NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP - Quarter Report: 2014 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, 2014

 

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)

 

 

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

 

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 November 4, 2014, there were 102,550 of the registrant’s Class A units (3,076,500 Depositary Receipts) of limited partnership issued and outstanding and 24,397 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, 2014 and December 31, 2013	3
	Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2014 and 2013	4
	Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2014 and 2013	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
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	38
Item 4.	Mine Safety Disclosure	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
SIGNATURES		39

 

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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, 2013 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, 2013.

 

The results of operations for the three and nine month periods ended September 30, 2014 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,
		2014			2013
		(Unaudited)
ASSETS
Rental Properties		$	149,759,026		$	152,904,661
Cash and Cash Equivalents		13,744,651			14,013,380
Rents Receivable		568,560			496,149
Real Estate Tax Escrows		304,398			375,560
Prepaid Expenses and Other Assets		3,364,841			3,895,189
Investments in Unconsolidated Joint Ventures		9,343,093			12,025,142
Financing Fees		1,775,187			1,635,076
Total Assets		$	178,859,756		$	185,345,157
LIABILITIES AND PARTNERS’ CAPITAL
Mortgage Notes Payable		196,103,164			198,520,478
Distribution and Loss in Excess of Investment in Unconsolidated Joint Venture		1,375,332			1,252,346
Accounts Payable and Accrued Expenses		2,908,670			3,178,495
Advance Rental Payments and Security Deposits		4,350,638			4,242,401
Total Liabilities		204,737,804			207,193,720
Commitments and Contingent Liabilities (Notes 3 and 9)		—			—
Partners’ Capital 128,407 and 129,487 units outstanding in 2014 and 2013 respectively		(25,878,048		)	(21,848,563		)
Total Liabilities and Partners’ Capital		$	178,859,756		$	185,345,157

 

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						Nine Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
Revenues
Rental income		$	10,546,055		$	9,859,135		$	31,500,342		$	27,687,903
Laundry and sundry income		96,973			108,617			321,150			302,305
		10,643,028			9,967,752			31,821,492			27,990,208
Expenses
Administrative		543,704			451,268			1,643,185			1,601,123
Depreciation and amortization		2,463,708			2,824,318			7,935,355			5,758,310
Management fee		438,319			400,588			1,303,780			1,144,462
Operating		838,728			786,179			3,540,985			3,032,964
Renting		155,865			78,874			301,334			135,540
Repairs and maintenance		2,087,290			1,641,608			4,899,746			4,238,821
Taxes and insurance		1,388,807			1,301,388			4,180,961			3,667,180
		7,916,421			7,484,223			23,805,346			19,578,400
Income Before Other Income (Expenses) and Discontinued Operations		2,726,607			2,483,529			8,016,146			8,411,808
Other Income (Expense)
Interest income		209			230			592			945
Interest expense		(2,393,427		)	(2,142,817		)	(7,160,489		)	(5,746,533		)
Gain on the sale of equipment		—			2,250			0			2,250
(Loss) from investments in unconsolidated joint ventures		(151,902		)	(375,412		)	(422,535		)	(1,028,602		)
		(2,545,120		)	(2,515,749		)	(7,582,432		)	(6,771,940		)
Income (loss) From Continuing Operations		181,487			(32,220		)	433,714			1,639,868
Discontinued Operations
Income (loss) from discontinued operations		—			(654		)	—			19,160
Gain on sale of real estate		—			—			—			3,678,839
		—			(654		)	—			3,697,999
Net Income (loss)		$	181,487		$	(32,874	)	$	433,714		$	5,337,867
Income (loss) per Unit
Income (loss) before discontinued operations		$	1.41		$	(0.25	)	$	3.36		$	12.62
Income (loss) from discontinued operations		—			(0.01		)	—			28.45
Net Income (loss) per Unit		$	1.41		$	(0.26	)	$	3.36		$	41.07
Weighted Average Number of Units Outstanding		128,587			129,719			129,149			129,981

 

