NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

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 001-31568

 

 

New England Realty Associates Limited Partnership

(Exact name of registrant as specified in its charter)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

Class A

Limited Partnership Units

(Title of class)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o  No x

 

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

 

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

 

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

 

 

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

 

As of September 30, 2011, there were 105,188 of the registrant’s Class A units (1,051,876 Depositary Receipts) of limited partnership issued and outstanding and 24,982 Class B units issued and outstanding.

 

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

 

INDEX

 

	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	3
	Consolidated Statements of Income for the Three Months Ended September 30, 2011 and 2010 and Nine Months ended September 30, 2011 and 2010	4
	Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2011 and 2010	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	6
	Notes to Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	(Removed and Reserved)	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38

 

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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 consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

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, 2010.

 

The results of operations for the nine month period ended September 30, 2011 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,			December 31,
		2011			2010
		(Unaudited)			(Audited)
ASSETS
Rental Properties		$	99,765,035		$	92,151,239
Property Held for Sale		—			593,018
Cash and Cash Equivalents		4,316,353			3,245,361
Rents Receivable		647,974			622,944
Real Estate Tax Escrows		392,852			301,853
Prepaid Expenses and Other Assets		3,846,623			3,337,886
Investments in Unconsolidated Joint Ventures		17,783,583			20,076,957
Financing and Leasing Fees		950,449			947,477
Total Assets		$	127,702,869		$	121,276,735
LIABILITIES AND PARTNERS’ CAPITAL
Notes Payable		$	3,668,600		$	4,668,600
Mortgage Notes Payable		139,417,037			137,680,660
Accounts Payable and Accrued Expenses		2,115,834			2,440,141
Advance Rental Payments and Security Deposits		3,460,121			3,407,901
Total Liabilities		148,661,592			148,197,302
Commitments and Contingent Liabilities (Notes 3 and 9)
Partners’ Capital 131,484 units outstanding in 2011 and 2010		(20,958,723		)	(26,920,567		)
Total Liabilities and Partners’ Capital		$	127,702,869		$	121,276,735

 

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,
		2011			2010			2011			2010
Revenues
Rental income		$	8,543,908		$	7,902,310		$	24,957,004		$	23,767,164
Laundry and sundry income		104,618			100,396			318,059			328,996
		8,648,526			8,002,706			25,275,063			24,096,160
Expenses
Administrative		411,836			394,735			1,237,424			1,288,046
Depreciation and amortization		1,603,529			1,475,936			4,412,144			4,245,494
Management fees		347,833			332,580			1,032,069			994,654
Operating		774,998			771,397			3,104,722			2,800,054
Renting		63,482			201,883			260,819			370,358
Repairs and maintenance		1,421,084			1,460,994			3,800,836			3,657,021
Taxes and insurance		1,042,470			1,016,862			3,103,215			3,083,751
		5,665,232			5,654,387			16,951,229			16,439,378
Income Before Other Income and Discontinued Operations		2,983,294			2,348,319			8,323,834			7,656,782
Other Income (loss)
Interest income		895			1,898			3,129			4,411
Interest expense		(2,033,082		)	(2,032,278		)	(5,962,907		)	(6,044,974		)
(Loss) from investment in unconsolidated joint ventures		(491,128		)	(1,151,355		)	(1,443,374		)	(3,169,926		)
		(2,523,315		)	(3,181,735		)	(7,403,152		)	(9,210,489		)
Income (loss) from Continuing Operations		459,979			(833,416		)	920,682			(1,553,707		)
Discontinued Operations
Income (loss) from discontinue operations		(2,245		)	51,925			95,390			174,811
Gain (loss) on the sale of real estate		(808		)	—			7,706,948			—
		(3,053		)	51,925			7,802,338			174,811
Net Income(Loss)		$	456,926		$	(781,491	)	$	8,723,020		$	(1,378,896	)
Income per Unit
Income (loss) before discontinued operations		$	3.50		$	(6.33	)	$	7.00		$	(11.79	)
Income (loss) from discontinued operations		(0.02		)	0.39			59.34			1.33
Net Income (Loss) per Unit		$	3.48		$	5.94		$	66.34		$	(10.46	)
Weighted Average Number of Units Outstanding		131,484			131,484			131,484			131,767

 

See notes to consolidated financial statements.

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

(Unaudited)

 

		Units												Partner’s Capital
		Limited				General				Treasury				Limited						General
		Class A		Class B		Partnership		Subtotal		Units		Total		Class A			Class B			Partnership			Total
Balance, January 1, 2010		144,180		34,243		1,802		180,225		47,879		132,346		$	(17,069,520	)	$	(4,050,138	)	$	(213,165	)	$	(21,332,823	)
Distribution to Partners		—		—		—		—		—		—		(2,213,767		)	(525,770		)	(27,672		)	(2,767,209		)
Stock Buyback		—		—		—		—		862		(862	)	(432,920		)	(102,591		)	(5,400		)	(540,911		)
Net (Loss)		—		—		—		—		—		—		(1,103,118		)	(261,990		)	(13,789		)	(1,378,897		)
Balance, September 30, 2010		144,180		34,243		1,802		180,225		48,741		131,484		$	(20,819,325	)	$	(4,940,489	)	$	(260,026	)	$	(26,019,840	)
Balance January 1, 2011		144,180		34,243		1,802		180,225		48,741		131,484		$	(21,539,906	)	$	(5,111,628	)	$	(269,033	)	$	(26,920,567	)
Distribution to Partners		—		—		—		—		—		—		(2,208,941		)	(524,623		)	(27,612		)	(2,761,176		)
Net Income		—		—		—		—		—		—		6,978,416			1,657,374			87,230			8,723,020
Balance, September 30, 2011		144,180		34,243		1,802		180,225		48,741		131,484		$	(16,770,431	)	$	(3,978,877	)	$	(209,415	)	$	(20,958,723	)

