NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP - Quarter Report: 2005 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

(Mark One)

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission file number 0-12138

 

New England Realty Associates Limited Partnership

(Exact name of registrant as specified in its charter)

 

Massachusetts		04-2619298
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
39 Brighton Avenue, Allston, Massachusetts		02134
(Address of principal executive offices)		(Zip code)

 

Registrant’s telephone number, including area code: (617) 783-0039

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

o

No

ý

 

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 (audited)
	Consolidated Statements of Income for the Three Months Ended September 30, 2005 and September 30, 2004, and the Nine Months Ended September 30, 2005 and September 30, 2004 (all unaudited)
	Consolidated Statement of Changes in Partners’ Capital for the Nine Months Ended September 30, 2005 and September 30, 2004 (all unaudited)
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and September 30, 2004 (all unaudited)
	Unaudited Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

NEW ENGLAND REALTY ASSOCIATES, L.P.

 

PART 1 – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

The accompanying unaudited consolidated balance sheets, statements of income, changes in partners’ capital, and cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are in the opinion of management, necessary for a fair presentation for the interim periods.

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in New England Realty Associates L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

The results of operations for the nine month period ended September 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2005			December 31, 2004
		(Unaudited)			(Audited)
ASSETS
Rental Properties		$	103,355,841		$	105,884,559
Rental Properties Held for Sale		—			406,805
Cash and Cash Equivalents		11,544,410			9,862,810
Rents Receivable		572,574			586,983
Real Estate Tax Escrows		707,916			736,608
Prepaid Expenses and Other Assets		2,913,488			2,625,798
Investment in Partnerships		16,250,163			10,233,188
Financing and Leasing Fees		593,921			640,542
Total Assets		$	135,938,313		$	130,977,293
LIABILITIES AND PARTNERS’ CAPITAL
Mortgage Notes Payable		$	115,770,231		$	115,615,800
Accounts Payable and Accrued Expenses		1,421,027			1,505,390
Advance Rental Payments and Security Deposits		3,022,415			3,386,547
Total Liabilities		120,213,673			120,507,737
Commitments and Contingent Liabilities (Note 9)
Partners’ Capital
173,252 units outstanding in 2005 and 2004		15,724,640			10,469,556
Total Liabilities and Partners’ Capital		$	135,938,313		$	130,977,293

 

See notes to consolidated financial statements.

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Revenue
Rental income		$	7,836,797		$	7,541,132		$	23,446,985		$	22,786,701
Laundry and sundry income		105,951			94,201			310,007			255,125
		7,942,748			7,635,333			23,756,992			23,041,826
Expense
Administrative		307,881			322,532			967,199			966,689
Depreciation and amortization		1,642,148			1,551,431			4,745,603			4,452,078
Interest		1,960,195			1,965,489			5,842,077			5,886,669
Management fees		315,741			311,238			956,485			940,694
Operating		692,382			669,136			2,870,006			2,443,804
Renting		190,651			272,372			448,420			507,738
Repairs and maintenance		1,371,378			1,438,459			3,661,190			3,687,770
Taxes and insurance		861,060			804,807			2,690,951			2,546,586
		7,341,436			7,335,464			22,181,931			21,432,028
Income Before Other Income		601,312			299,869			1,575,061			1,609,798
Other Income (Loss)
Interest income		58,907			52,140			156,815			186,863
Income (Loss) from investment in joint ventures		521,993			(160,706		)	1,189,475			(233,758		)
		580,900			(108,566		)	1,346,290			(46,895		)
Income from Continuing Operations		1,182,212			191,303			2,921,351			1,562,903
Discontinued Operations
Income from discontinued operations		1,727			18,708			6,111			66,134
Gain on sale of real estate from discontinued operations		189,670			—			5,960,033			—
		191,397			18,708			5,966,144			66,134
Net Income		$	1,373,609		$	210,011		$	8,887,495		$	1,629,037
Income per Unit
Income before discontinued operations		6.82			1.10			16.86			9.02
Income from discontinued operations		1.11			0.11			34.44			0.38
		7.93			1.21			51.30			9.40
Net Income per Unit		$	7.93		$	1.21		$	51.30		$	9.40
Weighted Average Number of Units Outstanding		173,252			173,252			173,252			173,252

 

See notes to consolidated financial statements.

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

 

(UNAUDITED)

 

		Limited						General
		Class A			Class B			Partnership			Total
Balance, January 1, 2004		$	10,846,650		$	2,579,532		$	135,795		$	13,561,977
Distribution to Partners		(2,795,597		)	(663,954		)	(34,945		)	(3,494,496		)
Net Income		1,303,230			309,517			16,290			1,629,037
Balance, September 30, 2004		$	9,354,283		$	2,225,095		$	117,140		$	11,696,518
Units authorized and Issued, net of 6,973 Treasury Units at September 30, 2004		138,602			32,918			1,732			173,252
Balance, January 1, 2005		$	8,372,714		$	1,991,972		$	104,870		$	10,469,556
Distribution to Partners		(2,905,929		)	(690,158		)	(36,324		)	(3,632,411		)
Net Income		7,109,996			1,688,624			88,875			8,887,495
Balance, September 30, 2005		$	12,576,781		$	2,990,438		$	157,421		$	15,724,640
Units authorized and Issued, net of 6,973 Treasury Units at September 30, 2005		138,602			32,918			1,732			173,252

 

See notes to consolidated financial statements.