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												Partners’s Capital
		Limited				General				Treasury				Limited						General
		Class A		Class B		Partnership		Subtotal		Units		Total		Class A			Class B			Partnership			Total
Balance January 1, 2013		144,180		34,243		1,802		180,225		49,781		130,444		$	(18,017,082	)	$	(4,273,666	)	$	(224,929	)	$	(22,515,677	)
Distribution to Partners		—		—		—		—		—		—		(2,337,714		)	(555,208		)	(29,221		)	(2,922,143		)
Stock Buyback										905		(905	)	(819,240		)	(192,610		)	(10,137		)	(1,021,987		)
Net Income		—		—		—		—		—		—		4,270,294			1,014,195			53,379			5,337,867
Balance September 30, 2013		144,180		34,243		1,802		180,225		50,686		129,539		$	(16,903,742	)	$	(4,007,289	)	$	(210,908	)	$	(21,121,940	)
Balance January 1, 2014		144,180		34,243		1,802		180,225		50,738		129,487		$	(17,485,327	)	$	(4,145,076	)	$	(218,160	)	$	(21,848,563	)
Distribution to Partners		—		—		—		—		—		—		(2,319,041		)	(550,772		)	(28,988		)	(2,898,801		)
Stock Buyback		—		—		—		—		1,080		(1,080	)	(1,258,399		)	(290,698		)	(15,300		)	(1,564,397		)
Net Income		—		—		—		—		—		—		346,971			82,406			4,337			433,714
Balance September 30, 2014		144,180		34,243		1,802		180,225		51,818		128,407		$	(20,715,796	)	$	(4,904,141	)	$	(258,111	)	$	(25,878,048	)

 

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,
		2014			2013
Cash Flows from Operating Activities
Net income		$	433,714		$	5,337,867
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of real estate		—			(3,678,839		)
Gain on the sale of equipment		—			(2,250		)
Depreciation and amortization		7,935,355			5,758,310
Loss from investments in joint venture		422,535			1,028,601
Depreciation and amortization - discontinued operations		—			2,111
Change in operating assets and liabilities
(Increase) in rents receivable		(72,411		)	(89,114		)
(Decrease) increase in accounts payable and accrued expense		(269,825		)	181,883
Decrease in real estate tax escrow		71,162			186,865
(Increase) in prepaid expenses and other assets		(408,753		)	(2,402,166		)
Increase in advance rental payments and security deposits		108,237			389,939
Total Adjustments		7,786,300			1,375,340
Net cash provided by operating activities		8,220,014			6,713,207
Cash Flows from Investing Activities
Proceeds from unconsolidated joint ventures		2,346,690			920,472
Net proceeds from the sale of equipment					2,250
Net proceeds from sale of real estate		—			2,155,546
Distribution in excess of investment in unconsolidated joint ventures		185,000			1,640,250
(Investment in) unconsolidated joint ventures		(149,190		)	(255,722		)
Improvement of rental properties		(3,701,170		)	(3,400,894		)
Purchase of rental property		—			(20,884,105		)
Net cash (used in) investing activities		(1,318,670		)	(19,822,203		)
Cash Flows from Financing Activities
Payment of financing costs		(289,561		)	(588,448		)
Proceeds of mortgage notes payable		1,109,555			20,500,000
Principal payments and payoffs of mortgage notes payable		(3,526,869		)	(4,581,283		)
Stock buyback		(1,564,397		)	(1,021,987		)
Distributions to partners		(2,898,801		)	(2,922,143		)
Net cash provided by (used in) financing activities		(7,170,073		)	11,386,139
Net (Decrease) in Cash and Cash Equivalents		(268,729		)	(1,722,857		)
Cash and Cash Equivalents, at beginning of period		14,013,380			6,981,906
Cash and Cash Equivalents, at end of period		$	13,744,651		$	5,259,049

 

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, 2014

 

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 24 properties which include 16 residential buildings; 4 mixed use residential, retail and office buildings; 3 commercial buildings and individual units at one condominium complex. These properties total 2,412 apartment units, 19 condominium units and 108,043 square feet of commercial space. Additionally, the Partnership also owns a 40-50% interest in 9 residential and mixed use properties consisting of 792 apartment units, 12,500 square feet of commercial space and a 50 car parking lot. The properties are located in Eastern Massachusetts and Southern New Hampshire.