 

See notes to consolidated financial statements.

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

		Nine Months Ended September 30,
		2011			2010
Cash Flows from Operating Activities
Net income (loss)		$	8,723,020		$	(1,378,896	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		4,412,144			4,245,494
Loss from investments in joint ventures		1,443,374			3,169,926
Depreciation and amortization, discontinued operations		16,472			45,489
Gain on the sale of rental property		(7,706,948		)	—
Changes in operating assets and liabilities
(Increase) Decrease in rents receivable		(25,030		)	340,315
Increase (decrease) in accounts payable and accrued expense		(324,307		)	40,265
(Increase) decrease in real estate tax escrow		(90,999		)	56,824
(Increase) in prepaid expenses and other assets		(579,064		)	(616,791		)
Increase (decrease) in advance rental payments and security deposits		52,220			(61,201		)
Total Adjustments		(2,802,138		)	7,220,321
Net cash provided by operating activities		5,920,882			5,841,425
Cash Flows From Investing Activities
Proceeds from unconsolidated joint ventures		890,710			750,000
Investment in unconsolidated subsidiaries		(40,710		)	(40,000		)
Purchase and improvement of rental properties		(11,871,330		)	(1,563,380		)
Net proceeds from the sale of rental property		8,297,928			—
Net cash (used in) investing activities		(2,723,402		)	(853,380		)
Cash Flows From Financing Activities
Payment of financing costs		(101,689		)	(7,143		)
Proceeds of mortgage notes payable		5,000,000			904,122
Proceeds of notes payable		3,998,573			—
Principal payment of note payable		(4,998,573		)	—
Principal payments of mortgage notes payable		(3,263,623		)	(642,372		)
Stock buyback		—			(540,911		)
Distributions to partners		(2,761,176		)	(2,767,209		)
Net cash (used in) financing activities		(2,126,488		)	(3,053,513		)
Net Increase in Cash and Cash Equivalents		1,070,992			1,934,532
Cash and Cash Equivalents, at beginning of year		3,245,361			2,879,663
Cash and Cash Equivalents, at end of period		$	4,316,353		$	4,814,195

 

See notes to consolidated financial statements.

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2011

 

(Unaudited)

 

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

 

Line of Business:  New England Realty Associates Limited Partnership (“NERA” or the “Partnership”) was organized in Massachusetts in 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.

 

Accounting Standards: On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, also known as FASB Accounting Standards Codification (“ASC 105-10”), General Accepted Accounting Principles (“ASC 105-10”).  ASC 105-10 established the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification supersedes all existing non-SEC accounting and reporting standards.  All other non -grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.  GAAP was not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented.  As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.  The Partnership has implemented the Codification in this report by providing references to the Codification topics, as appropriate.

 

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 the nine limited liability companies (the “Investment Properties” or “Joint Ventures”) in which the Partnership has between a 40 - 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 Investment Properties using the equity method of consolidation. (See Note 14: Investments in Unconsolidated Joint Ventures).

 

The Partnership accounts for its investments in joint ventures using the equity method of accounting. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”).  Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

 

On January 1, 2010, the Partnership adopted the updated provisions of ASC 810, pursuant to FASB No. 167, which amends FIN 46® to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  Additionally, FASB No. 167 amends FIN 46® to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.  FASB No. 167 amends certain guidance in Interpretation 46® for determining whether an entity is a variable interest entity. Also, FASB No. 167 amends FIN 46® to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity.  The adoption of this guidance did not have a material impact to these financial statements.

 

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Impairment:  On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties or investments in unconsolidated subsidiaries may be impaired.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property.  The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved. The Partnership has not recognized an impairment loss since 1995.

 

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. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. 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. Contingent rent for commercial properties are received from tenants for certain costs as provided in lease agreements.  The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Concessions made on residential leases are also accounted for on the straight-line basis.

 

Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed —rate renewal options for below-market leases.  The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.

 

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 by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships.  The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values.  The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction.  In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information.  The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Partnership’s overall relationship with the respective tenant.  Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions.  In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.  Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals.  The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.  The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

 

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In the event that facts and circumstances indicate that the carrying value of a rental property may be impaired, an analysis of the value is prepared. The estimated future undiscounted cash flows are compared to the asset’s 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 on 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 2011 and 2010 other than net income as reported.

