2004 and the related statement of operations, parent’s investment account and cash flows for the years ended December 31, 2005 and 2004 included in this registration statement have been audited by Moss Adams LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The combined financial statements of Great Bear Lodge of Wisconsin Dells, LLC and Great Bear Lodge of Sandusky, LLC as of and for the periods ended December 20, 2004, December 31, 2003 and December 31, 2002 included in this registration statement have been audited by RubinBrown LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The audited historical combined statement of revenue and certain expenses of the DMC Properties as of and for the year ended January 31, 2005 included in this registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The combined statement of revenue and certain expenses of Intrawest Portfolio Commercial Properties, for the year ended June 30, 2004 included in this registration statement have been audited by KPMG LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

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APPENDIX B

PRIOR PERFORMANCE TABLES

The following information in Tables II and III updates and replaces the corresponding information in Tables II and III of Appendix B to the prospectus:

Table II – CNL Hotels & Resorts, Inc.
Dollar amount of cash generated from (used in) operations before deducting payments to sponsor:
2005 (Note 3)	202,196,000
Table III – CNL Hotels & Resorts, Inc.
Less:	2004
	(Note 1&2)
Depreciation and amortization	(145,872,000	)

29

INDEX TO FINANCIAL STATEMENTS

CNL Income Properties, Inc.

Pro Forma Consolidated Financial Information:
Unaudited Pro Forma Consolidated Financial Information	F - 1
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2006	F - 2
Unaudited Pro Forma Consolidated Statement of Operations for the quarter ended March 31, 2006	F - 3
Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2005	F - 4
Notes to Unaudited Pro Forma Consolidated Financial Statements	F - 5
Interim Unaudited Condensed Consolidated Financial Statements as recently filed in CNL Income Properties Inc.’s March 31, 2006 Form 10-Q:
Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005	F - 12
Condensed Consolidated Statements of Operations for the quarters ended March 31, 2006 and 2005	F - 13
Condensed Consolidated Statements of Stockholders’ Equity for the quarter ended March 31, 2006 and for the year ended December 31, 2005	F - 14
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2006 and 2005	F - 15
Notes to Condensed Consolidated Financial Statements	F - 16
Financial Statement Schedules:
Schedule III – Real Estate and Accumulated Depreciation for the year ended December 31, 2005	F - 27
Schedule IV – Mortgage Loans on Real Estate for the year ended December 31, 2005	F - 28
Index to Other Financial Statements	F - 29

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA

CONSOLIDATED FINANCIAL INFORMATION

The accompanying Unaudited Pro Forma Consolidated Balance Sheet of CNL Income Properties, Inc. (the “Company”) is presented as if the Cypress Mountain, Harley-Davidson, Hawaiian Falls, Bretton Woods, Palmetto Hall and South Mountain investments described in Note (c) had occurred on March 31, 2006.

The following Unaudited Pro Forma Consolidated Statements of Operations are presented for the quarter ended March 31, 2006 and for the year ended December 31, 2005 (the “Pro Forma Periods”), and include certain pro forma adjustments to illustrate the estimated effect of the transactions described in the notes to the pro forma financial statements as if they had occurred on January 1, 2005.

This pro forma consolidated financial information is presented for informational purposes only and does not purport to be indicative of the Company’s financial results or condition if the various events and transactions reflected herein had occurred on the dates or been in effect during the periods indicated. This pro forma consolidated financial information should not be viewed as indicative of the Company’s financial results or conditions in the future.

F-1

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2006

	Historical (a)			Pro Forma Adjustments			Pro Forma
ASSETS
Real estate investment properties under operating leases	$	20,783,247		$	119,176,927	(c)	$	139,960,174
Investment in unconsolidated entities		170,696,589			—			170,696,589
Cash		201,409,693			(108,217,927	)(b)		93,191,766
Distributions receivable from unconsolidated entities		5,398,706			—			5,398,706
Mortgages and other notes receivable		56,472,143			—			56,472,143
Deposit on real estate		2,100,000			—			2,100,000
Deferred offering costs		1,073,709			—			1,073,709
Prepaid expenses and other assets		9,683,341			(4,459,000	)(c)		5,224,341
Total Assets	$	467,617,428		$	6,500,000		$	474,117,428
LIABILITIES AND STOCKHOLDERS’ EQUITY
Line of credit	$	6,137,669		$	—		$	6,137,669
Accounts payable and accrued expenses		806,611			—			806,611
Due to affiliates		12,782,175			—			12,782,175
Other liabilities		—			6,500,000	(c)		6,500,000
Total Liabilities		19,726,455			6,500,000			26,226,455
Commitments and Contingencies
Stockholders’ equity:
Preferred stock, $.01 par value per share 200 million shares authorized and unissued		—			—			—
Excess shares, $.01 par value per share 120 million shares authorized and unissued		—			—			—
Common stock, $.01 par value per share One billion shares authorized at March 31, 2006 52,246,052 shares issued and 52,195,388 outstanding		521,954			—			521,954
Capital in excess of par value		454,272,706			—			454,272,706
Accumulated distributions in excess of net income		(6,903,687	)		—			(6,903,687	)
		447,890,973			—			447,890,973
Total Liabilities and Stockholders’ Equity	$	467,617,428		$	6,500,000		$	474,117,428

See accompanying notes to unaudited pro forma consolidated financial statements

F-2

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED MARCH 31, 2006

	Historical (1)			Pro Forma Adjustments			Pro Forma Results
Revenues
Rental income from operating leases	$	714,500		$	2,846,190	(2)	$	3,647,244
					86,554	(3)
FF&E reserve income		31,006			576,813	(4)		607,819
Percentage rent		18,603			3,851	(5)		22,454
Interest income on mortgages and other notes receivable		502,358			335,888	(6)		838,246
		1,266,467			3,849,296			5,115,763
Expenses:
Asset management fee to advisor		1,005,300			309,211	(7)		1,314,511
General and administrative		1,098,554			—			1,098,554
Land lease and permit fee expense		—			86,554	(3)		86,554
Depreciation and amortization		169,654			1,486,918	(8)		1,656,572
		2,273,508			1,882,683			4,156,191
Operating income (loss)		(1,007,041	)		1,966,613			959,572
Other income (expense):
Interest and other income		1,402,001			(726,494	)(9)		675,507
Interest expense and loan cost amortization		(80,265	)		(93,750	)(10)		(174,015	)
Equity in earnings of unconsolidated entities		3,963,868			(670,320	)(11)		3,247,611
		—			(45,937	)(13)		—
Total other income		5,285,604			(1,536,501	)		3,749,103
Net income	$	4,278,563		$	430,112		$	4,708,675
Earnings Per Share of Common Stock (Basic and Diluted)	$	0.10					$	0.11
Weighted Average Number of Shares of Common Stock Outstanding (Basic and Diluted)		44,318,153						44,318,153

See accompanying notes to unaudited pro forma consolidated financial statements

F-3

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2005

	Historical (1)			Pro Forma Adjustments			Pro Forma Results
Revenues
Rental income from operating leases	$	94,815		$	13,786,691	(2)	$	14,886,384
					1,004,878	(3)
FF&E reserve income		10,532			2,651,593	(4)		2,662,125
Percentage rent		6,319			143,688	(5)		150,007
Interest income on mortgage note receivable		115,000			365,104	(6)		480,104
		226,666			17,951,954			18,178,620
Expenses:
Asset management fees to advisor		2,558,973			2,469,725	(7)		5,028,698
General and administrative		2,614,239			—			2,614,239
Land lease and permit fee expense		—			1,004,878	(3)		1,004,878
Depreciation and amortization		37,224			6,569,000	(8)		6,606,224
		5,210,436			10,043,603			15,254,039
Operating income (loss)		(4,983,770	)		7,908,351			2,924,581
Other income (expense):
Interest and other income		1,346,505			(1,346,505	)(9)		—
Interest expense and loan cost amortization		(69,145	)		(375,000	)(10)		(444,145	)
Equity in earnings of unconsolidated entities		10,289,841			754,660	(11)		12,148,048
					1,307,987	(12)
					(204,440	)(13)
Total other income		11,567,201			136,702			11,703,903
Net income	$	6,583,431		$	8,045,053		$	14,628,484
Earnings Per Share of Common Stock (Basic and Diluted)	$	0.33					$	0.48
Weighted Average Number of Shares of Common Stock Outstanding (Basic and Diluted)		19,795,649				(14)		30,234,986

See accompanying notes to unaudited pro forma consolidated financial statements

F-4

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Balance Sheet:

(a) Reflects the Company’s historical balance sheet as of March 31, 2006.

(b) Represents the reduction in cash in connection with the Company’s acquisition of the properties described in Note (c) below.

(c) Represents the Company’s pending and completed property acquisitions subsequent to March 31, 2006:

Property	Purchase Price		Closing Cost		Acquisition Fees		Total
Cypress Mountain(i)	$	27,500,000	$	825,000	$	1,100,000	$	29,425,000
Harley-Davidson(ii)		6,500,000		63,072		260,000		6,823,072
Hawaiian Falls (iii)		12,125,000		231,724		485,000		12,841,724
Palmetto Hall(iv)		7,600,000		240,631		304,000		8,144,631
South Mountain(v)		12,750,000		382,500		510,000		13,642,500
Bretton Woods(vi)		45,000,000		1,500,000		1,800,000		48,300,000
Total	$	111,475,000	$	3,242,927	$	4,459,000	$	119,176,927

FOOTNOTES:

⁽ⁱ⁾ On November 10, 2005, the Company entered into an agreement with Boyne USA, Inc. (“Boyne USA”) and subsidiaries to acquire and leaseback two real estate properties: Cypress Mountain, a ski resort in British Columbia and the Gatlinburg Sky Lift, a scenic chairlift attraction in Gatlinburg, Tennessee. The Company acquired the Gatlinburg Sky Lift on December 22, 2005, which is included in the historical balance sheet as of March 31, 2006. The Cypress ski area was acquired on May 30, 2006 for $27.5 million. The properties are leased to Boyne USA under a triple-net lease for a term of 20 years with four five-year renewal options. The pro forma adjustment represents the acquisition of the Cypress Mountain ski area for approximately $29.4 million including closing costs of $825,000 and the reclassification of certain acquisition fees of $1.1 million that were previously capitalized in other assets.

⁽ⁱⁱ⁾ On April 27, 2006, the Company acquired and leased back the Route 66 Harley-Davidson and the 5 & Diner in Tulsa, Oklahoma for $6.5 million. The Company leased the properties to Route 66 Real Estate LLC under a triple-net lease for a term of 20 years with four five-year renewal options. The pro forma adjustment represents the acquisition of the Route 66 Harley-Davidson and the 5 & Diner for approximately $6.8 million, including closing costs of $63,072 and the reclassification of certain acquisition fees of $260,000 that were previously capitalized in other assets.

⁽ⁱⁱⁱ⁾ On April 21, 2006, the Company acquired and leased back two Hawaiian Falls waterparks, the Garland Waterpark located in Garland, Texas and The Colony Waterpark in The Colony, Texas, from HFE Horizon LP for a purchase price of approximately $12.1 million. HFE Hozion, LP leases the waterparks under a triple-net lease for a term of 27 years with no renewal options. The pro forma adjustment represents the total purchase price of approximately $12.8 million including closing costs of $231,724 and the reclassification of certain acquisition fees of $485,000 that were previously capitalized in other assets.