 

Basis of Presentation:  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.

 

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 a 40 - 50% ownership interest. The consolidated group is referred to as the “Partnership.” 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. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses. In 2013, the carrying value of an investment fell below zero. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. (See Note 14: Investment in Unconsolidated Joint Ventures.)

 

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 equity’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. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.

 

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. In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment. The criteria considered by management include reviewing low leased percentages, significant near term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near term mortgage debt maturities or other factors that might impact the Partnership’s intent and ability to hold property. A property’s value is impaired only if management’s estimate of the aggregate future cash flows

 

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(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.

 

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 the lease agreement. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Rental concessions 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 which improve or extend the life of the assets 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.

 

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.

 

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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 have been recorded (See Note 13).

 

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 2014 or 2013 other than net income as reported.

 

Income Per Depositary Receipt:  Effective January 3, 2012, the Partnership authorized a 3-for-1 forward split of its Depositary Receipts listed on the NYSE Amex and a concurrent adjustment of the exchange ratio of Depositary Receipts for Class A Units of the Partnership from 10-to-1 to 30-to-1, such that each Depositary Receipt represents one-thirtieth (1/30) of a Class A Unit of the Partnership. All references to Depositary Receipts in the report are reflective of the 3- for-1 forward split.

 

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 2014 or 2013. The Partnership makes its temporary cash investments with high-credit quality financial institutions. At September 30, 2014, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from 0.01% to 0.35%.  At September 30, 2014 and December 31, 2013, respectively approximately $13,372,000 and $15,275,000 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 $79,346 and $23,483 for the nine months ended September 30, 2014 and 2013, respectively.

 

Discontinued Operations and Rental Property Held for Sale:  When significant 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, 2014 and 2013 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 refinancing 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, 2014, the Partnership and its Subsidiary Partnerships owned 2,412 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, 2014, 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, 2014 with a total of 792 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, 2014			December 31, 2013			Useful Life
Land, improvements and parking lots		$	44,300,508		$	43,919,728		15–40 years
Buildings and improvements		152,926,255			152,130,635			15–40 years
Kitchen cabinets		6,791,528			5,956,078			5–10 years
Carpets		6,601,426			5,820,516			5–10 years
Air conditioning		736,933			707,928			5–10 years
Laundry equipment		422,552			404,775			5–7 years
Elevators		1,139,296			1,139,296			20–40 years
Swimming pools		444,629			444,629			10–30 years
Equipment		5,476,998			5,038,530			5–7 years
Motor vehicles		86,657			86,657			5 years
Fences		24,670			24,670			5–15 years
Furniture and fixtures		5,967,285			5,564,621			5–7 years
Smoke alarms		236,719			216,223			5–7 years
Total fixed assets		225,155,456			221,454,286
Less: Accumulated depreciation		(75,396,430		)	(68,549,625		)
		$	149,759,026		$	152,904,661

 

In May 2013 the Partnership sold the Nashoba Apartments located in Acton, Massachusetts. The sale price was $4,300,000; the net proceeds of approximately $2,100,000 were transferred to Investment Property Exchange Services, Inc. a Qualified Intermediary. These funds were held by the intermediary in order to maintain the Partnership’s ability to structure a tax free exchange in accordance with the Internal Revenue Service’s rules under Sec. 1031. The gain on the sale in accordance with GAAP is approximately $3,679,000. The proceeds were subsequently used in the acquisition of the Hamilton Green Apartments described below.