 

Income Per Unit: Net income per unit has been calculated based upon the weighted average number of units outstanding during each period 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 Partnership’s properties are located in New England, and the Partnership is subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnership’s revenues in 2011or 2010. The Partnership makes its temporary cash investments with high-credit-quality financial institutions. At September 30, 2011and December 31, 2010, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates 0.05% to 0.75%.  At September 30, 2011 and December 31, 2010, respectively, approximately $5,235,000, and $4,349,000 of cash and cash equivalents, and security deposits included in prepaid expenses and other assets exceeded federally insured amounts.

 

Advertising Expense: Advertising is expensed as incurred. Advertising expense was $59,997 and $57,288 for the nine months ended September 30, 2011 and 2010, 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 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.

 

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 had 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 Partnership 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 nine months ended September 30, 2011 and 2010 there was no capitalized interest.

 

Extinguishment of Debt: When existing mortgages are refinanced with the same lender and it is determined that the refinancing is substantially different then they are recorded as an extinguishment of debt.  However if it is determined that the refinancing is substantially the same then they are recorded as an exchange of debt. All refinancings qualify as extinguishment of debt.

 

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

 

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NOTE 2. RENTAL PROPERTIES

 

As of September 30, 2011, the Partnership and its Subsidiary Partnerships owned 2,251 residential apartment units in 20 residential and mixed-use complexes (collectively, the “Apartment Complexes”). The Partnership also owns 19 condominium units in a residential condominium complex, 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 metropolitan Boston area of Massachusetts.

 

Additionally, as of September 30, 2011, the Partnership and Subsidiary Partnerships owned a commercial shopping center in Framingham, commercial buildings in Newton and Brookline and mixed-use properties in Boston, Brockton and Newton, all in Massachusetts. These properties are referred to collectively as the “Commercial Properties”.

 

The Partnership also owned a 40% to 50% ownership interest in nine residential and mixed use complexes (the “Investment Properties”) at September 30, 2011 with a total of 799 units, accounted for using the equity method of consolidation.

 

See Note 14 for summary information on these investments.

 

Rental properties consist of the following:

 

		September 30, 2011			December 31, 2010			Useful Life
Land, improvements and parking lots		$	27,544,354		$	26,110,238		15—40 years
Buildings and improvements		118,968,208			110,106,179			15—40 years
Kitchen cabinets		4,301,765			3,923,029			5—10 years
Carpets		3,894,476			3,404,951			5—10 years
Air conditioning		887,688			857,375			7—10 years
Laundry equipment		335,099			331,002			5—7 years
Elevators		1,139,296			1,086,140			20 years
Swimming pools		235,242			155,442			10 years
Equipment		2,167,621			1,989,645			5—7 years
Motor vehicles		107,792			107,792			5 years
Fences		41,470			33,970			5—10 years
Furniture and fixtures		1,232,885			924,633			5—7 years
Smoke alarms		132,184			97,840			5—7 years
Total fixed assets		160,988,080			149,128,236
Less: Accumulated depreciation		(61,223,045		)	(56,976,997		)
		$	99,765,035		$	92,151,239

 

On May 18, 2011, the Partnership sold Avon Street Apartments, a 66 unit residential apartment complex located at 130 Avon Street, Malden, Massachusetts.  The sales price was $8,750,000, which resulted in a gain of approximately $7,700,000.  The net proceeds of the sale, of approximately $5,444,000 were held by a qualified intermediary in order for the Partnership to structure a tax free exchange in accordance with Section 1031 of the IRS code.  This tax free exchange was completed with the purchase of Battle Green Apartments.

 

On June 1, 2011, the Partnership purchased the Battle Green Apartments, a 48 unit residential apartment complex located at 34-42 Worthen Road, Lexington, Massachusetts.  The purchase price was $10,000,000.  The Partnership used cash reserves, the proceeds from the sale of Avon Street and borrowed $3,998,573 from Harold Brown, Treasurer of the General Partner to make this purchase.  This loan had an interest rate of 6% and was secured by the Partnership’s ownership interest in Battle Green Apartments, LLC.  The term of the loan is four years with a provision requiring payment in whole or in part upon demand within six months of notice or prepay without penalty.  On July 27, 2011, the Partnership financed the Battle Green Apartments with a new $5,000,000 mortgage at 4.95% which matures in August 2026.  Principal payments will be made using a 30 year amortization schedule.  Deferred financing costs associated with this mortgage totaled approximately $90,000 and accordingly the effective interest rate is 5.07%.  After paying off the existing loan of $3,998,573, approximately $1,000,000 was received by the Partnership. The interest paid on this loan to Harold Brown was $38,123.

 

NOTE 3. RELATED PARTY TRANSACTIONS

 

The Partnership’s 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 collected rental revenue and other income on the majority of the Partnership’s properties and 3% on Linewt.  Total fees paid were approximately $1,047,000 and $1,022,000 during the nine months ended September 30, 2011 and 2010, respectively.  On the Partnership’s

 

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investment properties, the management fee is equal to 4% of rental income on the majority of investment properties and 2% on Dexter Park.  Total fees paid were approximately $416,000 and $389,000 during the nine months ended September 30, 2011 and 2010, 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. During the nine months ended September 30, 2011 and 2010 approximately $601,000 and $506,000 was charged to NERA for legal, accounting, construction, maintenance, rental and architectural services and supervision of capital improvements.  Of the 2011 expenses referred to above, approximately $194,000 was for repairs and maintenance and $234,000 was for administrative expense.  Approximately $163,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2011, the Hamilton Company received approximately $510,000 from the Investment Properties of which approximately $416,000 was the management fee, approximately $76,000 was for maintenance, construction, rental, and snow removal; and approximately $18,000 was for administrative services.