 

5

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended September 30,
		2005			2004
Cash Flows from Operating Activities
Net income		$	8,887,495		$	1,629,037
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,764,508			4,481,480
(Income) loss from investments in joint venture/partnership		(1,189,475		)	233,758
(Income) on sale of rental properties		(5,770,363		)	—
Change in operating assets and liabilities
(Increase) decrease in rents receivable		14,409			(43,498		)
(Increase) in financing and leasing fees		(44,854		)	—
Increase (decrease) in accounts payable and accrued expense		(84,363		)	(14,142		)
(Increase) decrease in real estate tax escrow		28,692			(50,406		)
(Increase) decrease in prepaid expenses and other assets		(301,601		)	13,148
Increase (decrease) in advance rental payments and security deposits		(364,132		)	23,902
Total Adjustments		(2,947,179		)	4,644,241
Net cash provided by operating activities		5,940,316			6,273,278
Cash Flows Used in Investing Activities
Purchase and improvement of rental properties		(2,122,653		)	(6,860,178		)
(Investment) in partnerships		(4,827,500		)	(13,065,750		)
Net proceeds from the sale of rental properties		6,169,417			—
Net cash provided by (used in) investing activities		(780,736		)	(19,925,928		)
Cash Flows Used in Financing Activities
Proceeds of mortgage notes payable		2,000,000			—
Principal payments of mortgage notes payable		(1,845,569		)	(535,638		)
Distribution to partners		(3,632,411		)	(3,494,496		)
Net cash (used in) financing activities		(3,477,980		)	(4,030,134		)
Net Increase (Decrease) in Cash and Cash Equivalents		1,681,600			(17,682,784		)
Cash and Cash Equivalents, at beginning of period		9,862,810			24,362,328
Cash and Cash Equivalents, at end of period		$	11,544,410		$	6,679,544

 

See notes to consolidated financial statements.

 

6

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005

 

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES

 

Line of Business:  New England Realty Associates Limited Partnership (“NERA” or the “Partnership”) was organized in Massachusetts during 1977. NERA and its subsidiaries own and operate various residential apartment buildings, condominium units and commercial properties located in Massachusetts and New Hampshire. NERA has also made investments in other real estate partnerships and has participated in other real estate-related activities, primarily located in Massachusetts. In connection with the mortgages referred to in Note 5, a substantial number of NERA’s properties are owned by separate subsidiaries without any change in the historical cost basis.

 

Principles of Consolidation:  The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for five limited liability companies (the “Investment Properties”) in which the Partnership has a 50% ownership interest. The consolidated group is referred to as the “Partnerships.” Minority interests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in the above-mentioned limited liability companies using the equity method of consolidation. (See Note 14 for information on the Investment Properties).

 

Accounting Estimates:  The preparation of the financial statements, in conformity with accounting principles generally accepted in the United State of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates.

 

Revenue Recognition:  Rental income from residential and commercial properties is recognized over the term of the related lease. Amounts 60 days in arrears are charged against income. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease.

 

Rental Properties:  Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts.  Rental properties are depreciated on a straight-line basis over their estimated useful lives.

 

In the event that facts and circumstances indicate that the carrying value of a rental property may be impaired, an analysis of recoverability is prepared. The estimated future undiscounted cash flows are compared to the assets carrying value to determine if a write-down to fair value is required.

 

Financing and Leasing Fees:  Financing fees are capitalized and amortized, using the interest method, over the life of the related mortgages. Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease.  Unamortized balances are expensed when the corresponding fee is no longer applicable.

 

Income Taxes:  The financial statements have been prepared under the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes has been recorded.

 

Cash Equivalents:  The Partnership considers cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less.

 

Segment Reporting:  Operating segments are revenue-producing components of the Partnership for which separate financial information is produced internally for management. Under the definition, NERA operated, for all periods presented, as one segment.

 

Comprehensive Income:  Comprehensive income is defined as changes in partners’ equity, exclusive of transactions with owners (such as capital contributions and dividends). NERA did not have any comprehensive income items in 2005 or 2004 other than net income as reported.

 

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Income Per Unit:  Net income per unit has been calculated based upon the weighted average number of units outstanding during each year presented. The Partnership has no dilutive units and, therefore, basic net income is the same as diluted net income per unit (see Note 7).

 

Concentration of Credit Risks and Financial Instruments:  The Partnerships’ properties are located in New England, and the Partnerships are subject to the general economic risks related thereto.  No single tenant accounted for more than 5% of the Partnerships’ revenues in 2005 or 2004.  The Partnerships make their temporary cash investments with high-credit-quality financial institutions.  At September 30, 2005, substantially all of the Partnerships’ cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from .40% to 3.43%.  At September 30, 2005 and December 31, 2004 approximately $12,000,000 and $9,000,000 of cash and cash equivalents exceeded federally insured amounts.

 

Advertising Expense:  Advertising is expensed as incurred. Advertising expense was $101,497 and $162,288 for the nine months ended September 30, 2005 and 2004, respectively.

 

Discontinued Operations and Rental Property Held for Sale: When assets are identified by management as held for sale, the Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the net sales price of the assets which have been identified as held for sale is less than the net book of the assets, a valuation allowance is established.  Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.

 

If circumstances arise that previously were considered unlikely and, as a result, the Partnership decides not to sell a property previously classified as held for sale, the property is reclassified as held and used.  A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized that the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.

 

Interest Capitalized:  The Company follows the policy of capitalizing interest as a component of the cost of rental property when the time of construction exceeds one year.  During the year ended December 31, 2004, the Company capitalized interest of approximately $125,000.

 

Reclassifications:  Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

 

NOTE 2.    RENTAL PROPERTIES

 

As of September 30, 2005, the Partnership and its Subsidiary Partnerships owned 2,378 residential apartment units in 22 residential and mixed-use complexes (collectively, the “Apartment Complexes”).  The Partnership also owns 24 condominium units in two residential condominium complexes, all of which are leased to residential tenants (collectively referred to as the “Condominium Units”).  The Apartment Complexes and Condominium Units are located primarily in the greater metropolitan Boston, Massachusetts area.

 

Additionally, as of September 30, 2005, the Subsidiary Partnerships owned commercial shopping centers in Framingham, Massachusetts and mixed-use properties in Boston, Brockton and Newton, Massachusetts.  These properties are referred to collectively as the “Commercial Properties.”