 

On July 15, 2013, Hamilton Green Apartments, LLC, (“Hamilton Green”) a newly formed subsidiary of the Partnership, purchased Windsor Green at Andover, a 193 unit apartment complex located at 311 and 319 Lowell Street, Andover, Massachusetts. The purchase price was $62,500,000. From the purchase price, the Partnership allocated approximately $1,656,000 to the value of the in-place leases and approximately $96,000 to the value of the tenant relationships. These amounts were amortized over 12 and 36 months respectively. To fund this purchase, the Partnership obtained short term financing of approximately $40,000,000, used the funds of approximately $2,100,000 from the sale of the Nashoba Apartments, and the balance from the Partnership’s cash reserves. The closing costs associated with this short term financing were approximately $38,000. The original mortgage matured in November 2013. On December 20, 2013, the Partnership refinanced the mortgage on Hamilton Green. The new 15 year mortgage is $38,500,000; the interest rate is 4.67%; interest only for 2 years. After the first two years, principal is amortized on a 30-year amortization schedule through January 2029. This refinancing required additional capital of approximately $1,846,000 from the Partnership. The closing costs associated with this refinancing were approximately $346,000.

 

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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 gross receipts rental revenue and laundry income on the majority of the Partnership’s properties and 3% on Linewt. Total fees paid including discontinued operations were approximately $1,304,000 and $1,153,000 for the nine months ended September 30, 2014 and 2013, 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, 2014 and 2013, approximately $630,000 and $817,000, was charged to NERA for legal, accounting, construction, maintenance, rental and architectural services and supervision of capital improvements. Of the 2014 expenses referred to above, approximately $256,000 consisted of repairs and maintenance, $261,000 of administrative expense and $6,000 for rental commission. Approximately $107,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2014, the Hamilton Company received approximately $684,000 from the Investment Properties of which approximately $489,000 was the management fee, approximately $64,000 was for maintenance services, approximately $95,000 was for construction and capital improvement projects and approximately $36,000 was for administrative services. The management fee is equal to 4% of gross receipts rental income on the majority of investment properties and 2% on Dexter Park.

 

The Partnership reimburses the management company for the payroll and related expenses of the employees who work at the properties. Total reimbursement was approximately $2,385,000 and $2,170,000 for the nine months ended September 30, 2014 and 2013, 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 during 2014 and 2013.

 

Bookkeeping and accounting functions are provided by the Management Company’s accounting staff, which consists of approximately 14 people. During the nine months ended September 30, 2014 and 2013, the Management Company charged the Partnership $93,750 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses above.

 

The President of the Management Company performs asset management consulting services and receives an asset management fee from the Partnership. The Partnership does not have a written agreement with this individual. During the nine months ended September 30, 2014 and 2013 this individual received fees of $56,250.

 

The Partnership has invested in nine limited partnerships, which have invested in mixed use residential apartment complexes. The Partnership has a 40% to 50% ownership interest in each investment property. 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 60%. 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.

 

NOTE 4. OTHER ASSETS

 

Approximately $2,066,000 and $2,053,000 of security deposits are included in prepaid expenses and other assets at September 30, 2014 and December 31, 2013, respectively. The security deposits and escrow accounts are restricted cash.

 

Included in prepaid expenses and other assets at September 30, 2014 and December 31, 2013 is approximately $234,000 and $123,000, respectively, held in escrow to fund future capital improvements.

 

Intangible assets on the acquisition of Hamilton Green are included in prepaid expenses and other assets.  Intangible assets are approximately $57,000 net of accumulated amortization of approximately $1,695,000 and approximately $978,000 net of accumulated amortization of approximately $774,000 at September 30, 2014 and December 31, 2013, respectively.

 

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Financing fees of approximately $1,775,000 and $1,635,000 are net of accumulated amortization of approximately $557,000 and $548,000 at September 30, 2014 and December 31, 2013, respectively.

 

NOTE 5. MORTGAGE NOTES PAYABLE AND LINE OF CREDIT

 

Mortgage Notes Payable

 

At September 30, 2014 and December 31, 2013, 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, 2014, the interest rates on these loans ranged from 3.76% to 5.97%, payable in monthly installments aggregating approximately $808,000 including principal, to various dates through 2029. The majority of the mortgages are subject to prepayment penalties. At September 30, 2014, the weighted average interest rate on the above mortgages was 4.81%. The effective rate of 4.92% includes the amortization expense of deferred financing costs. See Note 12 for fair value information. The Partnership’s mortgage debt and the mortgage debt of its unconsolidated joint ventures generally is non-recourse except for customary exceptions pertaining to misuse of funds and material misrepresentations.