^(iv) On April 27, 2006, the Company acquired and leased back the Palmetto Hall Plantation Club in Hilton Head, South Carolina for $7.6 million. A wholly-owned subsidiary of Heritage Golf Group, LLC leases the golf club under a triple-net lease for a term of 20 years with four five-year renewal options. The pro forma adjustment represents the total purchase price of approximately $8.1 million including closing costs of $240,631 and the reclassification of certain acquisition fees of $304,000 that were previously capitalized in other assets.

^(v) On June 9, 2006, the Company acquired the Raven Golf Club at South Mountain in Phoenix, Arizona from Intrawest Corporation for approximately $12.8 million. The property is leased to IRI Golf Group, the owner and operator of the prestigious Arizona National in nearby Tucson, under a triple-net lease with an initial term of 20 years and four five-year renewal options. The pro forma adjustment represents the total purchase price of approximately $13.6 million including closing costs of $382,500 and the reclassification of certain acquisition fees of $510,000 that were previously capitalized in other assets.

F-5

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Balance Sheet (Continued):

^(vi) On June 22, 2006, the Company acquired the Bretton Woods Mountain Resort in northern New Hampshire for $45.0 million. Pursuant to the purchase and sale agreement, the Company paid $38.5 million upon closing with the remaining balance of $6.5 million plus approximately $1.5 million in interest expense, due in June 2010. The Company entered into a triple-net lease with an affiliate of Celebration Associates and Crosland, Inc. which will engage National Resort Management to market and operate the property. The pro forma adjustment represents the total purchase price of $48.3 million including estimated closing costs of $1.5 million and the reclassification of certain acquisition fees of $1.8 million that were previously capitalized in other assets.

Unaudited Pro Forma Consolidated Statements of Operations:

(1) Represents the Company’s historical operating results for the respective Pro Forma Periods being presented.

(2) Represents the pro forma rental income from operating leases as a result of the acquisition of the properties described in Note (c) above:

	Rental Income
Property	Year ended December 31, 2005		Quarter ended March 31, 2006
Gatlinburg Sky Lift	$	2,401,924	$	—
Cypress Mountain		3,483,456		870,864
Harley-Davidson		696,662		174,165
Hawaiian Falls		1,354,419		338,604
Palmetto Hall		695,856		173,964
South Mountain		1,174,374		293,593
Bretton Woods		3,980,000		995,000
Total	$	13,786,691	$	2,846,190

(3) Represents ground lease and land permit fees paid by the tenants as follows:

Property	Year ended December 31, 2005		Quarter ended March 31, 2006
Gatlinburg Sky Lift(i)	$	658,662	$	—
Cypress Mountain (ii)		184,721		46,180
Hawaiian Falls (iii)		161,495		40,374
Total		1,004,878		86,554

FOOTNOTES:

⁽ⁱ⁾ The Gatlinburg Sky Lift operates on land under an operating lease with annual rent expense equal to approximately 15.0% of gross sales.

⁽ⁱⁱ⁾ The Cypress Mountain ski area operates on land owned by the Canadian Provincial Government under a Special Park Use Permit with annual fees of approximately 2.0% of revenues.

⁽ⁱⁱⁱ⁾ The Hawaiian Falls waterparks are located on municipal park land in the northern suburbs of Dallas, Texas under long-term municipal ground leases from the municipalities. The annual rent expense for the Garland Waterpark is the greater of $40,000 or 5.0% of gross revenue and for The Colony Waterpark is 5.0% of gross revenue for lease years one through ten.

F-6

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Statements of Operations (Continued):

(4) FF&E reserve income represents capital that is set aside by tenants for capital expenditure purposes. The Company has exclusive rights to and ownership of the accounts. The amounts are based on an agreed upon percentage of the tenants’ gross revenues as defined in the respective leases. The historical revenues of the properties were used to estimate FF&E reserves due under the leases for the pro forma periods presented.

	FF&E Reserve Income
Property	Year ended December 31, 2005		Quarter ended March 31, 2006
Gatlinburg Sky Lift	$	224,341	$	—
Cypress Mountain		554,164		138,541
Harley-Davidson		24,000		6,000
Hawaiian Falls		120,000		—
Palmetto Hall		88,320		22,080
South Mountain		3,080		770
Bretton Woods		1,637,688		409,422
Total	$	2,651,593	$	576,813

(5) Represents percentage rents due under the leases which are generally based on a percentage of gross revenue. The historical revenues of the properties were used to estimate percentage rent due under the leases for the pro forma periods presented.

(6) On March 10, 2006, the Company purchased a $15.0 million mezzanine loan from Column Financial, Inc., as former lender to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, L.P. The proceeds from the mezzanine loan, in addition to the proceeds from an $89 million first mortgage loan, were used to acquire an apartment complex in Boca Raton, Florida which is in the process of being converted into condominiums. The short-term loan earns interest at a rate of one month LIBOR plus 7.0% per year and requires monthly interest payments. The pro forma adjustment for the quarter ended March 31, 2006 and for the year ended December 31, 2005 represents interest income from the date that the loan was originated on October 14, 2005 through the end of the pro forma periods.

(7) Represents asset management fees associated with owning interests in or making loans in connection with real estate, including the Company’s proportionate share of properties owned through its unconsolidated entities. The assets and loans are managed by the Company’s advisor for an annual asset management fee of 1% of the Company’s pro-rata share of the “Real Estate Asset Value” as defined in the Company’s Prospectus. The pro forma adjustments include asset management fees for all properties acquired, loans made and pending acquisitions as if the acquisitions had occurred at the beginning of the pro forma periods presented.

F-7

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Statements of Operations(Continued):

(8) The following is a preliminary allocation of purchase price to the real estate properties acquired as discussed in Note (c) above. Depreciation and amortization will be computed using the straight-line method of accounting over the estimated useful lives of the related assets.

					Depreciation expense
Property	Assets	Purchase price		Estimated useful life	Year ended December 31, 2005		Quarter ended March 31, 2006
Gatlinburg Sky Lift	Leasehold interest	$	19,674,026	46 years	$	427,696	$	—
	Buildings & improvements		162,700	39 years		4,172		—
	FF&E		1,133,400	5 years		226,680		—
	Total	$	20,970,126		$	658,548		—
Cypress Mountain	Permit rights	$	18,152,000	28 years	$	648,286	$	162,072
	Buildings & improvements		1,316,900	39 years		33,767		8,442
	Ski lifts		7,339,400	20 years		366,970		91,742
	FF&E		2,616,700	7 years		373,814		93,453
	Total	$	29,425,000		$	1,422,837	$	355,709
Harley-Davidson	Land	$	997,516	n/a	$	—	$	—
	Buildings & improvements		5,626,485	39 years		144,269		36,067
	FF&E		199,071	7 years		28,439		7,110
	Total	$	6,823,072		$	172,708	$	43,177
Hawaiian Falls	Leasehold interests	$	2,548,184	27 years	$	94,377	$	23,594
	Building		4,661,640	39 years		119,529		29,882
	FF&E		5,631,900	7 years		804,557		201,139
		$	12,841,724		$	1,018,463	$	254,615
Palmetto Hall	Land	$	3,241,416	n/a	$	—	$	—
	Building		4,172,510	39 years		106,987		26,747
	Equipment		730,705	7 years		104,386		26,096
		$	8,144,631		$	211,373	$	52,843
South Mountain	Land	$	5,582,588	n/a	$	—	$	—
	Land improvement		4,498,179	20 years		224,909		56,227
	Building		2,691,075	39 years		69,002		17,251
	Equipment		870,658	7 years		124,380		31,095
		$	13,642,500		$	418,291	$	104,573
Bretton Woods	Land	$	4,844,490	n/a	$	—	$	—
	Building		29,892,870	39 years		766,484		191,621
	FF&E		13,562,640	7 years		1,937,520		484,380
		$	48,300,000		$	2,704,004	$	676,001

The final allocation of the purchase price may include other identifiable assets such as intangibles which may have varying estimated lives and could impact the amount of future depreciation or amortization expense.

(9) Reflects a reduction in interest income due to the decrease in the amount of cash available to invest in interest bearing accounts after the Company’s acquisition of the properties described in Note (c).

F-8

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Statements of Operations(Continued):

(10) Represents interest expense associated with the note signed in connection with the acquisition of Bretton Woods described in Note (c) above. The note bears interest at an average rate of 5.74% with principal and interest totaling approximately $8.0 million due in June 2010.

(11) Reflects the Company’s estimated equity in earnings from its investment in unconsolidated entities acquired during the Pro Forma Periods as follows:

On October 11, 2005, the Company entered into a joint venture (the “GW Partnership”) with Great Wolf Resorts, Inc. and affiliates (“Great Wolf”) that acquired two waterpark resorts: the 309-suite Great Wolf Lodge in Wisconsin Dells, Wisconsin and the 271-suite Great Wolf Lodge in Sandusky, Ohio (the “Great Wolf Properties”), both of which were previously owned and operated by Great Wolf. The Great Wolf Properties were contributed to the GW Partnership from Great Wolf and valued at $114.5 million, excluding transaction costs of approximately $1.3 million. The Company contributed approximately $80.0 million to the GW Partnership for a 70% partnership interest in connection with the transaction and Great Wolf holds the remaining 30% interest in the partnership.

On March 1, 2006, the GW Partnership obtained previously anticipated debt financing on the properties for $63.0 million. The loan has a seven-year term with payments of interest only for the first three years with a fixed interest rate of 6.08%. The pro forma adjustment for the quarter ended March 31, 2006 includes interest expense in connection with the debt financing as if it had occurred on January 1, 2005.

The following estimated operating results of the Great Wolf Properties and equity in earnings of the Company are presented as if the investment had been made on January 1, 2005:

	Year ended December 31, 2005
Revenues (hotel operations)(i)	$	36,156,152
Hotel and property operating expenses(i)		(26,086,952	)
Management & license fees(ii)		(2,530,931	)
Depreciation and amortization(iii)		(4,261,002	)
Interest expense including loan cost amortization of $63,000(iv)		(3,893,400	)
Pro forma net income (loss) of the properties	$	(616,133	)
Allocation of income (loss) to:
Great Wolf	$	(978,302	)
The Company		362,169
Less: amount recognized in historical results		(392,491	)
Net pro forma income adjustment	$	754,660

FOOTNOTES:

⁽ⁱ⁾ Amounts for the Pro Forma Period for the year ended December 31, 2005 are derived from the unaudited combined statement of operations for the year ended December 31, 2005.

F-9

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Statements of Operations(Continued):

⁽ⁱⁱ⁾ A subsidiary of Great Wolf continues to operate the Great Wolf Properties and license the Great Wolf Lodge brand to the venture pursuant to a 25-year management and license agreement. The agreement provides for management fees of 3% and license fees of 3% to be paid based on a percentage of gross revenue. In addition, there is a 1% license fee paid to a third-party.

⁽ⁱⁱⁱ⁾ Depreciation and amortization of long-lived assets is based on the allocation of the base purchase price of the Properties of $114.5 million and closing costs.

^(iv) Interest expense is based on the debt financing on the properties up to $63.0 million obtained through a third-party lender for a term of seven years with a fixed interest rate of 6.08%. The loan is interest only for the first three years with principal and interest payments thereafter.

The net cash flows of the GW Partnership are distributed to each partner first to pay preferences on unreturned capital balances and the residual is allocated based on each partners’ respective ownership percentage. The Company records its share of equity in earnings of the GW Partnership using the hypothetical liquidation at book value (“HLBV”) method of accounting. Under the HLBV method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.