 

In March 2005, the Partnership sold the Middlesex Apartments to an entity wholly owned by the majority shareholder of the General Partner.  The selling price was $6,500,000 which resulted in a capital gain for the Partnership of approximately $5,800,000 and an increase in the Partnership’s cash reserves by approximately $4,800,000 after payment of the existing $1,300,000 mortgage, prepayment penalties and other selling expenses. The buyer is selling the property as condominium units. An entity 31% owned by the majority shareholder of the General Partner and 5% owned by the President of the management company is the sales agent and will receive a variable commission of 3% to 5% on each sale.  Total commissions were $138,000 for the nine months ended September 30, 2005.  Although the buyer is assuming the costs and economic risks of converting and selling the condominium units, if the net gains from the sale of these units exceed $500,000, the excess will be split equally between the buyer and the Partnership. The buyer estimates that the gain from the sale of these units will exceed $500,000 and a profit of $189,670 through September 2005 is included in gain on sale.

 

In September 2004, the Partnership completed the construction of twenty residential units at the Westgate Apartments in Woburn, Massachusetts. The total cost of these twenty units was approximately $5,100,000 and is included in buildings and improvements above.  In January 2005, the Partnership obtained a $2,000,000 mortgage on this property.

 

8

 

Rental properties consist of the following:

 

		September 30, 2005			December 31, 2004			Useful Life
Land, improvements and parking lots		$	23,178,089		$	23,168,229		10-31 years
Buildings and improvements		105,870,698			105,631,294			15-31 years
Kitchen cabinets		4,104,176			3,371,139			5-10 years
Carpets		3,482,048			2,895,045			5-10 years
Air conditioning		812,937			737,030			7-10 years
Laundry equipment		197,243			185,254			5-7 years
Elevators		709,243			560,838			20 years
Swimming pools		142,428			142,429			10 years
Equipment		1,652,731			1,504,555			5-7 years
Motor vehicles		126,483			126,483			5 years
Fences		269,031			244,869			5-10 years
Furniture and fixtures		4,422,629			4,236,547			5-7 years
Smoke alarms		130,602			116,496			5-7 years
Construction in progress		—			17,692			—
		145,098,338			142,937,900
Less accumulated depreciation		(41,742,497		)	(37,053,341		)
		$	103,355,841		$	105,884,559

 

Additionally, as of September 30, 2005, the Partnership owned a 50% ownership interest in five residential and condominium complexes (the Investment Properties).  See Note 14 to the consolidated financial statements for additional information on these investments.

 

NOTE 3.    RELATED PARTY TRANSACTIONS

 

The Partnerships’ properties are managed by an entity that is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of rental revenue and laundry income. Total fees paid were approximately $959,000 and $953,000 for the nine months ended September 30, 2005 and 2004, respectively.

 

The Partnership Agreement permits the General Partner or management company to charge the costs of professional services (such as counsel, accountants and contractors) to NERA. In the nine months ended September 30, 2005 and 2004, approximately $363,000 and $3,980,000 respectively, was charged to NERA for legal, construction, maintenance, rental and architectural services and supervision of capital improvements. Of the 2005 expenses referred to above, approximately $180,000 consisted of repairs and maintenance and $97,000 of administrative expense; approximately $68,000 of construction, architectural services and supervision of capital projects was capitalized in rental properties and approximately $18,000 for rental commissions.  Of the 2004 expenses referred to above, approximately $100,000 consisted of repairs and maintenance and $81,000 of administrative expense; approximately $2,355,000 of construction, architectural services and supervision of capital projects was capitalized in rental properties. Additionally in each of the quarters ended September 30, 2005 and 2004, the Partnership paid to the management company $20,000 for in-house accounting services. Included in accounts payable and accrued expenses at September 30, 2005 and December 31, 2004 is $332,811 and $147,195, respectively, due to the management company. The Partnership Agreement entitles the General Partner or the management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%. No commissions were paid during the year ended December 31, 2004 and through September 30, 2005.

 

The Hamilton Company also received fees of approximately $597,000 from the Investment Properties of which approximately $196,000 was the management fee and $346,000 for construction, construction supervision and architectural fees and $55,000 for other services.  Additionally, as more fully described in Note 2 and 14, an entity partially owned by the majority shareholder of the General Partner is the sales agent for certain condominium sales receiving approximately $556,000 of commissions through September 30, 2005.

 

9

 

On January 1, 2004, NERA’S employees were transferred to the management company’s payroll.  The Partnership and Investment Properties reimbursed the management company for the payroll and related expenses of the employees directly employed by the NERA properties.  Total reimbursement was approximately $1,538,000 for the nine months ended September 30, 2005.

 

In 1996, prior to becoming an employee and President of the management company, the current President performed asset management consulting services to the Partnership. This individual continues to perform this service and to receive an asset management fee from the Partnership, receiving $37,500 for the nine months ended September 30, 2005 and $50,000 for the year ended December 31, 2004.

 

The Partnership has invested in five limited liability companies to purchase five residential apartment complexes (the “Investment Properties”).  The Partnership owns 50% of each entity and the majority shareholder of the General Partner owns 47½% and the President of Hamilton owns 2½% respectively.  See Note 14 for a description of the properties and their operations and Note 17 for an additional investment made in October 2005.

 

The Partnership owns 5 condominiums in a 42-unit condominium building managed by an entity wholly owned by the 25% shareholder and President of the General Partner.  That entity will receive annual management fees from the five units of approximately $1,500, and Hamilton will reduce its management fees to approximately 2%, so that the total management fee will not exceed the 4% allowed by the Partnership’s Partnership Agreement.

 

In March 2005, the Partnership sold the Middlesex Apartments to the majority shareholder of the General Partner.  See Note 2 for the description of the transaction.

 

NOTE 4.    OTHER ASSETS

 

Included in prepaid expenses and other assets at September 30, 2005 and December 31, 2004 is approximately $526,000 and $536,000, respectively, held in escrow to fund future capital improvements.

 

Financing and leasing fees of $593,921 and $640,542 are net of accumulated amortization of $438,394 and $371,604 at September 30, 2005 and December 31, 2004, respectively.