 

On January 1, 2004, all employees were transferred to the Management Company’s payroll. The Partnership reimburses the management company for the payroll and related expenses of the employees who work at the properties. Total reimbursement was approximately $1,923,000 and $2,007,000 for the nine months ended September 30, 2011 and 2010, respectively. The Management Company maintains a 401K plan for all eligible employees whereby the employees may contribute the maximum allowed by law. The plan also provides for discretionary contributions by the employer. There were no employer contributions in 2011 and 2010. The Investment Properties reimbursed the Partnership for payroll and other related expenses for employees who work at the properties.  Total reimbursement was approximately $556,000 and $602,000 for the nine months ended September 30, 2011 and 2010 respectively.

 

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 Management Company’s accounting staff, which consists of approximately 14 people.  During the nine months ended September 30, 2011, the Management Company charged the Partnership $93,750 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses of approximately $234,000 previously discussed.

 

In 1996, prior to becoming an employee of the Management Company, the President of the Management Company performed asset management consulting services for the Partnership. This individual continues to perform this service and receives an asset management fee from the Partnership.  The Partnership does not have any written agreement with this individual.  During the nine months ended September 30, 2011, this individual received $56,250.

 

The Partnership has invested in nine limited partnerships, which have invested in mixed use residential apartment complexes. The Partnership has between a 40% and 50% ownership interest in each investment. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 57%. See Note 14 for a description of the properties and their operations.

 

See Note 8 for information regarding the repurchase of Class B and General Partnership Units.

 

On October 28, 2009, the Partnership borrowed approximately $7,168,000 with an interest rate of 6% from HBC Holdings, LLC, an entity owned by Harold Brown and his affiliates (“HBC”).  The term of the loan is four years with a provision requiring payment in whole or in part upon demand by HBC with six months notice.  The Partnership may also prepay the note without penalty.  On August 17, 2010, HBC gave six months written notice to the Partnership requesting a principal pay down of $2,500,000.  During the fourth quarter of 2010, the Partnership paid HBC $2,500,000 as requested.  In August 2011, the Partnership elected to pay an additional $1,000,000 on the $7,168,000 note to reduce the outstanding loan balance to $3,668,600. In October 2011, the Partnership elected to pay an additional $1,000,000 on this note.  See Note 16 Subsequent Events.  This loan will remain subject to the original terms of the Note, including HBC’s right to demand payment of the balance of the loan in whole or in part upon six months notice. The interest paid during the nine months ended September 30, 2011 and 2010 was approximately $202,000 and $326,000, respectively.  This loan is collateralized by the Partnership’s 99% ownership interest in 62 Boylston Street.

 

See Note 2 regarding the loan from Harold Brown in connection with the purchase of Battle Green Apartments.

 

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NOTE 4. OTHER ASSETS

 

Approximately $1,794,000 and $1,729,000 of security deposits and prepaid rent deposits are included in prepaid expenses and other assets at September 30, 2011 and December 31, 2010, respectively.

 

Included in prepaid expenses and other assets at September 30, 2011 and December 31, 2010 is approximately $1,010,000 and $896,000, respectively, held in escrow to fund future capital improvements. The security deposits and escrow accounts are restricted cash.

 

Financing and leasing fees of approximately $950,000 and $947,000 are net of accumulated amortization of approximately $605,000 and $541,000 at September 30, 2011 and December 31, 2010, respectively.

 

NOTE 5. MORTGAGE NOTES PAYABLE

 

At September 30, 2011 and December 31, 2010, 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, 2011, the fixed interest rates on these loans ranged from 4.84% to 7.07%, payable in monthly installments aggregating approximately $742,000, including principal, to various dates through2026. The majority of the mortgages are subject to prepayment penalties.  At September 30, 2011, the weighted average interest rate on the above mortgages was 5.53%. The effective rate of 5.62% 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, 2011 are as follows:

 

2012—current maturities		$	1,084,000
2013		41,357,000
2014		7,889,000
2015		9,119,000
2016		191,000
Thereafter		79,777,000
		$	139,417,000

 

The $2,550,000 mortgage secured by the Avon Street Apartments was repaid in full from the proceeds of the sale of Avon Street Apartments on May 18, 2011.

 

On July 27, 2011, the Partnership financed the Battle Green Apartments with a new $5,000,000 mortgage at 4.95% which matures in August 2026.  Principal payments will be made using a 30 year amortization schedule.  Deferred financing costs associated with this mortgage totaled approximately $90,000 and accordingly the effective interest rate is 5.07%.  After paying off the existing loan of $3,998,573, approximately $1,000,000 was received by the Partnership. The interest paid on this loan to Harold Brown was $38,123.