(12) The pro forma adjustment represents the Company’s equity in earnings generated from an unconsolidated partnership (the “DMC Partnership”) with Dallas Market Center Company Ltd. (“DMC”). On January 14, 2005, the Company announced its intent to form the DMC Partnership to acquire, in two phases, interests in certain real estate and related assets at the Dallas Market Center in Dallas, Texas. In the first phase, which occurred on February 14 and March 11, 2005, the DMC Partnership was formed and acquired the Trade Mart, the World Trade Center, Market Hall and surface and garage parking areas at the Dallas Market Center (the “DMC Property”). The DMC Property consists of approximately 4.3 million leaseable square feet of showroom and exhibition space and is leased to Dallas Market Center Operating, L.P., a subsidiary of the existing management company, Market Center Management Company, Ltd., (“MCMC”) which continues to manage the DMC Property. The Company invested approximately $60.0 million in the DMC Partnership, excluding transaction costs, for an 80% equity ownership interest in the DMC Property.

In phase two of the transaction, which was completed on May 25, 2005, the Company invested an additional $11.2 million in the DMC Partnership, excluding certain transaction costs and fees. Concurrently, the DMC Partnership acquired the International Floral and Gift Center (the “IFGC”) located at the Dallas Market Center. The IFGC consists of approximately 440,000 square feet of wholesale merchandising and exhibition space and is leased to a subsidiary of MCMC which continues to manage the IFGC. The DMC Partnership acquired the IFGC for approximately $31.0 million including the assumption of an existing mortgage loan in the amount of approximately $17.0 million. The Company’s $11.2 million investment represents its 80% equity ownership interest in the IFGC.

F-10

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Statements of Operations(Continued):

The following estimated operating results of the properties owned by the DMC Partnership and the allocation of profits and losses are presented as if the investment had been made on January 1, 2005:

	Year ended December 31, 2005
Revenue (net rental revenues under triple-net leases) (i)	$	25,268,524
Depreciation and amortization(ii)		(6,977,911	)
Interest expense including loan cost amortization of $150,758(iii)		(9,710,168	)
Pro forma net income of the DMC Property and IFGC	$	8,580,445
Allocation of income to:
DMC	$	561,642
The Company		8,018,803
Less: amount recognized in historical results		(6,710,816	)
Net pro forma income adjustment	$	1,307,987

FOOTNOTES:

⁽ⁱ⁾ Amounts for the pro forma period ended December 31, 2005 are derived from the audited combined statement of operations for the period from February 14, 2005 through December 31, 2005 and was annualized as if the investment had been made on January 1, 2005.

⁽ⁱⁱ⁾ Depreciation and amortization of long-lived assets for the year ended December 31, 2005, is based on the audited combined statement of operations depreciated on the straight-line method over each respective useful life.

⁽ⁱⁱⁱ⁾ Interest expense is based on the debt financing on WTC and IFDC in the aggregate approximate amount of $160.0 million obtained through a third-party lender. The term for WTC is for approximately 28 years with a fixed interest rate of 6.037% and monthly principal and interest payment of $889,146. The term for IFDC is for nine years with a fixed interest rate of 5.45% and monthly and principal payment of $110,664.

Cash flows are distributed to each partner first to pay preferences on unreturned capital balances and the residual is allocated 50% to each partner. The Company records its share of equity in earnings of the DMC Partnership using the HLBV method of accounting. Under the HLBV method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.

(13) Represents additional amortization of capitalized acquisition fees and debt acquisition fees paid to the Company’s advisor in connection with the Company’s unconsolidated investments. The fees are paid and capitalized upon the sale of shares or incurrence of debt and subsequently allocated to the basis of the investments upon closing. These capitalized fees are amortized over the life of the related underlying assets or debt amortization period.

(14) Historical earnings per share were calculated based upon the actual weighted average number of shares of common stock outstanding during the respective Pro Forma Periods presented. The pro forma earnings per share were calculated assuming that proceeds from the sale of shares were sufficient to fund the acquisitions described in Note (c) above at the beginning of the Pro Forma Periods and that those shares of common stock were outstanding for the entire Pro Forma Periods presented.

F-11

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31, 2006			December 31, 2005
ASSETS
Real estate investment properties under operating leases	$	20,783,247		$	20,952,902
Investment in unconsolidated entities		170,696,589			207,150,838
Cash		201,409,693			93,804,681
Distributions receivable from unconsolidated entities		5,398,706			4,873,746
Mortgages and other notes receivable		56,472,143			3,000,000
Deposits on real estate		2,100,000			1,000,000
Deferred offering costs		1,073,709			—
Prepaid expenses and other assets		9,683,341			6,012,940
Total Assets	$	467,617,428		$	336,795,107
LIABILITIES AND STOCKHOLDERS’ EQUITY
Line of credit	$	6,137,669		$	4,503,563
Accounts payable and accrued expenses		806,611			602,481
Due to affiliates		12,782,175			7,057,233
Total Liabilities		19,726,455			12,163,277
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value per share 200 million shares authorized and unissued		—			—
Excess shares, $.01 par value per share 120 million shares authorized and unissued		—			—
Common stock, $.01 par value per share One billion shares authorized; 52,246,052 and 38,002,550 shares issued and 52,195,388 and 37,978,357 shares outstanding as of March 31, 2006 and December 31, 2005, respectively		521,954			379,784
Capital in excess of par value		454,272,706			329,620,995
Accumulated distributions in excess of net income		(6,903,687	)		(5,368,949	)
		447,890,973			324,631,830
Total Liabilities and Stockholders’ Equity	$	467,617,428		$	336,795,107

See accompanying notes to condensed consolidated financial statements.

F-12

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarter Ended March 31,
	2006			2005
Revenue:
Rental income from operating leases	$	714,500		$	—
FF&E reserve income		31,006			—
Percentage rent		18,603			—
Interest income on mortgages and other notes receivable		502,358			—
Total revenue		1,266,467			—
Expenses:
Asset management fees to advisor		1,005,300			313,973
General and administrative		1,098,554			533,773
Depreciation and amortization		169,654			—
Total expenses		2,273,508			847,746
Operating loss		(1,007,041	)		(847,746	)
Other income (expense):
Interest and other income		1,402,001			186,917
Interest expense and loan cost amortization		(80,265	)		—
Equity in earnings of unconsolidated entities		3,963,868			1,652,997
Total other income		5,285,604			1,839,914
Net income	$	4,278,563		$	992,168
Earnings per share of common stock (basic and diluted)	$	0.10		$	0.09
Weighted average number of shares of common stock outstanding (basic and diluted)		44,318,153			10,775,650

See accompanying notes to condensed consolidated financial statements.

F-13

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Quarter Ended March 31, 2006 and Year Ended December 31, 2005

(UNAUDITED)

	Common Stock					Capital in Excess of Par Value			Accumulated Distributions in Excess of Net Income			Total Stockholders’ Equity
	Number of Shares		Par Value
Balance at December 31, 2004	8,838,978		$	88,390		$	76,719,939		$	(1,855,951	)	$	74,952,378
Subscriptions received for common stock through public offering and reinvestment plan	29,163,572			291,636			290,881,372			—			291,173,008
Redemption of common stock	(24,193	)		(242	)		(229,592	)		—			(229,834	)
Stock issuance and offering costs	—			—			(37,750,724	)		—			(37,750,724	)
Net income	—			—			—			6,583,431			6,583,431
Distributions, declared and paid ($0.5354 per share)	—			—			—			(10,096,429	)		(10,096,429	)
Balance at December 31, 2005	37,978,357		$	379,784		$	329,620,995		$	(5,368,949	)	$	324,631,830
Subscriptions received for common stock through public offering and reinvestment plan	14,243,502			142,435			142,734,457			—			142,876,892
Redemption of common stock	(26,471	)		(265	)		(250,065	)		—			(250,330	)
Stock issuance and offering costs	—			—			(17,832,681	)		—			(17,832,681	)
Net income	—			—			—			4,278,563			4,278,563
Distributions, declared and paid ($0.1374 per share)	—			—			—			(5,813,301	)		(5,813,301	)
Balance at March 31, 2006	52,195,388		$	521,954		$	454,272,706		$	(6,903,687	)	$	447,890,973

See accompanying notes to condensed consolidated financial statements.

F-14

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Quarter Ended March 31,
	2006			2005
Increase (decrease) in cash:
Operating activities:
Net cash provided by operating activities	$	4,244,468		$	140,519
Investing activities:
Investments in unconsolidated entities		(6,647,825	)		(61,919,904	)
Distribution of loan proceeds from unconsolidated entity		43,514,548			—
Investments in mortgage loans and other notes		(51,800,000	)		—
Deposits on properties		(1,100,000	)		—
Acquisition fees and costs		(5,628,764	)		(2,123,231	)
Net cash used in investing activities		(21,662,041	)		(64,043,135	)
Financing activities:
Subscriptions received from stockholders		142,876,892			43,786,798
Redemptions		(250,330	)		—
Stock issuance costs		(13,287,113	)		(2,817,794	)
Cash advance from affiliate		—			1,256,360
Borrowings under line of credit, net of payments		1,634,106			—
Payment of loan costs		(137,669	)		—
Distributions to stockholders		(5,813,301	)		(1,280,706	)
Net cash provided by financing activities		125,022,585			40,944,658
Net increase (decrease) in cash		107,605,012			(22,957,958	)
Cash at beginning of period		93,804,681			36,710,117
Cash at end of period	$	201,409,693		$	13,752,159
Supplemental disclosure of non-cash investing activities:
Amounts incurred but not paid (included in due to affiliates):
Acquisition fees and costs	$	1,353,569		$	4,406,777
Supplemental disclosure of non-cash financing activities:
Amounts incurred but not paid (included in due to affiliates):
Offering and stock issuance costs	$	10,981,278		$	3,876,219

See accompanying notes to condensed consolidated financial statements.

F-15

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

1. Organization and Nature of Business:

CNL Income Properties, Inc. (the “Company”) was organized in Maryland on August 11, 2003. The Company operates and has elected to be taxed as a real estate investment trust (a “REIT”) for federal income tax purposes. Various wholly-owned subsidiaries have been and will be formed by the Company for the purpose of acquiring and owning direct or indirect interests in real estate. The Company was formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20-years, plus multiple renewal options), triple-net or gross basis to tenants or operators who are significant industry leaders. To a lesser extent, the Company also leases properties to taxable REIT subsidiary (TRS) tenants and engages independent third-party managers to operate those properties. The asset classes in which the Company is most likely to invest or has invested include the following:

• Property leased to dealerships

• Campgrounds or recreational vehicle (“RV”) parks

• Health clubs

• Parking lots

• Merchandise marts

• Destination retail and entertainment centers

• Marinas

• Ski resorts, including real estate in and around ski resorts such as ski-in/ski-out alpine villages, lodging and other related properties

• Golf courses and golf resorts, including real estate in and around golf courses

• Amusement parks, waterparks and family entertainment centers, which may include lodging facilities

• Real estate in and around lifestyle communities

• Vacation ownership interests

• Other attractions, such as sports-related venues, and cultural facilities such as visual and performing arts centers, zoological parks or aquariums.

The Company may also make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments related to interests in real estate and may purchase equity and other interests in financings. In addition, the Company may invest up to 10% of its assets in businesses that provide services, or are otherwise ancillary, to the types of properties in which it is permitted to invest. As of March 31, 2006, the Company has invested in retail and commercial properties at seven resort villages, one merchandise mart, two waterpark resorts, a sky lift attraction and has made four loans.