 

NOTE 5.    MORTGAGE NOTES PAYABLE

 

At September 30, 2005 and December 31, 2004, the mortgages payable consisted of various loans, all of which were secured by first mortgages on properties referred to in Note 2.  At September 30, 2005, the fixed interest rates on these loans ranged from 4.84% to 8.46%, payable in monthly installments aggregating approximately $704,000, including interest, to various dates through 2016.  The majority of the mortgages are subject to prepayment penalties.  At September 30, 2005, the weighted average interest rate on the above mortgages was 5.89%.  The effective rate of approximately 7% includes the amortization expense of deferred financing costs.  See Note 12 for fair value information.

 

The Partnerships have pledged tenant leases as additional collateral for certain of these loans.

 

Approximate annual maturities at September 30, 2005 are as follows:

 

2006- current maturities		$	2,442,000
2007		1,036,000
2008		1,161,000
2009		5,712,000
2010		41,796,000
Thereafter		63,623,000
		$	115,770,000

 

In January 2005, the Partnership obtained a mortgage on the Courtyard at Westgate for $2,000,000 at an interest rate of 5.25%.   These funds were added to cash reserves. The loan requires interest-only payments through December 2014, when the entire balance is due.

 

On December 1, 2004, the Partnership refinanced the Dean Street Associates, LLC with outstanding balances totaling approximately $5,237,000 with interest rate of 7.08% that would mature in 2008.  The new mortgage is $5,650,000 with an interest rate of 5.13%. The new loan requires interest only payment until 2007 and interest and principal payments amounting to

 

10

 

$30,781 monthly until November 2014.  The remaining balance of approximately $5,025,000 becomes due in December 2014. The Partnership recorded a loss on the early extinguishment of debt of approximately $411,000 because of prepayment penalties of $387,000 and the write-off of deferred financing fees of approximately $24,000.

 

NOTE 6.    ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The lease agreements require the majority of tenants to maintain a one-month advance rental payment plus security deposits.  Amounts received for prepaid rents of approximately $1,704,000 are included in cash and cash equivalents and security deposits of approximately $1,000,000 are included with other assets.

 

NOTE 7.    PARTNERS’ CAPITAL

 

The Partnership has two classes of Limited Partners (Class A and B) and one category of General Partner.  Under the terms of the Partnership Agreement, Class B Units and General Partnership Units must represent 19% and 1%, respectively, of the total units outstanding.  All classes have equal profit sharing and distribution rights, in proportion to their ownership interests.

 

The Partnership has paid quarterly dividends of $7.00 per unit ($.70 per receipt) in March, June and September, 2005 and will pay the same dividend on December 31, 2005.

 

In 2004, the Partnership paid a quarterly distribution $6.60 per unit ($.66 per receipt) on March 31, 2004, and June 30, 2004.  On September 30, 2004 and December 31, 2004, the Partnership paid a quarterly distribution of $7.00 per unit ($0.70 per receipt) for a total distribution of $27.20 for 2004.

 

The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners’ interests in Class A units.  Under the terms of this agreement, the holders of Class A units have the right to exchange each Class A unit for 10 depositary receipts.  The following is information per depositary receipt:

 

		Nine months ended September 30,
		2005			2004
Income per Depositary Receipt before Discontinued Operations		$	1.69		$	.90
Income from Discontinued Operations		3.44			.04
Net Income per Depositary Receipt after Discontinued Operations		$	5.13		$	.94

 

NOTE 8.    TREASURY UNITS

 

Treasury units at September 30, 2005 are as follows:

 

Class A		5,681
Class B		1,228
General Partnership		64
		6,973

 

NOTE 9.    COMMITMENTS AND CONTINGENCIES

 

From time to time, the Partnerships are involved in various ordinary routine litigation incidental to their business. The Partnership either has insurance coverage or has provided for any uninsured claims which, in the aggregate, are not significant. The Partnerships are not involved in any material pending legal proceedings.

 

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NOTE 10.    RENTAL INCOME

 

During the nine months ended September 30, 2005, approximately 93% of rental income was related to residential apartments and condominium units with leases of one year or less.  The remaining 7% was related to commercial properties, which have minimum future rental income on noncancellable operating leases as follows:

 

		Commercial Property Leases
2006		$	1,671,000
2007		1,638,000
2008		1,589,000
2009		1,431,000
2010		1,057,000
Thereafter		4,156,000
		$	11,542,000

 

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with percentage rents, common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $291,000 for the nine months ended September 30, 2005 and $364,000 for the year ended December 31, 2004.

 

Rents receivable are net of allowances for doubtful accounts of $462,151 and $276,046 at September 30, 2005 and December 31, 2004, respectively. Included in rents receivable is approximately $387,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis.  The majority of this amount is for a long-term lease with Staples at Staples Plaza in Framingham, Massachusetts.

 

NOTE 11.    CASH FLOW INFORMATION

 

During the nine months ended September 30, 2005 and 2004, cash paid for interest was $5,851,573 and $5,940,982 respectively.

 

NOTE 12.    FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments:

 

•      For cash and cash equivalents, other assets, investment in partnerships, accounts payable, advance rents and security deposits: fair value approximates the carrying value of such assets and liabilities.

 

•      For mortgage notes payable: fair value is generally based on estimated future cash flows, which are discounted using the quoted market rate from an independent source for similar obligations. Refer to the table below for the carrying amount and estimated fair value of such instruments.

 

		Carrying Amount			Estimated Fair Value
Mortgage Notes Payable
At September 30, 2005		$	115,770,231		$	120,602,330
At December 31, 2004		$	115,615,800		$	122,123,808

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2005 and December 31, 2004.  Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2004 and current estimates of fair value may differ significantly from the amounts presented herein.

 

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NOTE 13.    TAXABLE INCOME AND TAX BASIS

 

Taxable income reportable by the Partnership and includable in its partner’s tax returns is different than financial statement income because of accelerated depreciation, different tax lives, and timing differences related to prepaid rents and allowances.  Taxable income is approximately $396,000 greater than statement income for the nine months ended September 30, 2005 and approximately $1,400,000 less than statement income for the year ended December 31, 2004.  The cumulative tax basis of the Partnership’s real estate at September 30, 2005 is approximately $278,000 less than the statement basis. The depreciation rules that generated substantial deductions in 2004 and 2003 expired in 2004, accordingly taxable income in future years is expected to increase.