 

On March 25, 2010, the Partnership refinanced the Brookside Apartments.  The new loan is $2,820,000, matures in 2020 and has an interest rate of 5.81%.  The loan is a ten year note amortized over 30 years. The proceeds of the loan were used to pay off the old mortgage of approximately $1,900,000.  There were no prepayment penalties.

 

NOTE 6. ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The Partnership’s residential lease agreements may require tenants to maintain a one-month advance rental payment and/or a security deposit. At September 30, 2011, amounts received for prepaid rents of approximately $1,275,000 are included in cash and cash equivalents, and security deposits of approximately $1,794,000 are included in other assets and are restricted cash.

 

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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, distributions to holders of 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.

 

In 2011, the Partnership approved a quarterly distribution of $7.00 per unit ($0.70 per receipt) payable on March 31, June 30, September 30, and December 31, 2011.

 

In 2010, the Partnership paid quarterly distributions of $7.00 per unit ($0.70 per receipt) in March, June, September and December for a total distribution of $28.00 per unit ($2.80 per receipt.)

 

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,
		2011			2010
Income (loss) per Depositary Receipt before Discontinued Operations		$	0.70		$	(1.18	)
Income from Discontinued Operations		5.93			0.13
Net Income (loss) per Depositary Receipt after Discontinued Operations		$	6.63		$	(1.05	)
Distributions per Depositary Receipt		$	2.10		$	2.10

 

NOTE 8. TREASURY UNITS

 

Treasury Units at September 30, 2011 are as follows:

 

Class A		38,993
Class B		9,260
General Partnership		488
		48,741

 

On August 20, 2007, NewReal, Inc., the General Partner authorized an equity repurchase program (“Repurchase Program”) under which the Partnership was permitted to purchase, over a period of twelve months, up to 100,000 Depositary Receipts (each of which is one-tenth of a Class A Unit).  On January 15, 2008, the General Partner authorized an increase in the Repurchase Program from 100,000 to 200,000 Depositary Receipts. On January 30, 2008 the General Partner authorized an increase the Repurchase Program from 200,000 to 300,000 Depositary Receipts.  On March 6, 2008, the General Partner authorized the increase in the total number of Depositary Receipts that could be repurchased pursuant to the Repurchase Program from 300,000 to 500,000.  On August 8, 2008, the General Partner re-authorized and renewed the Repurchase Program for an additional 12-month period ended August 19, 2009.  On March 22, 2010, the General Partner re-authorized and renewed the Repurchase Program that expired on August 19, 2009.  Under the terms of the renewed Repurchase Program, the Partnership may purchase up to 500,000 Depositary Receipts from the start of the program in 2007 through March 31, 2015.  The Repurchase Program requires the Partnership to repurchase a proportionate number of Class B Units and General Partner Units in connection with any repurchases of any Depositary Receipts by the Partnership based upon the 80%, 19% and 1% fixed distribution percentages of the holders of the Class A, Class B and General Partner Units under the Partnership’s Second Amended and Restate Contract of Limited Partnership.  Repurchases of Depositary Receipts or Partnership Units pursuant to the Repurchase Program may be made by the Partnership from time to time in its sole discretion in open market transactions or in privately negotiated transactions.  From August 20, 2007 through September 30, 2011, the Partnership has repurchased 398,320 Depositary Receipts at an average price of $73.86 per receipt (or $738.60 per underlying Class A Unit), 1,724 Class B Units and 91 General Partnership Units, both at an average price of $585.05 per Unit, totaling approximately $30,481,000 including brokerage fees paid by the Partnership.

 

On September 17, 2008, the Partnership completed the issuance of an aggregate of 6,642 Class A Units held in treasury to current holders of Class B and General Partner Units upon the simultaneous retirement to treasury of 6,309 Class B Units and 333 General Partner Units pursuant to an equity distribution plan authorized by the Board of Directors of the General Partner on August 8, 2008 and as further described under Item

 

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3.02 of the Partnership’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 18, 2008, which is incorporated herein by reference. Harold Brown, the treasurer of the General Partner, owns 75% of the issued and outstanding Class B Units of the Partnership and 75% of the issued and outstanding equity of the General Partner, Ronald Brown, the brother of Harold Brown and the president of the General Partner, owns 25% of the issued and outstanding Class B Units of the Partnership and 25% of the issued and outstanding equity of the General Partner.

 

The Partnership did not purchase any Depositary Receipts during the nine months ended September 30, 2011.

 

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 provides for any uninsured claims when appropriate. The Partnerships are not involved in any material pending legal proceedings.

 

As more fully described in the Form 8-K filed on September 13, 2011, the Partnership received a letter from the NYSE Amex dated September 9, 2011, notifying the Partnership that it was not in compliance with the continued listing standards of the exchange.  In our October 4, 2011 response to the NYSE, the Partnership demonstrated how it will be in compliance with its listing requirements.  Management anticipates that its comprehensive response will be received favorably and the Partnership will retain the listing on NYSE.  Management expects to receive a formal response from the NYSE in the fourth quarter of 2011.