2. Significant Accounting Policies:

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim period presented. Operating results for the quarter ended March 31, 2006 may not be indicative of the results that may be expected for the year ending December 31, 2006. Amounts as of December 31, 2005 included in the condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date, but do not include all disclosure required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2005.

F-16

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

2. Significant Accounting Policies(Continued):

Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and entities in which the Company has a controlling interest in accordance with the provisions of Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (“SOP 78-9”), or is the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities (“FIN 46”).

Real Estate Investment Properties –Real estate properties are generally comprised of buildings and improvements, leasehold interests, and equipment and are recorded at historical cost. Depreciation is computed using the straight-line method of accounting over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 39 years and leasehold interests and equipment over their estimated useful lives. When the properties or equipment are sold, the related cost and accumulated depreciation will be removed from the accounts and any gain or loss from sale will be reflected in the Company’s results of operations.

Investment in Unconsolidated Entities—The equity method of accounting is applied with respect to investments in entities in which the Company has determined that consolidation is not appropriate under FIN 46 or SOP 78-9. The difference between the Company’s carrying amount of its investments in unconsolidated entities and the underlying equity in the net assets of the entities is due to acquisition fees and expenses paid to affiliates which have been allocated to the Company’s investment. These amounts are amortized over the estimated useful life of the underlying real estate tangible assets when the properties were acquired. The Company records its equity in earnings of the entities under the hypothetical liquidation at book value method of accounting. Under this method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.

Distributions Receivable—In accordance with the partnership agreements governing the unconsolidated entities in which the Company has invested, at the end of each quarter the partner distributions are calculated for the period and the partnership is obligated to make those distributions generally within 45 days after the quarter end. As such, the Company has recorded its share of the distributions receivable from its unconsolidated entities.

Mortgages and Other Notes Receivable— Mortgage loans receivable are recorded at the lower of cost or market. Whenever future collection of a specific note appears doubtful, a valuation allowance will be established. The allowance represents the difference between the carrying value and the amount expected to be received. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in impairments and provisions on assets. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan, including an impaired loan, is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that collection of interest is doubtful. Subsequent interest is recorded as income when collected. At this time the Company has not established a valuation allowance on its loans as collection is expected to occur. Loan origination and other fees received by the Company in connection with making the loans are recorded as a reduction of the note receivable and amortized into interest income over the initial term of the loan.

3. Real Estate Investment Properties:

Real estate investment properties consist of the following at March 31, 2006 and December 31, 2005:

	March 31, 2006			December 31, 2005
Leasehold interest	$	19,674,026		$	19,674,026
Building		162,700			162,700
Equipment		1,133,400			1,133,400
Less: accumulated depreciation		(186,879	)		(17,224	)
	$	20,783,247		$	20,952,902

F-17

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

3. Real Estate Investment Properties(Continued):

The Company has made deposits of $2.1 million related to additional properties it is considering purchasing in the future. The purchase of the properties is subject to the satisfactory completion of due diligence and other requirements. There can be no assurance that any of these properties will ultimately be purchased or the Company’s deposits returned.

4. Investment in Unconsolidated Entities:

As of March 31, 2006 and December 31, 2005, the Company owned investments in unconsolidated entities which own real estate properties accounted for under the equity method of accounting with carrying values totaling approximately $170.7 million and $207.2 million, respectively. The Company’s maximum exposure to loss from these entities is generally limited to its investment in each entity.

Under the hypothetical liquidation at book value method of accounting, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. For the quarters ended March 31, 2006 and 2005, the Company recognized equity in earnings from the entities of approximately $4.0 million and $1.7 million, respectively. As of March 31, 2006 and December 31, 2005, the Company had distributions receivable of approximately $5.4 million and $4.9 million from its unconsolidated entities, respectively. Additionally, during the quarter ended March 31, 2006, the Company received a distribution of approximately $43.5 million representing its share of proceeds from the $63.0 million debt financing obtained by the Wolf Partnership. Pursuant to the loan agreement, the loan earns interest at a rate of 6.08% per year and requires monthly interest payments of $319,200 through March 2009. Monthly interest and principal payments of $380,963 will commence on April 1, 2009 through March 1, 2013 (maturity date).

The following presents the unaudited condensed financial information for the unconsolidated entities for the quarters ended March 31, 2006 and 2005:

	Quarter Ended March 31, 2006
	Wolf Partnership			DMC Partnership			Intrawest US Venture			Intrawest Canada Venture			Total
Revenue	$	10,024,966		$	9,158,108		$	2,809,677		$	1,171,680		$	23,164,431
Property operating expenses		(7,846,441	)		(255,534	)		(1,171,427	)		(546,678	)		(9,820,080	)
Depreciation & amortization expenses		(1,454,846	)		(1,970,372	)		(1,028,817	)		(413,623	)		(4,867,658	)
Interest expense		(329,840	)		(2,217,953	)		(653,182	)		(720,792	)		(3,921,767	)
Interest and other income		35,539			2,268			3,940			20,455			62,202
Net income (loss)	$	429,378		$	4,716,517		$	(39,809	)	$	(488,958	)	$	4,617,128
Income (loss) allocable to other venture partners	$	(331,732	)	$	2,483,740		$	(912,766	)	$	(749,737	)	$	489,505
Income allocable to the Company(1)	$	761,110		$	2,232,777		$	872,957		$	260,779		$	4,127,623
Amortization of capitalized costs		(10,755	)		(126,556	)		(19,040	)		(7,404	)		(163,755	)
Equity in earnings of unconsolidated entities	$	750,355		$	2,106,221		$	853,917		$	253,375		$	3,963,868
Distributions declared to the Company(2)	$	1,535,148		$	3,038,904		$	300,342		$	52,822		$	4,927,216
Distributions received by the Company(2)	$	1,981,445		$	2,202,925		$	165,066		$	—		$	4,349,436

FOOTNOTES:

⁽¹⁾ Income is allocated to the Company on the hypothetical liquidation at book value method of accounting.

⁽²⁾ The Company receives interest payments from a loan made to Intrawest Venture Canada. These payments are reflected as distributions received from unconsolidated entities. The amount excludes the distribution of approximately $43.5 million from the Wolf Partnership as discussed above.

F-18

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

4. Investment in Unconsolidated Entities(Continued):

	Quarter Ended March 31, 2005
	Wolf Partnership		DMC Partnership			Intrawest US Venture			Intrawest Canada Venture			Total
Revenue	$	—	$	2,699,383		$	2,841,146		$	1,180,606		$	6,721,135
Property operating expenses		—		(53,510	)		(1,132,444	)		(410,568	)		(1,596,522	)
Depreciation & amortization expenses		—		(864,282	)		(1,049,264	)		(404,712	)		(2,318,258	)
Interest expense		—		(1,037,805	)		(670,586	)		(315,705	)		(2,024,096	)
Interest and other income		—		—			1			3,434			3,435
Net income (loss)	$	—	$	743,786		$	(11,147	)	$	53,055		$	785,694
Income (loss) allocable to other venture partners	$	—	$	72,488		$	(827,781	)	$	(196,386	)	$	(951,679	)
Income allocable to the Company(1)	$	—	$	671,298		$	816,634		$	249,441		$	1,737,373
Amortization of capitalized costs		—		(53,471	)		(22,252	)		(8,653	)		(84,376	)
Equity in earnings of unconsolidated entities	$	—	$	617,827		$	794,382		$	240,788		$	1,652,997
Distributions declared to the Company(2)	$	—	$	671,298		$	816,634		$	249,441		$	1,737,373
Distributions received by the Company(2)	$	—	$	—		$	—		$	—		$	—

FOOTNOTES:

⁽¹⁾ Income is allocated to the Company on the hypothetical liquidation at book value method of accounting.

⁽²⁾ The Company receives interest payments from a loan made to Intrawest Venture Canada. These payments are reflected as distributions received from unconsolidated entities.

The following presents the condensed financial information for the unconsolidated entities as of March 31, 2006 (unaudited) and December 31, 2005:

	As of March 31, 2006
	Wolf Partnership			DMC Partnership			Intrawest US Venture			Intrawest Canada Venture			Total
Real estate assets, net	$	108,761,392		$	242,384,356		$	77,544,030		$	31,009,276		$	459,699,054
Intangible assets, net		—			11,204,946			2,669,597			1,215,812			15,090,355
Other assets		11,811,638			9,090,743			4,618,009			2,974,271			28,494,661
Mortgages and other notes payable		63,000,000			155,722,908			45,584,602			35,020,314			299,327,824
Other liabilities		8,102,908			5,175,929			4,588,330			2,078,982			19,946,149
Partners’ capital (deficit)		49,470,122			101,781,208			34,658,704			(1,899,937	)		184,010,097
Difference between carrying amount of investment and the Company’s share of partners’ capital		2,589,246			5,789,544			1,855,785			790,326			11,024,901
Percentage of ownership at end of reporting period		70.0	%		80.0	%		80.0	%		80.0	%

F-19

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

4. Investment in Unconsolidated Entities(Continued):

	As of December 31, 2005
	Wolf Partnership			DMC Partnership			Intrawest US Venture			Intrawest Canada Venture			Total
Real estate assets, net	$	101,485,037		$	238,968,816		$	78,555,347		$	31,572,738		$	450,581,938
Intangible assets, net		689,422			11,285,729			2,843,175			1,294,388			16,112,714
Other assets		18,709,826			4,217,192			3,536,103			2,190,921			28,654,042
Mortgages and other notes payable		—			156,388,869			45,581,177			33,922,800			235,892,846
Other liabilities		9,284,298			3,953,029			4,354,594			2,530,690			20,122,611
Partners’ capital (deficit)		111,599,987			94,129,839			34,998,854			(1,395,443	)		239,333,237
Difference between carrying amount of investment and the Company’s share of partners’ capital		1,277,001			5,916,100			1,874,825			797,730			9,865,656
Percentage of ownership at end of reporting period		70.0	%		80.0	%		80.0	%		80.0	%

5. Deferred Offering and Stock Issuance Costs:

Beginning on April 16, 2004, the Company offered for sale up to $2.0 billion in shares of common stock (200 million shares of common stock at $10.00 per share) (the “1^st Offering”), pursuant to a registration statement on Form S-11 under the Securities Act of 1933. The Company incurred costs in connection with the 1^st Offering and issuance of shares, including filing fees, legal, accounting, printing, selling commissions, marketing support fees, due diligence expense reimbursements and escrow fees, which were deducted from the gross proceeds of the 1^st Offering. As of March 31, 2006, the total stock issuance costs incurred to date were approximately $66.8 million. On March 31, 2006, the Company stopped selling shares of its common stock under the 1^st Offering in preparation for its second offering of common stock (2^nd Offering). See Note 13, “Subsequent Events” for additional information regarding the 2^nd Offering. The balance of deferred offering costs as of March 31, 2006 relates to the Company’s 2^nd Offering.