 

NOTE 14—INVESTMENT IN PARTNERSHIPS

 

Since November 2001, the Partnership has invested in five limited partnerships, each of which has invested primarily in residential apartment complexes.  The Partnership has a 50% ownership interest in each investment.  The other investors are Harold Brown and the President of the management company, who have a 47.5% and 2.5% ownership interest respectively.  A description of each investment is as follows:

 

On March 7, 2005, the Partnership invested $1,800,000 for a 50% ownership interest in a building comprising 49 apartments, one commercial space and a 50-car surface parking lot located in Boston, Massachusetts. The purchase price was $14,300,000, and a $10,750,000 30-month mortgage with a floating interest rate of 2% over the 30 day Libor Index (3.86% at September 30, 2005) was obtained to finance this acquisition.  The Partnership plans to operate the building and initiate development of the parking lot. The plan may also include disposition of selected units, as condominiums in order to reduce the above mentioned mortgage.  Any profits from the condominium sales will be taxed at ordinary rates.  Mr. Brown has guaranteed 25% of this mortgage until such time as $2,687,500 of principal has been paid.  The Partnership and the other investor have, in turn agreed to indemnify Mr. Brown for their proportional share of any losses incurred by this guarantee.  This investment is referred to as Essex Street.

 

On March 2, 2005, the Partnership invested $2,300,000 for a 50% ownership interest in a 176-unit apartment complex with an additional small commercial building located in Quincy, Massachusetts. The purchase price was $23,750,000, and a $19,200,000 30-month mortgage with a floating interest rate of 2% over the 30 day Libor Index (3.86% at September 30, 2005) was obtained to finance this acquisition.  The Partnership plans to sell the majority of units as condominiums and retain 40 to 50 units for long-term investment.  The proceeds from the condominium sales will primarily be used to reduce the above-mentioned mortgage.  It is estimated that it will take longer than one year to sell these units. Harold Brown has guaranteed 30% of this mortgage until such time as $5,760,000 of principal has been paid.  The Partnership and the other investor have, in turn agreed to indemnify Mr. Brown their proportionate share of any losses incurred by this guarantee.  As of September 30, 2005, 59 units have been sold, and 20 units have a signed purchase and sales agreement.  Gains from the sales of units (currently estimated to average $60,000 per condominium) will be taxed at ordinary income rates.  This investment is referred to as 1025 Hamilton.

 

In September 2004, the Partnership invested approximately $5,075,000 for a 50% ownership interest in a 42-unit apartment complex located in Lexington, Massachusetts. The purchase price was $10,100,000.  In October 2004, the Partnership obtained a mortgage on the property in the amount of $8,025,000 and returned $3,775,000 to the Partnership.  This investment is referred to as Hamilton Minuteman.

 

In August 2004, the Partnership invested $8,000,000 for a 50% ownership interest in a 280-unit apartment complex located in Watertown, Massachusetts.  The total purchase price was $56,000,000. The Partnership plans to sell, over time, three buildings with a total of 136 units as condominiums commencing in January 2005. As of September 30, 2005, 54 units have been sold and an additional 14 units are under contract. The majority of the sales proceeds will be used to reduce the mortgage. An entity partially owned by the majority shareholder of the General Partner and the President of the management company, 31% and 5% respectively, is the sales agent and will receive a variable commission on each sale of 3% to 5%.  Approximately $418,000 of commissions was paid through September 30, 2005. This investment is referred to as Hamilton Place.

 

On February 10, 2005, Hamilton Place, Watertown, MA obtained a new 10 year mortgage on the three buildings to be retained for $16,825,000 interest only at 5.18% for 3 years and amortizes on a 30 year schedule for the remaining 7 years when the balance is due.  The net proceeds after funding escrow accounts and closing costs on the new mortgage was approximately $16,700,000, which was used to reduce the existing mortgage. Hamilton Place paid an approximate $400,000 penalty to be able to obtain the new financing.

 

In November 2001, the Partnership formed a limited liability company to purchase a 40-unit apartment building in Cambridge, Massachusetts. This property has a 12-year mortgage, which is amortized on a 30-year schedule, with a final payment of approximately $6,000,000 in 2014. The Partnership is a 50% owner in this investment and is referred to as Franklin Street.

 

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Commencing in 2005, the mortgages on Hamilton Place and Hamilton Minuteman require minimum principal payments (“Curtailment Payments”) and additional investment by the Partnership will be required if the proceeds from sales cannot provide for these payments.

 

As required by the lender for the 2004 acquisitions, the Treasurer of the General Partner has provided a limited repayment guarantee equal to twenty percent (20%) of the outstanding balance, reducing to zero percent (0%) upon the completion of the Curtailment Payments.  In the event that he is obligated to make payments to the lender as a result of this guaranty, the Partnership and other investors have, in turn, agreed to indemnify him for their proportionate share of any such payments.

 

Summary financial information for the nine months ended September 30, 2005 (unaudited)

 

								Hamilton Place
		Franklin Street			Hamilton Place			(for sale units)			Hamilton Minuteman			Essex 81			1025 Hamilton
Acquisition Date		November 2001			August 2004			August 2004			September 2004			March 2005			March 2005			Total
Property assets – net		$	10,050,712		$	27,980,003		$	16,622,055		$	9,516,772		$	14,023,201		$	15,391,064		$	93,583,807
Mortgages payable		7,848,115			16,825,000			11,590,097			7,823,994			10,750,000			8,663,653			63,500,859
Total Equity		2,113,728			13,984,056			2,563,142			1,963,132			3,755,012			7,121,256			31,500,326
NERA – 50% equity		1,056,864			6,992,028			1,281,571			981,566			1,877,506			3,560,628			15,750,163
Summary income statement:
Rental income		731,582			1,733,261			998,511			511,881			682,377			1,033,858			5,691,470
Operating expenses		237,860			1,111,228			664,882			169,194			288,226			754,429			3,225,819
Management fees		29,377			71,559			15,096			20,299			30,968			26,892			194,191
Interest expense		410,930			817,702			530,240			307,177			336,870			468,915			2,871,834
Depreciation & amortization		268,529			1,088,685			627,310			394,763			271,302			526,116			3,176,705
Financing expense		—			404,881			—			—			—			—			404,881
Gain on sale of condominiums		—			—			3,402,160			—			—			3,158,749			6,560,909
Net profit (loss)		(215,114		)	(1,760,794		)	2,563,143			(379,552		)	(244,989		)	2,416,255			2,378,949
NERA – 50%		$	(107,557	)	$	(880,397	)	$	1,281,572		$	(189,776	)	$	(122,495	)	$	1,208,128		$	1,189,475
Total units/ condominiums		40			144			136			42			49			176			587
Units to be retained		40			144			0			42			49			46			321
Units to be sold		0			0			136			0			0			130			266
Units sold through September 30, 2005		0			0			54			0			0			59			113
Balance of unsold units		0			0			82			0			0			71			153
Unsold units with deposits for future sale as of September 30, 2005		0			0			14			0			0			20			34