 

The Partnership has pledged tenant leases as additional collateral for certain of these loans.

 

Approximate annual maturities at September 30, 2014 are as follows:

 

2015—current maturities		$	133,000
2016		726,000
2017		1,821,000
2018		7,840,000
2019		1,912,000
Thereafter		183,671,000
		$	196,103,000

 

On February 25, 2013, the Partnership paid off the mortgage of approximately $3,967,000 on Hamilton Cypress LLC. There was no penalty on the early payoff. The funds used to pay off the mortgage were from the Partnership’s cash reserves.

 

On March 11, 2013, the Partnership refinanced the property owned by School Street 9 LLC. The new loan is $15,000,000 with an interest rate of 3.7% due in 2023. The loan calls for interest only for three years followed by principal and interest payments over the remainder of the loan term. Principal payments will be on a 30 year amortization schedule. The Partnership paid off the prior mortgage in the amount of approximately $15,284,000 with the proceeds of the new mortgage and the Partnership’s cash reserves. The costs associated with this refinancing were approximately $159,000.

 

On July 7, 2013, the Partnership refinanced the property owned by Boylston Downtown LP. The new 15 year $40,000,000 mortgage has an interest rate of 3.97%. The terms of the loan are interest only for the first three years, with a 30 year amortization thereafter until maturity in August 2028. Approximately $19,500,000 of loan proceeds was used to pay off the existing mortgage. The balance of the funds, approximately $20,000,000, after closing costs, were used in connection with the purchase of Hamilton Green Apartments. The costs associated with this refinancing are approximately $279,000.

 

On October 1, 2013, the Partnership refinanced the property owned by Westgate Apartments LLC. The new mortgage is $15,700,000; the interest rate is 4.65%, interest only payable in 10 years. Approximately $7,616,000 of the loan proceeds was used to pay off the existing mortgage. The mortgage matures in September 2023. The costs associated with the refinancing were approximately $190,000.

 

On December 20, 2013, the Partnership refinanced the property owned by Hamilton Green Apartments LLP. The new mortgage is $38,500,000; the interest rate is 4.67%; interest only for 2 years. After the first two years, principal is amortized on a 30-year amortization schedule through January 2029. The proceeds of the new mortgage as well as the Partnership’s cash reserves of approximately $1,846,000 were used to pay off the prior mortgage of $40,000,000 and cover the cost of this refinancing. The costs associated with the refinancing were approximately $346,000.

 

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In February 2014, the Partnership paid off the mortgages on Linewt in the amount of approximately $1,466,000 and Linhart in the amount of approximately $1,926,000. There were no prepayment penalties. The Partnership’s cash reserves were used to pay off these mortgages.

 

On June 11, 2014, the Partnership refinanced the property owned by NERA Dean Street Associates, LLC.  The new mortgage is $5,687,000; the interest rate is 4.22%, interest only payable in 10 years. Approximately $5,077,000 of the loan proceeds were used to pay off the existing mortgage.  The mortgage matures in June 2024. The costs associated with the refinancing were approximately $89,000.

 

On July 11, 2014, the Partnership refinanced the property owned by Westgate Apartments Burlington, LLC.  The new mortgage is $2,500,000; the interest rate is 4.31%; interest only, payable in 10 years.  Approximately $2,010,000 of loan proceeds were used to pay off the existing mortgage.  The mortgage matures in August 2024.  The costs associated with the refinancing were approximately $75,000.

 

Line of Credit

 

On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit.  The term of the line is three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus an applicable margin of 2.5% to 3.5%. The costs associated with the line of credit were approximately $125,000.  As of September 30, 2014, no funds have been drawn on this credit line.

 

The line of credit may be used for acquisition, refinancing, improvements, working capital and other needs of the Partnership. The line may not be used to pay dividends, make distributions or acquire equity interests of the Partnership.

 

The line of credit is collateralized by varying percentages of the Partnership’s ownership interest in 23 of its subsidiary properties and joint ventures. Pledged interests range from 49% to 100% of the Partnership’s ownership interest in the respective entities.