F-20

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

6. Mortgages and Other Notes Receivable:

As of March 31, 2006, the Company has made the following loans:

Description	Date of Loan Agreement	Maturity date	Interest Rate		Loan Amount
Consolidated Conversion, LLC (hotel conversion)	9/29/2005	4/30/2007	15.0	%(1)	$	3,000,000
Plaza Partners, LLC (hotel conversion)	2/28/2006	2/28/2007	15.0	%(2)	$	16,800,000
Mizner Court Holdings, LP (condominium conversion)	3/10/2006	11/9/2007	LIBOR + 7.0	%(3)	$	15,000,000
Shorefox Development, LLC (lifestyle community development)	3/13/2006	3/10/2009	13.5	%(4)	$	20,000,000

FOOTNOTES:

⁽¹⁾ Pursuant to the loan agreement, the loan earns interest at a rate of 15.0% per year and requires monthly interest payments based on an annual percentage rate of 8.5% with the remaining 6.5% becoming due and payable upon the loan’s maturity. The term of the loan is 18 months and may be extended by the borrower for up to three additional six-month periods. The loan is collateralized by a first mortgage on ten vacant acres of land adjacent to the hotel and a second priority mortgage on the remainder of the property which includes the hotel. Completion of the condominium conversion and related improvements is guaranteed by the principals of Consolidated Conversions, LLC. The loan may be prepaid at anytime, but in no event will the Company receive less than a 15% return for at least one year.

⁽²⁾ Pursuant to the loan agreement, the loan earns interest at a rate of 15.0% per year and requires monthly interest payments based on an annual percentage rate of 8.75% with remaining 6.25% becoming due and payable upon the loan’s maturity. The term of the loan is 12 months and may be extended by the borrower for up to two additional six-month periods. The loan is collateralized by a first mortgage on the property.

⁽³⁾ The loan was purchased from Column Financial, Inc., as former lender, to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, LP. The initial term of the loan is 24 months and has 20 months remaining with a one year extension option. The interest rate is at one month LIBOR (approximately 4.83% on March 31, 2006) plus 7.0%. The mezzanine loan is collateralized by a pledge of all the partnership interests in Mizner Court, LP and is guaranteed as to interest payments and as to completion by Morris L. Stoltz II. The loan may not be prepaid before May 9, 2006.

⁽⁴⁾ Pursuant to the loan agreement, the Company agreed to provide financing up to $40.0 million in connection to the development of the infrastructure of an Orvis branded lifestyle community in Granby, Colorado. As of March 31, 2006, the Company has contributed $20.0 million. The loan requires interest payments based on an annual interest rate of 9.5% paid monthly with the remaining 4.0% becoming due and payable upon the loan’s maturity. The term of the loan is 36 months and may be extended by the borrower up to 12 months. The loan may not be prepaid during the first year. The loan is collateralized by a first mortgage on a portion of the Granby property. The loan is personally guaranteed by the principals of Shorefox Development, LLC until $10.0 million in infrastructure is completed. Loan origination fees of $400,000 were paid to the Company in connection with making this loan. This amount was recorded as a reduction in the value of the note receivable on the accompanying condensed consolidated balance sheet and will be amortized into interest income over the initial term of the loan.

The Company records acquisition fees incurred in connection with making the loans as part of the note receivable balance and amortizes the amounts as a reduction of interest income over the term of the notes.

F-21

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

7. Line of Credit:

On March 24, 2006, the Company entered into an agreement for a $20.0 million revolving line of credit with Colonial Bank, N.A. The line replaced a previously existing $5.0 million line of credit with Branch Banking & Trust Company and will primarily be used for working capital needs, to temporarily fund distributions to stockholders and bridge financing on real estate investments. The line of credit is unsecured, bears interest at the 30-day LIBOR (approximately 4.83% on March 31, 2006) plus 2.25% and has a term of two years with monthly payments of interest only and principal due at maturity (March 24, 2008). As of March 31, 2006, borrowings outstanding under the line of credit were approximately $6.1 million. The balance outstanding on our previous line of credit at December 31, 2005 was approximately $4.5 million. The terms of the line of credit agreement require the Company to meet certain customary financial covenants and ratios including (a) a total permanent debt to total assets ratio of no more than 65%, (b) a tangible net worth of no less than $200.0 million and (c) a ratio of distributions to funds from operations of no more than 110%. The Company was in compliance with these covenants at March 31, 2006. Additionally, the Company is required to maintain a zero balance on the line of credit for a 30-day period during the first quarter of each year beginning in 2007.

8. Related Party Arrangements:

Certain directors and officers of the Company hold similar positions with CNL Income Corp., a stockholder and the advisor (the “Advisor”) of the Company, and with the managing dealer of the Company’s public offering, CNL Securities Corp. The Company’s chairman of the board indirectly owns a controlling interest in the parent company of the Advisor. These affiliates receive fees and compensation in connection with the Company’s stock offerings and the acquisition, management and sale of the Company’s assets. In connection with the 1^st Offering, CNL Securities Corp., the managing dealer of the Company’s public offerings, received selling commissions of up to 6.5% of gross offering proceeds on all shares sold, a marketing support fee of up to 2.5% of gross offering proceeds, and reimbursement of actual expenses incurred up to 0.10% of proceeds in connection with due diligence of the offerings. A substantial portion of the selling commissions and marketing support fees are reallowed to third-party participating broker dealers. During the quarters ended March 31, 2006 and 2005, the Company incurred the following fees:

	Quarter Ended March 31,
	2006		2005
Selling commissions	$	9,064,290	$	2,789,162
Marketing support fee & due diligence expense reimbursements		3,487,247		1,072,755
Total	$	12,551,537	$	3,861,917

F-22

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

9. Related Party Arrangements(Continued):

During the quarters ended March 31, 2006 and 2005, the Advisor and its affiliates earned fees and incurred reimbursable expenses as follows:

	Quarter Ended March 31,
	2006		2005
Acquisition fees(1):
Acquisition fees from offering proceeds	$	4,255,028	$	1,314,491
Acquisition fees from debt proceeds		1,323,000		3,413,159
Total		5,578,028		4,727,650
Asset management fees(2):		1,005,300		313,973
Reimbursable expenses(3):
Offering costs	$	1,594,126	$	2,234,198
Acquisition costs		85,319		299,334
Operating expenses		315,073		592,419
Total		1,994,518		3,125,951
Total fees earned and reimbursable expenses	$	8,577,846	$	8,167,574

FOOTNOTES:

⁽¹⁾ Acquisition fees for services in the selection, purchase, development or construction of real property, generally equal to 3.0% of gross offering proceeds, and 3.0% of loan proceeds for services in connection with the incurrence of debt. The debt acquisition fees for the quarter ended March 31, 2006 were incurred in connection with a loan obtained by the Wolf Partnership.

⁽²⁾ Asset management fees of 0.08334% per month of the Company’s “real estate asset value,” as defined in the Company’s prospectus dated April 18, 2005 and the outstanding principal amount of any mortgage loan as of the end of the preceding month.

⁽³⁾ The Advisor and its affiliates are entitled to reimbursement of certain expenses incurred on behalf of the Company in connection with the Company’s organization, offering, acquisitions, and operating activities. Pursuant to the advisory agreement, the Company will not reimburse the Advisor any amount by which total operating expenses paid or incurred by the Company exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”) in any expense year, as defined in the advisory agreement. For the expense year ended March 31, 2006, operating expenses did not exceed the Expense Cap.

F-23

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

9. Related Party Arrangements(Continued):

Amounts due to affiliates for fees and expenses described above are as follows:

	March 31, 2006		December 31, 2005
Due to the Advisor and its affiliates:
Offering expenses	$	9,380,914	$	3,136,789
Asset management fees		354,435		300,489
Operating expenses (reimbursements)		92,893		734,970
Acquisition fees and expenses		1,353,569		1,318,983
Total	$	11,181,811	$	5,491,231
Due to CNL Securities Corp:
Selling commissions	$	1,155,818	$	1,131,002
Marketing support fees and due diligence expense reimbursements		444,546		435,000
Total	$	1,600,364	$	1,566,002
Total due to affiliates	$	12,782,175	$	7,057,233

10. Redemption of Shares:

During the quarter ended March 31, 2006, the Company redeemed 26,471 shares for an average price of approximately $9.46 per share totaling $250,330. As of March 31, 2006, the Company has redeemed a total of 50,664 shares for an average price of approximately $9.48 per share totaling $480,164.

11. Distributions:

The Company declared and paid distributions of approximately $5.8 million ($0.1374 per share) for the quarter ended March 31, 2006.

For the quarter ended March 31, 2006, approximately 93.29% of the distributions paid to the stockholders were considered ordinary income and approximately 6.71% were considered a return of capital for federal income tax purposes. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the stockholders’ return on their invested capital. The characterization of distributions declared for the quarter and three months ended March 31, 2006 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2006.

12. Commitments & Contingencies:

On October 12, 2005, the Company, through the DMC Partnership with DMC entered, into a memorandum of understanding and a development agreement to develop an approximately 500,000 square foot lighting center expansion (160,000 leasable square feet) at the Dallas Trade Mart (the “Trade Mart Expansion”) at the DMC Property. The total estimated construction costs are expected to be approximately $21.3 million. The Company’s total contribution to the DMC Partnership for the Trade Mart Expansion is estimated to be approximately $17.0 million and will be made in accordance with the current partnership structure. As of March 31, 2006, the Company had contributed approximately $9.3 million and its partner had contributed approximately $2.3 million. The remaining costs will be funded over the remainder of the development period. The Trade Mart Expansion is expected to be completed in early 2007 and will be leased to an affiliate of DMC.

F-24

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

12. Commitments & Contingencies(Continued):

On December 22, 2005, the Company entered into an agreement with a subsidiary of Boyne USA, Inc. (“Boyne”) to acquire the Cypress Mountain ski area located approximately 20 minutes north of Vancouver, British Columbia for approximately $27.5 million. It is anticipated that the Cypress Mountain ski area will be leased to a subsidiary of Boyne on a long-term, triple-net basis. On December 31, 2005, the Company made a $1.0 million deposit in connection with this acquisition. The Company expects that the acquisition of the Cypress Mountain ski area will be completed during the second quarter of 2006. The pending Cypress Mountain acquisition is subject to the fulfillment of certain conditions which include settlement and execution of definitive documents, completion of customary closing conditions and certain special conditions including Provincial approval of the transfer of the underlying land permit to the Company. There can be no assurance that any or all of these conditions will be satisfied or, if satisfied, that the property will ultimately be acquired.

In connection with the purchase of the resort village property located at Copper Mountain, Colorado, the Intrawest Partnership agreed to pay additional future purchase consideration contingent upon the Copper Mountain property achieving certain levels of financial performance, as specified in the purchase and sale agreement. The amount of the contingent purchase price will be determined as of December 31, 2008, and in no event will exceed $3.75 million. The Company has guaranteed the payment of the contingent purchase price to Intrawest on behalf of the Intrawest Partnership.

In connection with the purchase of the Wolf Dells Property and the Wolf Sandusky Property, Great Wolf may receive an additional contingent purchase price of up to $3.0 million per waterpark resort if those properties achieve certain financial performance goals during 2007 and 2008. The amount of contingent purchase price will be determined during those years, and in no event will exceed a total of $6.0 million for both properties.

13. Subsequent Events:

The Company’s board of directors declared distributions of $0.0458 per share to stockholders of record at the close of business on April 1, 2006 and May 1, 2006 to be paid by June 30, 2006.

As of March 31, 2006, the Company determined that it would redeem an additional 30,440 shares at $9.50 per share totaling $289,180 during the second quarter of 2006.