 

Additionally, the company invested $500,000 in August 2005 for a 50% equity interest in a partnership which purchased a 168-unit residential building located on Quincy Shore Drive in Quincy, MA on October 3, 2005.  (See Note 17).

 

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NOTE 15.    NEW ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 153, Accounting for Non-monetary Transactions

 

In December 2004, the FASB issued SFAS No. 153, “Accounting for Non-monetary Transactions” (“SFAS 153”).  SFAS 153 requires non-monetary exchanges to be accounted for at fair value, recognizing any gain or loss, if the transactions meet a commercial-substance criterion and fair value is determinable.  SFAS No. 153 is effective for non-monetary transactions occurring in fiscal years beginning after June 15, 2005.  The Company believes that the implementation of this standard will not have a material effect on the Company’s consolidated financial position or results of operations.

 

The Partnership adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standard 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-lived Assets” on January 1, 2002. FAS 144 supersedes FAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The primary objectives of FAS 144 are to develop one accounting model, based on the framework established in FAS 121, for long-lived assets to be disposed of by sale, and to address significant implementation issues regarding impairment of long-lived assets held for use. FAS 144 requires separate presentation of discontinued operations for an operating property sold or considered held for sale for years beginning on January 1, 2002. In accordance with FAS 144, the Partnership classifies real estate assets as held for sale in the period in which all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset; (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

The Partnership’s adoption of FAS 144 resulted in: (i) the net operating results of properties held for sale at December 31, 2004 and sold during 2002 being presented as income from discontinued operations for all periods presented and (ii) the gain on the sale of operating properties sold, net of sale costs, being presented as income from discontinued operations for the year 2002. Implementation of FAS 144 will impact how information is classified on the income statement but will have no effect on net income (see Note 17).

 

EIFT 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in Determining Whether to Report Discontinued Operations

 

At its September 2004 meeting, the Task Force reached the following conclusions:

 

•      A reassessment period is necessary in evaluating whether a disposal meets the criteria for discounted operations reporting; the reassessment period should include the point at which the component initially meets the criteria to be classified as held for sale through one year after the component’s disposal date.  However, the Task Force concluded that the reassessment will be required only when significant changes in events or circumstances make it likely that the criteria in paragraph 42 of SFAS 144 will, or will no longer, be met after the disposal date.

•      There is a presumption that the continued sale of a commodity in an active market should be considered a migration of customers.

•      For the purpose of determining whether operations and cash flows are eliminated, the determination will be limited to evaluating gross cash inflows (revenues) and outflows (costs) versus evaluating other operating measures such as gross profit or net income.

•      The retention of risks associated with the ongoing operations of the disposed component or the ability to obtain benefits associated with the ongoing operations of the disposed component should be considered in evaluating whether the entity has the ability to influence the operating and/or financial policies of the disposed component.

 

As a result, factors (b) and (c) were eliminated from paragraph 9 of the draft abstract.

 

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The Task Force affirmed the consensus as previously exposed with the following modifications/clarifications:

 

•      The period for assessing whether a component has met the criteria for discontinued operations could extend beyond one year if events or circumstances beyond an entity’s control extend the period required to eliminate direct cash flows of the disposed component or eliminate significant continuing involvement in the ongoing operations of the disposed component provided that the entity (1) takes actions necessary to respond to those situations, and (2) expects to eliminate the direct cash flows and the significant continuing involvement.  The extension of the assessment period is only for determining whether a component has met the criteria for discontinued operations, and is not an extension of the assessment period for the held-for-sale classification of the component.

 

In January 2003, the FASB issued FIN 46, which provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity’s consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. In December 2003, the FASB reissued FIN 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs commonly referred to as special-purpose entities (SPEs) as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. The Partnership does not believe that the application of FIN 46, if required, will have a material impact on its financial position, results of operations, or liquidity.

 

NOTE 16.    DISCONTINUED OPERATIONS and SALES of REAL ESTATE

 

The following tables summarize income from discontinued operations and the related realized gain on sale of rental property for the nine months ended September 30, 2005 and 2004.

 

		Nine Months Ended September 30
		2005			2004
Total Revenues		$	79,426		$	307,679
Operating and other expenses		54,409			212,143
Depreciation and amortization		18,906			29,402
		73,315			241,545
Income from discontinued operations		$	6,111		$	66,134

 

The Partnership realized a gain on the sale of the property of approximately $5,960,033 during the nine months ended September 30, 2005.

 

NOTE 17.  SUBSEQUENT EVENTS

 

In August 2005, the Partnership invested $500,000 and in October an additional $2,000,000 for a 50% ownership interest in a 168-unit residential apartment complex located on Quincy Shore Drive in Quincy, Massachusetts.  The purchase price was $30,875,000, and a $27,450,000, thirty month mortgage with a floating interest rate of 2.1% over the 30 day Libor Index was obtained to finance this acquisition.  The Partnership plans to sell the majority of units as condominiums and retain approximately 45 units for long-term investment.  The proceeds from the condominium sales will primarily be used to reduce the above mentioned mortgage.  The Partnership is required to reduce the mortgage by no less than $18,457,500 by June 3, 2007, and by $24,697,500 by August 3, 2008.  This investment is referred to as Hamilton Bay, LLC.