 

The Partnership paid fees to secure the line of credit. Any unused balance of the line of credit is subject to a fee ranging from 15 to 20 basis points per annum.

 

The line of credit agreement contains several covenants including, but not limited to, providing cash flow projections and compliance certificates, as well as other financial information. Additional covenants include certain restrictions on additional encumbrances of Partnership assets, limitations on debt, maintenance of leverage ratios, minimum tangible net worth, limitations on total aggregate indebtedness, minimum ratio of net operating income to total indebtedness debt service, disposition of properties, and other items.

 

See Form 8-K filed on August 6, 2014 for additional information.

 

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, 2014, amounts received for prepaid rents of approximately $1,538,000 are included in cash and cash equivalents, and security deposits of approximately $2,066,000 are included in prepaid expenses and other assets and are restricted cash.

 

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.

 

Effective January 3, 2012, the Partnership authorized a 3-for-1 forward split of its Depositary Receipts listed on the NYSE Amex and a concurrent adjustment of the exchange ratio of Depositary Receipts for Class A Units of the Partnership from 10-to-1 to 30-to-1, such that each Depositary Receipt represents one-thirtieth (1/30) of a Class A Unit of the Partnership.

 

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In 2014, the Partnership paid quarterly distributions of $7.50 per unit ($0.25 per receipt) on March 31, June 30, and September 30, 2014.

 

In 2013, the Partnership paid quarterly distributions of $7.50 per unit ($0.25 per receipt) in March, June, September, and December for a total distribution of $30.00 per unit ($1.00 per receipt) for the year.

 

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 30 Depositary Receipts. The following is information per Depositary Receipt:

 

		Nine Months Ended September30,
		2014			2013
Income per Depositary Receipt before Discontinued Operations		$	0.11		$	0.42
Income per Depository Receipt from Discontinued Operations		0.00			0.95
Net Income per Depositary Receipt after Discontinued Operations		$	0.11		$	1.37
Distributions per Depositary Receipt		$	0.75		$	0.75

 

NOTE 8. TREASURY UNITS

 

Treasury Units at September 30, 2014 are as follows:

 

Class A		41,455
Class B		9,845
General Partnership		518
		51,818

 

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 300,000 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 300,000 to 600,000 Depositary Receipts. On January 30, 2008 the General Partner authorized an increase the Repurchase Program from 600,000 to 900,000 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 900,000 to1,500,000. 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 1,500,000 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, 2014, the Partnership has repurchased 1,268,811 Depositary Receipts at an average price of $25.32 per receipt (or $759.60 per underlying Class A Unit), 2,308 Class B Units and 122 General Partnership Units, both at an average price of $726.25 per Unit, totaling approximately $34,045,000 including brokerage fees paid by the Partnership.

 

During the nine months ended September 30, 2014, the Partnership purchased a total of 25,920 Depositary Receipts. The average price was $47.22 per receipt or $1,416.60 per unit. The total cost including commission was $1,258,399. The Partnership was required to repurchase 205 Class B Units and 11 General Partnership units at a cost of $290,698 and $15,300 respectively.

 

From October 1, 2014 through November 4, 2014, the Partnership purchased a total of 5,277 Depositary Receipts. The average price was $47.37 per receipt or $1,421.10 per unit. The total cost was $257,098. The Partnership is required to repurchase 41.8 Class B Units and 2.2 General Partnership Units at a cost of $59,369 and $3,125 respectively.

 

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NOTE 9. COMMITMENTS AND CONTINGENCIES

 

From time to time, the Partnership is 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 Partnership is not involved in any material pending legal proceedings.

 

NOTE 10. RENTAL INCOME

 

During the nine months ended September 30, 2014, approximately 92% of rental income was related to residential apartments and condominium units with leases of one year or less. The majority of these leases expire in June, July and August. Approximately 8% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at September 30, 2014 as follows:

 

		Commercial Property Leases
2015		$	2,754,000
2016		2,299,000
2017		1,532,000
2018		1,188,000
2019		794,000
Thereafter		837,000
		$	9,404,000

 

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $532,000 and $489,000 for the nine months ended September 30, 2014 and 2013 respectively. Staples and Trader Joes, tenants at Staples Plaza, are approximately 29% of the total commercial rental income.