On April 27, 2006, the Company acquired Palmetto Hall Club in Hilton Head, South Carolina consisting of two 18-hole full-length championship golf courses designed by Arthur Hills and Robert Cupp, for $7.6 million excluding closing costs. The club also includes a full-service clubhouse, a pro shop, a golf maintenance center, two tennis courts and an in-ground pool. The Company also entered into a long-term, triple net lease with Heritage Golf Group, a nationwide owner/operator of golf properties, which will operate the club. The club is located 20 miles from Interstate 95 and less than an hour drive from the international airport in Savannah, Georgia.

On April 27, 2006, the Company acquired the Route 66 Harley Davidson dealership in Tulsa, Oklahoma for a purchase price of $6.5 million excluding acquisition and closing costs. The facility includes a “5 & Diner” restaurant, a full service department, a Harley Davidson Café as well as conference/event facilities. On April 27, 2006, the Company also entered into twenty year triple-net lease with four five-year renewal options with Route 66 Real Estate, LLC.

On April 27, 2006, the Company committed to acquire the Bretton Woods Mountain Resort in northern New Hampshire, for approximately $46.5 million (excluding acquisition and closing costs) of which $8.0 million will be paid at the fourth anniversary of the closing. The Company anticipates that it will commit to investing an additional $21 million for improvements on the property during the first 5 years. The resort will include the historical Mount Washington Hotel, the Bretton Arms Country Inn, the Lodge at Bretton Woods, the Bretton Woods Ski Area, the Bretton Woods Ski Lodge, tennis facilities and a free-standing restaurant. The Company has also anticipated that it will enter into a long-term, triple-net lease with an affiliate of Celebration Associates and Crosland, Inc., which will engage National Resort Management to market and operate the property. The resort is located 2.0 hours from Portland, Maine and 2.5 hours from Boston, Massachusetts. The transaction is expected to close in the second quarter of 2006 following the satisfactory completion of due diligence. There can be no assurance that due diligence will be successfully completed, that the final terms of the acquisition will be satisfactory to our board of directors or that such closing will occur.

F-25

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED MARCH 31, 2006

(UNAUDITED)

13. Subsequent Events(Continued):

On April 21, 2006, the Company entered into an agreement with Horizon Family Holdings, LLC (“HFE Horizon, LP”) and acquired and leased back two Hawaiian Falls waterparks, the Garland Waterpark located in Garland, Texas and the Colony Waterpark in Colony, Texas, collectively the “Waterparks” for a purchase price of approximately $12.1 million excluding closing costs. The Garland Waterpark consists of approximately 10 acres with slides, rivers, children’s attractions and a small wave pool with additional areas for groups and private parties. The Colony waterpark consists of approximately 7.5 acres with slides, rivers, children’s attractions and a small wave attraction. Both waterparks are on long-term municipal ground leases from their respective municipalities. HFE Horizon, LP leased the waterparks under a triple-net lease basis for a term of 27 years with no renewal option.

In anticipation of the end of the Company’s initial stock offering, on September 29, 2005, the Company filed a registration statement on Form S-11 under the Securities Act of 1933, as amended (the “2^nd Offering”). On March 31, 2006, the 1^st Offering was terminated and on April 4, 2006, the registration statement for the 2^nd Offering was declared effective and the Company began selling shares of common stock under this new offering. A total of $2.0 billion in shares of common stock (200 million shares of common stock at $10.00 per share) including up to $47.5 million in shares of common stock (5 million shares of common stock at $9.50 per share available for sale under the terms of the Company’s distribution reinvestment plan) are available for sale under the 2^nd Offering. In connection with the 2^nd Offering, CNL Securities Corp., the managing dealer of the Company’s public offerings, will receive selling commissions of up to 7.0% of gross offering proceeds on all shares sold, a marketing support fee of up to 3.0% of gross proceeds, and reimbursement of actual expenses incurred up to 0.10% of proceeds in connection with due diligence of the offerings. A substantial portion of the selling commissions and marketing support fees are reallocated to third-party participating broker dealers.

F-26

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005

Initial Costs

Costs Capitalized Subsequent to Acquisition

Gross Amounts at which Carried at Close of Period

Description

Leasehold Interest

Buildings

Equipment

Improvements

Carrying Costs

Lease hold Interest

Buildings

Equipment

Total

Accumulated Depreciation

Date of Construction

Date Acquired

Life on which depreciation in latest income statements is computed

Gatlinburg Sky Lift (sky lift attraction)

$19,674,026

$162,700

$1,133,400

$—

$—

$19,674,026

$162,700

$1,133,400

$20,970,126

$(17,224)

In 1953

12/22/2005

(1)

Gatlinburg, Tennessee

Transactions in real estate and accumulated depreciation during 2005 are as follows

Balance at January 1, 2005	$	—
Acquisitions		20,970,126
Accumulated depreciation		(17,224	)
Balance at December 31, 2005	$	20,952,902

FOOTNOTES:

(1) Buildings and improvements are depreciated over 39 years. Leasehold improvements and equipment are depreciation over their estimated useful lives.

F-27

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

SCHEDULE IV – MORTGAGE LOANS ON REAL ESTATE

December 31, 2005

Description	Interest Rate	Final Maturity Date(2)	Periodic Payment Term	Prior Liens	Face Amount of Mortgages		Carrying Amount of Mortgages		Principal Amount of Loans subject to Delinquent Principal or Interest
Consolidated Conversions, LLC (hotel conversion)	15.0% annually (1)	4/30/2007	Monthly interest only payments with a balloon at maturity	n/a	$	3,000,000	$	3,000,000	$	—

FOOTNOTES:

(1) Pursuant to the loan agreement, the loan earns interest at a rate of 15% per year and requires monthly interest payments based on an annual percentage rate of 8.5% with the remaining 6.5% becoming due and payable upon the loan’s maturity. As of December 31, 2005, the receipt of approximately $50,000 in interest income has been deferred until maturity.

(2) The loan matures on April 30, 2007 or earlier upon the sale of the condominium hotel units.

F-28

INDEX TO OTHER FINANCIAL STATEMENTS

The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s acquiring an interest in Cypress Recreations, LP. For information regarding this investment and the leases into which the Company has entered, see the “Business - Property Acquisitions.”

	Page
Cypress Bowl Recreations, LP
Unaudited Financial Statements as of March 31, 2006 and for Quarters Ended March 31, 2006 and 2005
Unaudited Balance Sheet	F - 30
Unaudited Statement of Income	F - 31
Unaudited Statement of Cash Flows	F - 32
Notes to the Unaudited Financial Statements	F - 33
Balance Sheets as of December 31, 2005 and 2004 and the related Statements of Income, Stockholder’s Equity and Accumulated Other Comprehensive Income (Loss), and Cash Flows for the years ended December 31, 2005 and 2004
Independent Auditor’s Report	F - 35
Balance Sheet	F - 36
Statement of Income	F - 37
Statement of Partner’s Capital and Accumulated Other Comprehensive Income (Loss)	F - 38
Statement of Cash Flows	F - 39
Notes to the Financial Statements	F - 40
The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of the Bretton Woods Mountain Resort. For information regarding this investment and the leases into which the Company has entered, see the “Business – Property Acquisitions.”
The Bretton Woods Property
Summarized Financial Information	F - 48

F-29

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

UNAUDITED BALANCE SHEET

MARCH 31, 2006 AND DECEMBER 31, 2005

	2006		2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3,356,912	$	736,509
Accounts receivable		70,065		142,442
Inventories		94,212		209,409
Prepaids		141,689		249,372
Total current assets		3,662,878		1,337,732
PROPERTIES, FACILITIES, AND EQUIPMENT, net		8,331,795		8,524,337
DEFERRED TAX ASSET		57,466		57,466
OTHER LONG TERM ASSETS
Park use permit, net of accumulated amortization		7,620,486		7,689,044
Total assets	$	19,672,625	$	17,608,579
LIABILITIES AND PARTNER’S CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,515,200	$	1,621,337
Current portion of long term obligations and allocated senior debt		—		117,782
Allocated Income tax payable		1,266,974		1,004,986
Deferred revenue		53,268		926,098
Total current liabilities		2,835,442		3,670,203
LONG TERM OBLIGATIONS AND ALLOCATED SENIOR DEBT, net of current portion		5,135,395		4,096,948
COMMITMENTS AND CONTINGENCIES
PARTNER’S CAPITAL
Partner’s contributed capital		4,736,161		4,736,161
Retained earnings		4,475,591		2,574,730
Accumulated other comprehensive income		2,490,036		2,530,537
		11,701,788		9,841,428
	$	19,672,625	$	17,608,579

See accompanying notes.

F-30

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

UNAUDITED STATEMENT OF INCOME

QUARTERS ENDED MARCH 31, 2006 AND 2005

	2006			2005
RESORT AND RETAIL REVENUES	$	6,950,852		$	3,934,130
RESORT AND RETAIL OPERATIONS EXPENSE, INCLUDING DIRECT PAYROLL		2,783,035			1,369,523
UNALLOCATED OPERATING EXPENSES
General and administrative		402,431			252,785
Selling and marketing		98,426			58,898
Depreciation and amortization		394,147			341,034
		895,004			652,717
OTHER INCOME (EXPENSE)
Interest expense		(105,378	)		(78,788	)
		(105,378	)		(78,788	)
NET INCOME BEFORE INCOME TAXES		3,167,435			1,833,102
INCOME TAX EXPENSE		1,266,974			733,241
NET INCOME	$	1,900,461		$	1,099,861

See accompanying notes.

F-31

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

UNAUDITED STATEMENT OF CASH FLOWS

QUARTERS ENDED MARCH 31, 2006 AND 2005

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,900,461		$	1,099,861
Adjustments to reconcile net income to net cash flows from operating activities
Depreciation and amortization		394,147			341,034
Loss on sale of equipment		—			8,299
Change in operating assets and liabilities:
Accounts receivable		72,377			46,469
Inventories		115,197			24,406
Prepaids		107,683			78,789
Accounts payable and accrued liabilities		(106,137	)		(410,472	)
Accrued income taxes		261,988			581,429
Deferred revenue		(872,830	)		(1,280,797	)
		1,872,886			489,018
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of facilities and equipment		(133,047	)		—
		(133,047	)		—
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances to parent		740,409			(1,023,831	)
		740,409			(1,023,831	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		140,155			(32,698	)
CHANGE IN CASH AND CASH EQUIVALENTS		2,620,403			(567,511	)
CASH AND CASH EQUIVALENTS
Beginning of year		736,509			1,174,776
End of year	$	3,356,912		$	607,265

See accompanying notes.

F-32

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

QUARTER END MARCH 31, 2006

1. General

The statements presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited balance sheet as of December 31, 2005 and 2004, and the related statement of income, statement of partner’s capital and accumulated other comprehensive income (loss) and statement of cash flows for the years ended December 31, 2005 and 2004. In the opinion of management, all adjustments that are deemed necessary have been made in order to fairly present the unaudited interim financial statements for the period and accounting policies have been consistently applied.

F-33

CYPRESS BOWL RECREATIONS

LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

INDEPENDENT AUDITOR’S REPORT

and

FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

F-34

INDEPENDENT AUDITOR’S REPORT

To the Partners

Cypress Bowl Recreations Limited Partnership

(A wholly owned subsidiary of Boyne USA, Inc.)