 

On October 27, 2005, the Partnership increased the mortgage on Hamilton 1025 and distributed $1,950,000 to the Partnership.

 

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Item 2 — MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion should be read in conjunction with the financial statements and notes thereof appearing elsewhere in this Report.  This Report, on Form 10-Q, contains forward-looking statements within the meaning of the securities law.  Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section below entitled “Factors That May Affect Future Results” and elsewhere in this Report.

 

While the national economy has largely recovered from the recession of the late 1990s and early 2000s, Massachusetts’ local economy continues to lag behind.  Job growth remains slow.  Vacancy rates for downtown office space have improved from nearly 20%, and similar vacancy rates are seen to begin improving in suburban areas.  In the face of these economic realities however, the Partnership has kept its residential vacancy rate below the 5-6% local industry average.  However, doing so has resulted in slow revenue growth due to various incentives for new rentals.  Additionally, new housing product in the residential market and low mortgage interest rates that attracted first-time buyers continue to be direct competitors of the rental housing market resulting in higher turnover expenses and unit renovation costs.  Finally, an abnormally cold winter, historically high snowfall, steadily increasing utility costs and increases in other operating expenses outpaced any modest increases in rental revenue that the Partnership’s properties have experienced to date. 

 

The Partnership expects these conditions to continue throughout 2005.  Revenue gains are expected to be modest while increases in non-controllable operating expenses are expected to continue.  Competition continues to be strong; however the payment of rental commissions to encourage leaseup has begun to abate.  As a result, it is presently unclear whether future earnings from operations will accelerate in the near term.  Lastly, tax reform allowed the Partnership to accelerate depreciation on improvements and acquisitions over the past two years reducing taxable income.  These tax incentives expired in 2004.  Therefore, we expect income taxable to partners to increase in 2005 and to be more in line with the Partnership’s financial statement net income, which will be substantially higher due to property sales.

 

The Partnership has retained The Hamilton Company (“Hamilton”) to manage and administer the Partnership’s properties.  Hamilton is a full-service real estate management company, which has legal, construction, maintenance, architectural, accounting and administrative departments.  The Partnership’s properties represent approximately 40% of the total properties and 70% of the residential properties managed by Hamilton.  Substantially all of the other properties managed by Hamilton are owned - wholly or partially, directly or indirectly - by Harold Brown.  The Partnership’s Second Amended and Restated Contract of Limited Partnership (the “Partnership Agreement”) expressly provides that the general partner may employ a management company to manage the properties, and that such management company may be paid a fee of 4% of rental receipts for administrative and management services (the “Management Fee”).  The Partnership annually pays Hamilton the full Management Fee, in monthly installments.

 

Harold Brown, his brother Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 21.9% of the depositary receipts representing the Partnership Class A Units (including depositary receipts held by trusts for the benefit of such persons’ family members).  Harold Brown also owns 75% of the Partnership’s Class B Units, 75% of the capital stock of NewReal, Inc. (“NewReal”), the Partnership’s sole general partner, and all of the outstanding stock of Hamilton.

 

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Ronald Brown also owns 25% of the Partnership’s Class B Units and 25% of NewReal’s capital stock.  In addition, Ronald Brown is the President and director of NewReal and Harold Brown is NewReal’s Treasurer and also a director.  Three of NewReal’s other directors Thomas Raffoul, Conrad DiGregorio, and Edward Sarkesian also own immaterial amounts of the Partnership’s Class A Units or receipts.

 

Beyond the Management Fee, the Partnership Agreement further provides for the employment of outside professionals to provide services to the Partnership and allows NewReal to charge the Partnership for the cost of employing professionals to assist with the administration of the Partnership’s properties.  In addition to the Management Fee, from time to time the Partnership pays Hamilton for repairs and maintenance services, legal services, construction services and accounting services.  The costs charged by Hamilton for these services are at the same hourly rate charged to all entities managed by Hamilton, and management believes such rates are competitive in the marketplace.

 

Hamilton accounted for approximately 4% and 5% of the repair and maintenance expense paid for by the Partnership in the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively.  Of the funds paid to Hamilton for this purpose, the great majority was to cover the cost of services provided by the Hamilton maintenance department, including plumbing, electrical, carpentry services, and snow removal for those properties close to Hamilton’s headquarters.  However, several of the larger Partnership properties have their own maintenance staff.  Further, those properties that do not have their own maintenance staff but are located more than a reasonable distance from Hamilton’s headquarters in Allston, Massachusetts are generally serviced by local, independent companies.

 

Hamilton’s legal department handles most of the Partnership’s eviction and collection matters.  Additionally, it prepares most long-term commercial lease agreements and represents the Partnership in selected purchase and sale transactions.  Overall, Hamilton provided approximately 63% of the legal services paid for by the Partnership during the nine months ended September 30, 2005 and approximately 81% for the year ended December 31, 2004.

 

R. Brown Partners, which is owned by Ronald Brown, manages five condominium units located in Brookline, Massachusetts.  That entity will receive annual management fees from the five units of approximately $1,500, and Hamilton will reduce its management fees to approximately 2%, so that the total management fee will not exceed the 4% allowed by the Partnership’s Partnership Agreement.  Additionally, as described in Note 3, the Hamilton Company received $597,000 in fees from the investment properties.

 

The Partnership requires that three bids be obtained for construction contracts in excess of $5,000.  Hamilton may be one of the three bidders on a particular project and may be awarded the contract if its bid and its ability to successfully complete the project are deemed appropriate.  For contracts that are not awarded to Hamilton, Hamilton charges the Partnership a construction supervision fee equal to 5% of the contract amount.  Hamilton’s architectural department also provides services to the Partnership on an as-needed basis.  In 2005, Hamilton provided the Partnership approximately $68,000 in construction and architectural services.  In 2004, Hamilton provided construction and architectural services paid for by the Partnership totaling $3,781,000 including approximately $3,500,000 for the construction of 20 additional residential units at Westgate Apartments in Woburn, Massachusetts.