 

NOTE 10. RENTAL INCOME

 

During the nine months ended September 30, 2011, approximately 90% of rental income was related to residential apartments and condominium units with leases of one year or less. Approximately 10% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at September 30, 2011 as follows:

 

Thru September 30,		Commercial Property Leases
2012		$	2,612,000
2013		2,126,000
2014		1,830,000
2015		1,269,000
2016		989,000
Thereafter		678,000
		$	9,504,000

 

The aggregate minimum future rental income does not include contingent rentals that represent expense reimbursements in excess of base rent including percentage rents, common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $461,000 and $490,000 for the nine months ended September 30, 2011 and 2010 respectively.

 

The leases on residential apartments are substantially for a period of one year or less. The majority expire in June, July and August.

 

The following information is provided for commercial leases:

 

									Percentage of
		Annual base rent			Total square feet		Total number		Annual base rent for
Thru September 30,		for expiring leases			for expiring leases		of leases expiring		expiring leases
2012		$	795,316		27,536		15		26	%
2013		292,900			10,684		5		10	%
2014		654,557			31,351		11		21	%
2015		105,150			4,645		2		3	%
2016		709,312			24,210		6		23	%
2017		382,816			9,473		3		13	%
2018		—			—		—		0	%
2019		—			—		—		0	%
2020		64,657			1,106		1		2	%
2021		63,000			1,800		1		2	%
Totals		$	3,067,708		110,805		44		100	%

 

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Rents receivable at September 30, 2011 are net of an allowance for doubtful accounts of approximately $656,000 at September 30, 2011 and $595,000 at December 31, 2010.  Included in rents receivable at September 30, 2011 is approximately $386,000 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 long-term leases with Staples and Trader Joe’s at Staples Plaza in Framingham, Massachusetts.

 

Rents receivable also includes approximately $24,000 representing the deferral of rental concession primarily related to the residential properties.

 

For the nine months ended September 30, 2011 rent at the commercial properties includes approximately $8,500 of amortization of deferred rents arising from the fair values assigned to in-place leases upon the purchase of Cypress Street in Brookline, Massachusetts.

 

NOTE 11. CASH FLOW INFORMATION

 

During the nine months ended September 30, 2011 and 2010, cash paid for interest was approximately $6,008,000, and $6,141,000, respectively. Cash paid for state income taxes was approximately $54,000 and $31,000 respectively.

 

NOTE 12. FAIR VALUE MEASUREMENTS

 

Fair Value Measurements on a Recurring Basis

 

At September 30, 2011 and December 31, 2010, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.

 

Financial Assets and Liabilities not Measured at Fair Value

 

At September 30, 2011 and December 31, 2011  the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, and note payable, accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments or, the recent acquisition of these items.

 

At September 30, 2011 and December 31, 2010, we estimated the fair value of our mortgages payable and other notes based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available.  We estimated the fair value of our secured mortgage debt that does not have current quoted market prices available by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3).  The differences in the fair value of our debt from the carrying value are the result of differences in interest rates and/or borrowing spreads that were available to us at September 30, 2011 and December 31, 2010, as compared with those in effect when the debt was issued or acquired.  The secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

 

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.

 

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The following table reflects the carrying amounts and estimated fair value of our debt.

 

		Carrying Amount			Estimated Fair Value
Mortgage Notes Payable
Partnership Properties
At September 30, 2011		$	139,417,037		$	155,940,250
At December 31, 2010		$	137,680,660		$	142,896,706
Investment Properties
At September 30, 2011		$	140,624,120		$	158,635,396

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2011 and December 31, 2010.  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, 2010 and current estimates of fair value may differ significantly from the amounts presented herein.

 

NOTE 13. TAXABLE INCOME AND TAX BASIS

 

Taxable income reportable by the Partnership and includable in its partners’ tax returns is different than financial statement income because of tax free exchanges, accelerated depreciation, different tax lives, and timing differences related to prepaid rents, allowances and intangible assets at significant acquisitions. Taxable loss was approximately $450,000 greater than statement loss for the year ended December 31, 2010. The cumulative tax basis of the Partnership’s real estate at September 30, 2011 is approximately $10,000,000 less than the statement basis. The primary reason for the lower tax basis is the acquisition of Battle Green in the second quarter of 2011, Linewt and Cypress Street in 2008 utilizing tax free exchanges. The Partnership’s tax basis in its joint venture investments is approximately $1,500,000 greater than statement basis.

 

Taxable income in 2011 will be approximately $7,700,000 less that book income because the gain on the sale of Avon Street of approximately $7,700,000 is deferred utilizing a tax free exchange in the $10,000,000 acquisition of Battle Green (See Note 2).  Taxable income in future years may be greater than book income due to the reduced depreciation available on the above mentioned tax free exchanges and other reductions in depreciation from prior accelerated depreciation and other timing differences.

 

Certain entities included in the Partnership’s consolidated financial statements are subject to certain state taxes.  These taxes are not significant and are recorded as operating expenses in the accompanying consolidates financial statements.

 

The Partnership adopted the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes.  As a result of the implementation of the guidance, the Partnership recognized no material adjustments regarding its tax accounting treatment.  The Partnership would recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which would be included in general and administrative expense.