We have audited the accompanying balance sheets of Cypress Bowl Recreations Limited Partnership (the Company) (a wholly owned subsidiary of Boyne USA, Inc.) as of December 31, 2005 and 2004, and the related statements of income, partner’s capital and accumulated other comprehensive income (loss), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards (United States of America). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cypress Bowl Recreations Limited Partnership at December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Seattle, Washington

March 27, 2006

F-35

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

BALANCE SHEET

DECEMBER 31, 2005 AND 2004

	2005		2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	736,509	$	1,174,776
Accounts receivable		142,442		101,846
Inventories		209,409		157,458
Prepaids		249,372		375,568
Total current assets		1,337,732		1,809,648
PROPERTY, FACILITIES, AND EQUIPMENT, net		8,524,337		8,002,697
DEFERRED TAX ASSETS		57,466		—
OTHER LONG TERM ASSETS
Park use permit, net of accumulated amortization of $1,328,944 and $1,053,990		7,689,044		7,965,345
Total assets	$	17,608,579	$	17,777,690
LIABILITIES AND PARTNER’S CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,621,337	$	1,013,325
Current portion of long term obligations and allocated senior debt		117,782		39,085
Income tax payable		1,004,986		151,812
Deferred revenue		926,098		2,466,144
Total current liabilities		3,670,203		3,670,366
DEFERRED TAX LIABILITY		—		142,705
LONG TERM OBLIGATIONS AND ALLOCATED SENIOR DEBT, net of current portion		4,096,948		5,674,778
COMMITMENTS AND CONTINGENCIES (Note 5)
PARTNER’S CAPITAL
Partner’s contributed capital		4,736,161		4,736,161
Retained earnings		2,574,730		1,367,508
Accumulated other comprehensive income		2,530,537		2,186,172
		9,841,428		8,289,841
	$	17,608,579	$	17,777,690

See accompanying notes.

F-36

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

STATEMENT OF INCOME

YEARS ENDED DECEMBER 31, 2005 AND 2004

	2005			2004
RESORT AND RETAIL REVENUES	$	9,236,066		$	9,491,104
RESORT AND RETAIL OPERATIONS EXPENSE, INCLUDING DIRECT PAYROLL		4,312,227			5,033,743
UNALLOCATED OPERATING EXPENSES
General and administrative		943,642			956,667
Selling and marketing		203,150			201,188
Depreciation and amortization		1,424,313			1,532,133
		2,571,105			2,689,988
OTHER INCOME (EXPENSE)
Unrealized foreign exchange gain (loss)		—			(202,346	)
Interest expense		(340,697	)		(350,333	)
		(340,697	)		(552,679	)
NET INCOME BEFORE INCOME TAXES		2,012,037			1,214,694
FOREIGN INCOME TAX EXPENSE (BENEFIT)
Current		1,004,986			196,212
Deferred		(200,171	)		(35,845	)
		804,815			160,367
NET INCOME	$	1,207,222		$	1,054,327

See accompanying notes.

F-37

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

STATEMENT OF PARTNER’S CAPITAL AND

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2005 AND 2004

	Partner’s Contributed Capital		Retained Earnings		Comprehensive Income		Accumulated Other Comprehensive Income		Total
BALANCE, December 31, 2003	$	4,736,161	$	313,181			$	1,536,473	$	6,585,815
Net income		—		1,054,327	$	1,054,327		—		1,054,327
Foreign currency translation adjustment		—		—		649,699		649,699		649,699
Comprehensive income		—		—	$	1,704,026		—		—
BALANCE, December 31, 2004		4,736,161		1,367,508				2,186,172		8,289,841
Net income		—		1,207,222	$	1,207,222		—		1,207,222
Foreign currency translation adjustment		—		—		344,365		344,365		344,365
Comprehensive income		—		—	$	1,551,587		—		—
BALANCE, December 31, 2005	$	4,736,161	$	2,574,730			$	2,530,537	$	9,841,428

See accompanying notes.

F-38

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005 AND 2004

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,207,222		$	1,054,327
Adjustments to reconcile net income to net cash flows from operating activities
Depreciation and amortization		1,424,313			1,532,133
Gain on sale of equipment		(29,641	)		—
Unrealized foreign exchange loss		—			202,346
Deferred income taxes		(200,171	)		(35,845	)
Change in operating assets and liabilities:
Accounts receivable		(36,638	)		43,213
Inventories		(46,032	)		87,124
Prepaids		135,682			(97,249	)
Accounts payable and accrued liabilities		564,852			(485,025	)
Accrued income taxes		853,174			—
Deferred revenue		(1,589,164	)		1,010,307
		2,283,597			3,311,331
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of facilities and equipment		(1,406,604	)		(457,507	)
Proceeds from sale of equipment		29,641			—
		(1,376,963	)		(457,507	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long term obligations and allocated senior debt		(1,577,830	)		(3,416,606	)
Net advances to parent		—			(257,107	)
		(1,577,830	)		(3,673,713	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		232,929			461,166
CHANGE IN CASH AND CASH EQUIVALENTS		(438,267	)		(358,723	)
CASH AND CASH EQUIVALENTS
Beginning of year		1,174,776			1,533,499
End of year	$	736,509		$	1,174,776

See accompanying notes.

F-39

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 1 - Operations and Principles of Combination

Operations - Cypress Bowl Recreations Limited Partnership (“Cypress” or the “Company”), a British Columbia, Canada, Limited Partnership, own and operate a year-round mountain resort facility in Vancouver, British Columbia. Cypress’ facilities are located on land owned by the Canadian Provincial Parks and operations are carried out under a Special Use Permit subject to certain terms and limitations (Note 6).

Cypress Bowl Recreations Limited Partnership is a wholly owned subsidiary of Boyne USA, Inc. and subsidiaries (collectively “Boyne USA” or the “Parent”). Boyne USA, through its wholly owned subsidiaries, is a multi-dimensional organization operating in the resort and recreation industry. Boyne USA owns and operates seasonal and year-round facilities consisting of ski, golf, lodging, restaurant, retail and other property management. During August 2005 Boyne USA entered into an agreement with CNL Income Properties, Inc. whereby CNL agreed to acquire the resort assets of the Cypress and related park use permit operating rights (Note 10).

Cypress’ operations are not accounted for as a separate entity within the organization of the Parent. The accompanying financial statements of Cypress are carved out of the Parent’s consolidated financial statements and have been prepared on a historical cost basis under established accounting methods, practices, procedures and policies and the accounting judgments and estimation methodologies of the Parent. These financial statements may not necessarily be indicative of the financial position, results of operations or cash flows that would have resulted if Cypress had been operated as a stand alone entity. Management believes the judgments made in preparing these financial statements were reasonable.

In order to reflect all of Cypress’s costs of operations, these financial statements reflect the pushdown of the identifiable intangible asset (Park Use Permit - Note 6) and related amortization, general and administrative costs, allocated debt, interest expense, and income taxes. The debt was allocated based on designated use of proceeds and reflects debt which is collateralized by substantially all of Cypress’s assets including cross collateralization for the debt related to other wholly owned subsidiaries of Boyne USA. Income taxes have been allocated based on net taxable income and related deferred tax assets and liabilities of Cypress subject to Canadian and provincial taxes.

Financial Statement Presentation and Foreign Currency Translation - The financial statements are presented in U.S. Dollars which is the Parent’s functional currency. Assets and liabilities denominated in local currencies (Canadian Dollars) are translated to U.S. Dollars using the year end exchange rate for assets and liabilities and the average exchange rate for the period for income and expense items.

F-40

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 1 - Operations and Principles of Combination(Continued)

Allocated debt and certain long-term assets including the allocated Park Permit are translated at the historical exchange rate. The year end exchange rate at December 31, 2005 and 2004 was approximately $1.17 and $1.20, respectively. The average exchange rate for the years ended December 31, 2005 and 2004 was approximately $1.19 and $1.30, respectively.

Note 2 - Summary of Significant Accounting Policies

Seasonality - The Company has two distinct seasons with skiing and other winter activities generally occurring from December through April and limited summer operations occurring from June through September. Winter activities represent substantially all revenues generated. Operations are subject to unusual seasonality and operating results are highly dependent upon weather conditions. The 2004/2005 season experienced adverse weather conditions and as a result certain resort revenues included in deferred revenue at December 31, 2004 were reclassified to accrued liabilities for refunds paid during 2005.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents - The Company considers all cash and short-term investments with a maturity at date of purchase of three months or less, to be cash equivalents.

Accounts Receivable - Accounts receivable are stated at an amount management expects to collect and accounts are written off on a specific identification method, which management does not believe materially differs from the allowance method required under accounting principles generally accepted in the United States of America. Based on management’s assessment of the credit history of the customers with outstanding balances, it has concluded that potential future losses on balances outstanding at year end will be immaterial.

F-41

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 2 - Summary of Significant Accounting Policies(Continued)

Inventories - The Company values inventories at the lower of cost or market with cost determined on the weighted-average or first-in, first-out (FIFO) method. Inventories consist of the following at December 31:

	2005		2004
Retail and demo equipment	$	141,880	$	142,475
Food, beverage, and supplies		67,529		14,983
	$	209,409	$	157,458

Property, Facilities, and Equipment - Property, facilities, and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets (15 to 39 years for buildings and improvements, 3 to 20 years for machinery and equipment, and 3 to 15 years for furniture and fixtures). Leasehold improvements are depreciated or amortized over the shorter of the estimated useful lives of the related assets or the lease term. Maintenance and repair costs are charged to operations as incurred and additions, renewals, and improvements are capitalized.

Park Use Permit - The Special Use Permit represents an identified intangible. The fair value of the permit was calculated to be $8,716,000 at the time of the Cypress acquisition during 2001, based upon exchange rates at such time, and is being amortized over the remaining useful life of the permit, or approximately 30 years. Annual amortization expense amounts to approximately $275,000 per year for the years ended December 31, 2005 and 2004. Amortization expense for the next 5 years is expected to be approximately $275,000 per year.

Impairment of Long-Lived Assets - The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value based on the present value of estimated expected future cash flows. No such impairments have been determined to be present.

Revenue Recognition - Revenue derived from resort activities and merchandise sales is generally recognized at the point of sale when earned, as the facilities are used, when the services are rendered, or when the retail merchandise is sold.

F-42

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 2 - Summary of Significant Accounting Policies(Continued)

The Company sells season passes and multi-week packages for various amenities, including equipment rentals and ski instructions. Revenues from season passes are recognized over the season in which the facilities are utilized, generally December 1st to April 15th. Revenues for multi-week packages and amenities are recognized as the services are performed.

Concentration of Credit Risk - Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. From time to time, the Company’s cash deposits at a single institution exceed federally insured amounts. Cash and cash equivalents are deposited with high credit, quality financial institutions.

Comprehensive Income - Comprehensive income includes all changes in equity during the period from non-owner sources such as foreign currency translation adjustments. Accumulated other comprehensive income (loss), as presented on the accompanying statement of stockholder’s equity, consists of the cumulative foreign currency translation adjustment resulting from the translation from the local currency (Canadian Dollars) to the reporting currency (U.S. Dollars).

Income Taxes - Cypress is limited partnership and as a result the resulting income tax obligations from the resort operations are passed through to the partners, Boyne Canada ULC and Cypress Bowl ULC, both Canadian entities and wholly owned subsidiaries of Boyne USA, Inc. The partners are subject to Canadian Federal and Provincial taxes. For purposes of these carve-out financial statements, income taxes have been reflected utilizing the “separate return” method and an income tax provision has been included for the taxable earnings reflected, including the impacts of certain allocated income and expenses. Certain allocations from the Parent have not been included in determining the provision for income taxes as the Parent is not subject to Canadian Federal or Provincial taxes and such costs do not impact the taxable income for such purposes. The Company has deferred income tax assets and liabilities due to the deferred benefits and obligations resulting from differences in the carrying basis between book reporting and Canadian tax purposes in property, equipment and facilities. Changes in these deferred benefits and liabilities are reflected in the deferred tax expense (benefit) within the statement of income.