 

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Prior to 1991, the Partnership employed an outside, unaffiliated company to perform its bookkeeping and accounting functions.  Since that time, such services have been provided by the accounting staff at Hamilton which consists of approximately twelve people.  Hamilton currently charges the Partnership $80,000 ($20,000 per quarter) per year for bookkeeping and accounting services.

 

For more information on related party transactions, see Note 3 to the Consolidated Financial Statements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  The Partnership regularly and continually evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures.  The Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances.  However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment.  The Partnership’s critical accounting policies are those which require assumptions to be made about such matters that are highly uncertain.  Different estimates could have a material effect on the Partnership’s financial results.  Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.  See Note 1 to the Consolidated Financial Statements, Principles of Consolidation.

 

Revenue Recognition: Revenues from rental properties are recognized when due from tenants.  Residential leases are generally for terms of one year and commercial leases are generally for five to ten years, with renewal options at increased rents.  Significant commercial leases with stepped increases over the term of the lease are recorded on the straight-line basis.

 

Real Estate and Depreciation: Real estate assets are stated at the lower of cost or fair value, less accumulated depreciation.  Costs related to the acquisition, development, construction and improvement of properties are capitalized, including interest, internal wages and benefits, real estate taxes and insurance.  Capitalization usually begins with commencement of development activity and ends when the property is ready for leasing.  Replacements and improvements— such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and kitchen/bath replacements and renovations — are capitalized and depreciated over their estimated useful lives as follows:

 

•      Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets.  In assessing estimated useful lives, the Partnership makes assumptions based on historical experience acquired from both within and outside the Partnership.  These assumptions have a direct impact on the Partnership’s net income.

 

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•      Ordinary repairs and maintenance, such as unit cleaning and painting and appliance repairs, are expensed.

 

If there is an event or change in circumstances that indicates an impairment in the value of a property, the Partnership’s policy is to assess the impairment by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property.  If the carrying value is in excess of the estimated projected operating cash flows of the property, the Partnership would recognize an impairment loss equivalent to the amount required to adjust the carrying amount to its estimated fair value.  The Partnership has not recognized an impairment loss since 1995.

 

Rental Property Held for Sale and Discontinued Operations:  When assets are identified by management as held for sale, the Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established.  Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.

 

Investments in Partnerships:  The Partnership accounts for its 50% ownership in the Investment Properties under the equity method of accounting, as it exercises significant influence over, but does not control these entities.  These investments are recorded initially at cost, as Investments in Partnerships, and subsequently adjusted for the Partnership’s share in earnings, cash contributions and distributions.  Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss from the Partnership is included on the consolidated statements of income.

 

With respect to investments in and advances to the Investment Properties, the Partnership looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties.  An impairment charge is recorded if the carrying value of the investment exceeds its fair value.

 

Legal Proceedings: The Partnership is subject to various legal proceedings and claims that arise, from time to time, in the ordinary course of business.  These matters are frequently covered by insurance.  If it is determined that a loss is likely to occur, the estimated amount of the loss is recorded in the financial statements.  Both the amount of the loss and the point at which its occurrence is considered likely can be difficult to determine.

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended September 30, 2005 to the three months ended September 30, 2004 (as adjusted for discontinued operations)

 

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The Partnership and its Subsidiary Partnerships earned income before other income and discontinued operations of $601,312 during the three months ended September 30, 2005 compared to $299,869 for the three months ended September 30, 2004, an increase of $301,443 (100%).

 

The rental activity is summarized as follows:

 

		Occupancy Date
		November 8, 2005		August 2, 2005		November 8, 2004
Residential
Units		2,402		2,402		2,420
Vacancies		34		58		95
Vacancy rate		1.4	%	2.4	%	3.9	%
Commercial
Total square feet		85,275		85,275		85,275
Vacancy		0		0		850
Vacancy rate		0	%	0	%	1	%

 

		Rental Income (in thousands) Three Months Ended September 30,
		2005						2004
		Total Operations			Continuing Operations			Total Operations			Continuing Operations
Total rents		$	7,837		$	7,837		$	7,640		$	7,541
Residential percentage		93		%	93		%	93		%	93		%
Commercial percentage		7		%	7		%	7		%	7		%
Contingent rentals		$	103		$	103		$	90		$	90

 

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Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

 

		September 30, 2005			September 30, 2004			Dollar Change			Percent Change
Revenues:
Rental income		$	7,836,797		$	7,541,132		$	295,665		3.9	%
Laundry and sundry income		105,951			94,201			11,750			12.5	%
		7,942,748			7,635,333			307,415			4.0	%
Expenses:
Administrative		307,881			322,532			(14,651		)	(4.5	)%
Depreciation and amortization		1,642,148			1,551,431			90,717			5.8	%
Interest		1,960,195			1,965,489			(5,294		)	(0.3	)%
Management fees		315,741			311,238			4,503			1.4	%
Operating		692,382			669,136			23,246			3.5	%
Renting		190,651			272,372			(81,721		)	(30.0	)%
Repairs and maintenance		1,371,378			1,438,459			(67,081		)	(4.7	)%
Taxes and insurance		861,060			804,807			56,253			7.0	%
		7,341,436			7,335,464			5,972			0.1	%
Income before other income		601,312			299,869			301,443			100.5	%
Other Income (Loss)
Interest income		58,907			52,140			6,767			13.0	%
Income (Loss) from investment in partnerships		521,993			(160,706		)	682,699			424.8	%
		580,900			(108,566		)	689,466			635.1	%
Income from continuing operations		1,182,212			191,303			990,909			518.0	%
Discontinued Operations:
Income from discontinued operations		1,727			18,708			(16,981		)	(90.8	)%
Gain (loss) on the sale of real estate from discontinued operations		189,670			—			189,670			100.0	%
		191,397			18,708			172,689			923.2	%
Net Income		$	1,373,609		$	210,011		$	1,163,598		554.1	%

 

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