 

In the normal course of business the Partnership or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of September 30, 2011, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2003 forward.

 

NOTE 14. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

 

Since November 2001, the Partnership has invested in nine limited partnerships and limited liability companies, the majority of which have invested in residential apartment complexes, with three partnerships investing in commercial property. The Partnership has a 40%-50% ownership interests in each investment. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 57%, with the balance owned by the others. A description of each investment is as follows:

 

On October 28, 2009 the Partnership invested approximately $15,925,000 in a joint venture to acquire a 40% interest in a residential property located in Brookline, Massachusetts.  The property, referred to as Dexter Park, is a 409 unit residential complex. The purchase price was $129,500,000.  The total mortgage is $89,914,000 with an interest rate of 5.57% and it matures in 2019.  The mortgage calls for interest only payments for the first two years of the loan and amortized over 30 years thereafter.  In order to fund this investment, the Partnership used

 

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approximately $8,757,000 of its cash reserves and borrowed approximately $7,168,000 with an interest rate of 6% from HBC Holdings, LLC, an entity owned by Harold Brown and his affiliates (“HBC”).  The term of the loan is four years with a provision requiring payment in whole or in part upon demand by HBC with six months notice.   On August 17, 2010, HBC gave six months written notice to the Partnership requesting a principal pay down of $2,500,000. During the fourth quarter of 2010, the Partnership paid HBC $2,500,000 as requested. On August 1, 2011 the Partnership elected to pay an additional $1,000,000 on the $7,168,000 Note to reduce the outstanding loan balance to $3,668,600.  The balance of the loan, $3,668,600, will remain subject to the original terms of the Note, including HBC’s right to demand payment of the balance of the loan in whole or in part upon six months notice. The interest paid during the nine months ended September 30, 2011 and 2010 was approximately $202,000 and $326,000, respectively. This loan is collateralized by the Partnership’s 99% ownership interest in 62 Boylston Street.  A majority of the apartments were leased at the time of the acquisition.  As a result, the Partnership amortized the intangible assets associated with the “in place” leases over a 12 month period which began in November 2009.  The total monthly amortization was approximately $407,000 which at 40% reduced the Partnership’s income by approximately $163,000 per month.  For the year ended December 31, 2010 the total amortization in connection with these leases was approximately $4,073,000, of which the Partnership’s share was approximately $1,629,000.  The intangible asset was fully amortized effective November 2010.   This investment, Hamilton Park Towers, LLC is referred to as Dexter Park.

 

On October 3, 2005, the Partnership invested $2,500,000 for a 50% ownership interest in a 168-unit apartment complex in Quincy, Massachusetts. The purchase price was $30,875,000. The Partnership plans to sell the majority of units as condominiums and retain 48 units for long-term investment. Gains from the sales of units will be taxed at ordinary income rates (approximately $47,000 per unit). In February 2007, the Partnership refinanced the 48 units which will be retained with a new mortgage in the amount of $4,750,000 with an interest rate of 5.57%, interest only for five years. This investment is referred to as Hamilton Bay Apartments, LLC. The loan will be amortized over 30 years thereafter and matures in March 2017. In April 2008, the Partnership refinanced an additional 20 units and obtained a new mortgage in the amount of $2,368,000 with interest at 5.75%, interest only, which matures in 2013.  As of October 24, 2011, 105 units have been sold, the proceeds of which went to pay down the mortgage on the property.  The balance on the new mortgage is approximately $1,668,000 at September 30, 2011. This investment is referred to as Hamilton Bay, LLC.

 

On March 7, 2005, the Partnership invested $2,000,000 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, with a $10,750,000 mortgage. The Partnership plans to operate the building and initiate development of the parking lot.  In June 2007, the Partnership separated the parcels, formed an additional limited liability company for the residential apartments and obtained a mortgage on the property. The new limited liability company formed for the residential apartments and commercial space is referred to as Hamilton Essex 81, LLC.  In August 2008, the Partnership restructured the mortgages on both parcels at Essex 81 and transferred the residential apartments to Hamilton Essex 81, LLC.  The mortgage on Hamilton Essex 81, LLC is $8,600,000 with interest only at 5.79% due in August 2015.  The mortgage on Essex Development, LLC, or the parking lot is approximately $2,158,000 with a variable interest rate of 2.25% over the daily Libor rate (0.24% at September 30, 2011). This loan was extended to August 2012 with the same conditions except for the addition of fixed principal payments in the amount of $4,301 per month. The cost associated with the extension was approximately $10,000. Harold Brown has issued a personal guaranty up to $1,000,000 of this mortgage. 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.  The investment in the parking lot is referred to as Hamilton Essex Development, LLC; the investment in the apartments is referred to as Hamilton Essex 81, LLC.

 

On March 2, 2005, the Partnership invested $2,352,000 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. The Partnership sold 127 of the units as condominiums and retained 49 units for long-term investment. In November 2006, the Partnership obtained a new 10-year mortgage in the amount of $5,000,000 on the units to be retained by the Partnership. The interest on the new loan is 5.67% fixed for the 10 year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan term.   This investment is referred to as Hamilton 1025, LLC.