Advertising and Promotion Expense - Advertising and promotion costs are expensed when incurred or expensed ratably over the advertising or promotional campaign. During 2005 and 2004, the Company expensed $80,000 and $74,000 for advertising and promotion costs.

F-43

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 2 - Summary of Significant Accounting Policies(Continued)

Recent Accounting Pronouncements - In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51” (“FIN 46R”), which provided, among other things, immediate deferral of the application of FIN 46 for entities that did not originally qualify as special purpose entities, and provided additional scope exceptions for joint ventures with business operations and franchises. The Company’s adoption of FIN 46R did not have an impact on its financial statements.

Note 3 - Property, Facilities, and Equipment

Property, facilities, and equipment consist of the following at December 31:

	2005		2004
Land and improvements	$	2,483,769	$	1,904,741
Buildings and improvements		2,537,810		2,458,939
Machinery and equipment		13,086,654		12,564,989
Construction-in-progress		83,740		142,630
		18,191,973		17,071,299
Less accumulated depreciation and amortization		9,667,636		9,068,602
	$	8,524,337	$	8,002,697

The Company has capitalized equipment under capital leases totaling $338,000 and $194,000 at December 31, 2005 and 2004 with related accumulated amortization amounting to $82,000 and $54,000, respectively.

Note 4 - Long Term Obligations and Allocated Senior Debt

Long term obligations and allocated senior debt consists of balances due under a term note payable and capital leases, and allocated amounts due under the Parent’s senior debt facilities.

Term Notes Payable - The Company has a term note payable as of December 31, 2004 resulting from the acquisition of equipment which was paid in full upon maturity on November 22, 2005.

F-44

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 4 - Long Term Obligations and Allocated Senior Debt(Continued)

Capital Leases - The Company leases certain equipment under capital leases, which expire at various dates through 2007. Capital lease obligations outstanding at December 31, 2005 and 2004 were $228,056 and $96,539, respectively. Certain capital leases require monthly payments, due in six equal monthly payments from December 1st to April 1st over the lives of the leases, with no payments being made between May to November. The total weighted average interest rate of capital lease agreements amounts to approximately 8.0%.

Allocated Senior Debt - Allocated senior debt consists of a portion of the senior debt obligations as recorded by the Parent which have been allocated to the Company. The allocation of the senior debt recorded by the Company reflect the amount attributable to the assets and operations included within these carve-out financial statements, including consideration of intercompany advances and repayments between the Company, the Parent and affiliates. The allocated senior debt is not indicative of the necessary funding requirements if the Company was a stand alone entity or the terms and conditions that the Company could obtain for similar financing arrangements.

On December 31, 2005 the Company’s Parent has a credit agreement with a financial institution which includes long-term revolving line of credit and a term note payable. The credit agreement was entered into on September 30, 2005 and refinanced certain outstanding obligations of the Parent, including an outstanding balance included in a separate revolving line of credit which was partially utilized during 2001 to acquire the Company. As a result of the refinance on September 30, 2005, the assets and operations of Cypress Bowl Recreation Limited Partnership are subject to the collateralization provisions of the new agreement. The aggregate outstanding balance as recorded by the Parent under the credit agreements under which the Company is collateralized amounts to $52,797,000 and accrues interest at an annual rate of 7.50%.

Prior to the Parent’s refinance on September 30, 2005 the Company was subject to collateralization of a separate revolving credit facility. At December 31, 2004, the outstanding balance under the credit facility as recorded by the Parent was $24,236,591 and accrues interest at an annual rate of LIBOR plus 100 basis points.

The financial statements include allocated interest at the average annual borrowing rate of the Parent based upon the allocated debt during the periods presented.

The Parents credit agreements is collateralized by substantially all assets of the Company, including assignment in trust of the Company’s interest and rights under the Special Use Permit (see Note 6). The Company is subject to certain restrictive financial covenants and other matters.

F-45

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 4 - Long Term Obligations and Allocated Senior Debt(Continued)

Maturities of senior debt for future years ending December 31 are as follows:

	Allocated Senior Debt		Capital Leases		Total
2006	$	250,000	$	117,782	$	367,782
2007		250,000		127,474		377,474
2008		250,000		—		250,000
2009		250,000		—		250,000
Thereafter		2,986,674		—		2,986,674
		3,986,674		245,256		4,231,930
Less amount representing interest		—		17,200		17,200
	$	3,986,674	$	228,056	$	4,214,730

Note 5 - Income Taxes

The income tax provision is calculated under the “separate return” basis and is derived from the estimated effective tax rates and taxable income related to the resort operations and assets within Canada as if Cypress were operating as a stand alone entity. The deferred tax assets (liabilities), income tax expense (benefit) and related income tax obligations may not be indicative of the impacts of Canadian and provincial taxing jurisdictions if Cypress was not part of consolidated Boyne USA, Inc.

The estimated income tax expense (benefit) differs from expected income tax expense (benefit) as follows:

	2005		2004
Expected income tax expense	40.0	%	40.0	%
Unrealized foreign exchange gain/loss	—		(20.0	)
Corporate allocations and credits	—		(7.0	)
	40.0	%	13.0	%

F-46

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 5 - Income Taxes(Continued)

The Company’s deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for federal income tax purposes. The Company’s net deferred tax assets (liability) at December 31, 2005 and 2004 result from differences in the recorded amounts for property, facilities and equipment. At December 31, 2004, accumulated unrealized foreign exchange rate gains and losses on amounts due to the Parent were treated as permanent differences due to the uncertainty of repayment and related recognition for tax purposes.

Note 6 - Commitments and Contingencies

Leases - The Company leases equipment under non-cancelable operating lease agreements, which expire at various dates through 2005. Lease expense for 2005 and 2004 under the agreements and other month-to-month lease agreements amounted to $77,515 and $76,734, respectively.

There are no scheduled future payments under the non-cancelable operating lease agreements for the year ended December 31, 2005.

Special Park Use Permit - The Company operates on land owned by the Canadian Provincial Parks (the Provincial Government) and operations are carried out under a Special Park Use Permit subject to certain terms and limitations (see Note 2). The commencement date of the Special Use Permit was September 17, 1984 and is valid for 50 years, or until October 31, 2034. However, anytime after the 40-year anniversary of the commencement date, the Company may petition to renew the term for an additional 50 years.

Under the terms of the Special Use Permit, the Company is required to pay a fee to the Provincial Government based on revenue, as defined by the Special Use Permit. Fees paid to the Provincial Government during each year amount to approximately 2.0% of revenues.

Contingencies - Injury claims are filed against the Company during the normal course of business. The Company believes the ultimate liability, if any, of such claims will not have a significant effect on the Company’s results of operations, liquidity, or financial position. The Company’s insurance policy includes provisions by which the Company is reimbursed for claims paid over $1.0 million, at which point stop-loss coverage is carried.

F-47

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 7 - Related Party Transactions

Insurance - The Company’s primary insurance provider is Lone Peak Insurance Company, LTD (“Lone Peak”), an offshore (Bermuda) captive insurance company that is a wholly owned subsidiary of Boyne USA. Its principal activity is the insurance of general liability risks of Boyne USA and subsidiaries under a claims made policy. During the years ended December 31, 2005 and 2004, the Company’s insurance premium expense included within resort operating expenses amounted to approximately $390,000 and $177,000, respectively. Unamortized insurance premiums paid to Lone Peak included within prepaids as of December 31, 2005 and 2004 amount to approximately $154,000 and $398,000, respectively.

Note 8 - Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair values for the Company’s financial instruments:

Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable - The carrying amounts of these items approximate their fair values at December 31, 2005 and 2004.

Term Note Payable and Capital Leases - Borrowings under the term note payable and capital lease obligations are subject to terms and conditions that reflect those currently available for similar financing arrangements. The carrying amount of these items approximates their fair values at December 31, 2005 and 2004.

Note 9 - 2010 Olympics and Sponsorship Agreement

In 2002, Cypress signed a Games Venue Agreement (the Agreement) with the Vancouver 2010 Bid Corporation (Bid Corp) regarding the use of existing and proposed additional facilities at Cypress during the 2010 Winter Olympic Games (the Games). The Agreement includes terms which would allow Bid Corp and its successor to host the freestyle skiing and snowboarding events of the Games at Cypress. The hosting of the Games at Cypress is expected to accrue tangible and intangible benefits to Cypress. Cypress has both fiduciary and non-fiduciary obligations as it relates to the Agreement.

F-48

CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP

(A wholly owned subsidiary of Boyne USA, Inc.)

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

Note 9 - 2010 Olympics and Sponsorship Agreement(Continued)

Cypress entered into a sponsorship agreement with Bell Canada in 2004. Terms of the agreement call for annual payments in exchange for exclusivity within the “telecommunications” category as a top tier Cypress sponsor and a supplier with respect to products. The annual payments are due in Canadian Dollar, amounting to the following based exchange rates at December 31, 2004: $104,000 beginning in 2004 through 2007, $125,000 during 2008 and 2009; and $145,000 due during 2010 to 2011. In addition, Bell contributed $33,000 in 2004 to Cypress towards the initial costs of a snowboard terrain park. Beginning in 2005 (through 2011), Bell will contribute $21,000 per year for other agreed upon “enhancements to winter property.” Both Cypress and Bell have various other obligations under the agreement which expires April 30, 2012.

Note 10 - Subsequent Event

During August 2005 Boyne USA entered into an agreement with CNL Income Properties, Inc. (CNL), whereby CNL agreed to acquire the resort assets of Cypress Bowl Recreation Limited Partnership and related park use permit operating rights for approximately $27.5 million. The closing was subject to various conditions including successful transfer of the park use permit.

The closing contingencies were successfully achieved and on May 30, 2006 CNL and Boyne USA, including Cypress Bowl Recreation Limited Partnership, completed the transaction and closed on the sale of substantially all of the resort assets of the Company. The Company received pre-tax proceeds of $27.5 million resulting in a pre-tax gain of approximately $20.0 million. In conjunction with the sale, the Company entered into two long term triple-net lease with the CNL for the Cypress assets sold and for the operating rights under the park use permit. The initial lease terms are 20 years with four five-year renewal options. The combined minimum annual rent is approximately $2.9 million and will increase annually to a maximum of approximately $3.7 million. Additionally, percentage rent due under the leases on a combined basis is equal to 9.0% of gross revenues in excess of $10.9 million. Boyne guaranteed the tenant’s payment of minimum annual rent under the leases for the first four years.

F-49

The Bretton Woods Property

Summarized Financial Information

The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of the Bretton Woods Mountain Resort.

Balance Sheet Data:

	March 31, 2006		December 31, 2005
	(unaudited)
Current assets	$	3,784,403	$	4,129,450
Noncurrent assets		29,915,142		30,287,745
Current liabilities		7,472,837		9,573,897
Noncurrent liabilities		16,938,165		16,640,090
Partner’s capital		9,288,543		8,203,208

Statement of Operations Data:

	Quarter ended March 31, 2006		Year Ended December 31, 2005
	(unaudited)
Revenues	$	9,909,829	$	30,056,892
Gross Profit	$	4,907,163	$	13,499,123
Net income (loss)	$	307,778	$	(1,204,363	)

F-50