 

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. The Partnership obtained a new 10-year mortgage in the amount of $5,500,000 in January 2007. The interest on the new loan is 5.67% fixed for the ten year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan. This loan required a cash contribution by the Partnership of $1,250,000 in December 2006. This investment is referred to as Hamilton Minuteman, LLC.

 

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.

 

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In 2005, Hamilton on Main Apartments, LLC obtained a ten year mortgage on the three buildings to be retained. The mortgage is $16,825,000, with interest only of 5.18% for three years and amortizing on a 30 year schedule for the remaining seven years when the balance is due. The net proceeds after funding escrow accounts and closing costs on the mortgage were approximately $16,700,000, which were used to reduce the existing mortgage. Hamilton on Main LLC paid a fee of approximately $400,000 in connection with this early extinguishment of debt.  At September 30, 2011, the remaining balance on the mortgage is approximately $15,953,000.

 

In November 2001, the Partnership invested approximately $1,533,000 for a 50% ownership interest in a 40-unit apartment building in Cambridge, Massachusetts. This property has a 12-year mortgage, with a remaining balance at September 30, 2011 of approximately $7,060,000 at 6.9% which is amortized on a 30-year schedule, with a final payment of approximately $6,000,000 in 2014. This investment is referred to as 345 Franklin, LLC.

 

As required by the lender, the Treasurer of the General Partner has provided a limited repayment guaranty equal to fifty percent (50%) of the outstanding balance for the loan on the for sale units at Hamilton Bay and a limited guaranty of $1,000,000 for the loan on Hamilton Essex Development.  In the event that he is obligated to make payments to the lenders as a result of these guaranties, the Partnership and other investors have, in turn, agreed to indemnify him for their proportionate share of any such payments.

 

Summary financial information as of September 30, 2011

 

		Hamilton Essex 81			Hamilton Essex Development			345 Franklin			Hamilton 1025			Hamilton Bay Sales			Hamilton Bay Apts			Hamilton Minuteman			Hamilton on Main			Dexter Park			Total
ASSETS
Rental Properties		$	9,546,059		$	2,597,309		$	8,336,008		$	5,906,387		$	1,951,075		$	7,347,113		$	7,387,465		$	22,162,035		$	114,310,012		$	179,543,463
Cash & Cash Equivalents		117			12,916			10,019			33			24,382			12,951			14,118			281			815,551			890,367
Rent Receivable		92,005			19,146			879			9,278			904			1,819			2,222			12,054			172,623			310,930
Due from Investment Properties		15,000			15,000
Real Estate Tax Escrow		93,721			—			38,291			60,411			86,578			44,193			102,117			620,090			1,045,402
Prepaid Expenses & Other Assets		98,142			789			91,158			86,663			189,773			93,298			81,180			526,254			1,178,633			2,345,890
Financing & Leasing Fees		78,711			9,607			18,371			25,928			7,836			34,195			20,911			23,158			473,908			692,624
Total Assets		$	9,923,756		$	2,639,767		$	8,494,727		$	6,088,700		$	2,173,969		$	7,575,954		$	7,550,088		$	22,825,899		$	117,570,816		$	184,843,676
LIABILITIES AND PARTNERS’ CAPITAL
Mortgage Notes Payable		$	8,487,795		$	2,157,699		$	7,059,569		$	5,000,000		$	1,668,000		$	4,750,000		$	5,500,000		$	15,952,852		$	89,914,000		$	140,489,916
Due to Investment Properties		15,000			15,000
Accts Pay & Acc Exp		50,338			5,826			71,853			48,147			17,514			6,661			83,378			200,478			750,820			1,235,011
Adv Rent Pmts & Sec Dep		149,104			—			111,782			70,319			21,446			83,709			63,134			244,407			1,764,347			2,508,248
Total Liabilities		8,687,238			2,178,525			7,243,205			5,118,466			1,706,960			4,840,370			5,646,512			16,397,734			92,429,166			144,248,175
Partners’ Capital		1,236,518			461,242			1,251,523			970,234			467,010			2,735,584			1,903,576			6,428,164			25,141,650			40,595,500
Total Liabilities & Capital		$	9,923,756		$	2,639,767		$	8,494,727		$	6,088,700		$	2,173,969		$	7,575,954		$	7,550,088		$	22,825,899		$	117,570,816		$	184,843,676
Partners’ Capital — NERA 50%		$	618,259		$	230,621		$	625,761		$	485,117		$	233,505		$	1,367,792		$	951,788		$	3,214,082					7,726,925
NERA 40%																										$	10,056,660		10,056,660
																													$	17,783,585
Total units/ condominiums
Apartments		48			—			40			175			120			48			42			148			409			1,030
Commercial		1			1			—			1			—			—			—			—			—			3
Total		49			1			40			176			120			48			42			148			409			1,033
Units to be retained		49			1			40			49			—			48			42			148			409			786
Units to be sold		—			—			—			127			120			—			—			—			—			247
Units sold through October 24, 2011		—			—			—			127			105			—			—			—			0			232
Unsold units		—			—			—			—			15			—			—			—			—			15
Unsold units with deposits for future sale as of October 24, 2011		—			—			—			—			0			—			—			—			—			—

 

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