 

The following information is provided for commercial leases:

 

									Percentage of
		Annual base rent			Total square feet		Total number		annual base rent for
		for expiring leases			for expiring leases		of leases expiring		expiring leases
Through September 30,
2015		$	386,561		20,703		11		13	%
2016		685,229			24,656		7		23	%
2017		576,040			20,023		9		20	%
2018		340,173			10,377		6		11	%
2019		632,886			22,657		7		21	%
2020		141,831			3,056		2		5	%
2021		64,800			1,800		1		2	%
2022		0			0		0		0	%
2023		0			0		0		0	%
2024		157,443			4,771		1		5	%
Totals		$	2,984,963		108,043		44		100	%

 

Rents receivable are net of an allowance for doubtful accounts of approximately $570,000 and $344,000 at September 30, 2014 and December 31, 2013. Included in rents receivable at September 30, 2014 is approximately $183,000 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 at September 30, 2014 also includes approximately $68,000 representing the deferral of rental concession primarily related to the residential properties.

 

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For the nine months ended September 30, 2014, rent at the commercial properties includes approximately $2,000 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, 2014 and 2013, cash paid for interest was approximately $6,444,000, and $5,795,000 respectively.  Cash paid for state income taxes was approximately $50,000 and $59,000 during the nine months ended September 30, 2014 and 2013 respectively.

 

NOTE 12. FAIR VALUE MEASUREMENTS

 

Fair Value Measurements on a Recurring Basis

 

At September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013 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, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, 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, accounts receivable, 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.

 

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, 2014		$	196,103,164		$	205,947,641
At December 31, 2013		$	198,520,478		$	196,059,827
Investment Properties
At September 30, 2014		$	138,334,647		$	147,420,121
At December 31, 2013		$	137,875,515		$	147,975,521

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2014 and December 31, 2013. 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

 

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statements since September 30, 2014 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 income was approximately $4,300,000 less than statement income for the year ended December 31, 2013. The primary reason for the decrease is due to tax free exchanges of approximately $3,700,000 from the sale of Nashoba and accelerated tax depreciation of approximately $1,100,000 at the related acquisition of Hamilton Green and other depreciation timing difference and accelerated depreciation in prior years. The cumulative tax basis of the Partnership’s real estate at December 31, 2013 is approximately $4,800,000, less than the statement basis. The primary reasons for the lower tax basis are tax free exchanges, and accelerated depreciation. The Partnership’s tax basis in its joint venture investments is approximately $1,300,000 less than statement basis because of accelerated depreciation.

 

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.

 

Allowable accelerated depreciation deductions have expired for 2014. This may result in higher taxable income in future years. Future tax law changes may significantly affect taxable income.

 

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 adjustment regarding its’ tax accounting treatment. The Partnership expects to 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, 2014, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2008 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 between 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 was $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. The balance of this mortgage is approximately $86,567,000 at September 30, 2014. In order to fund this investment, the Partnership used 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 was four years with a provision requiring payment in whole or in part upon demand by HBC with six months notice. The loan was paid in full in April 2012. 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 sold 120 units as condominiums and retained 48 units for long-term investment. In February 2007, the Partnership refinanced the 48 units with a new mortgage in the amount of $4,750,000 with an interest rate of 5.57%, interest only for five years. The loan will be amortized over 30 years thereafter and matures in March 2017. As of September 30, 2014, the balance of the mortgage is approximately $4,590,000. This investment is referred to as Hamilton Bay Apartments, LLC. 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 matured in 2013. On October 18, 2013, the Partnership and its joint venture partner each made capital contributions to the entity of $660,000. The capital was used to pay off the outstanding mortgage.  Six units have been sold during the first nine

 

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months of 2014 with a gain of approximately $351,000.  As of November 1, 2014, nine units are still owned by the Partnership. 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 48 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 may 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 approximately $8,141,000, at September 30, 2014, amortizing over 30 years at 5.79% due in August 2016. The mortgage on Essex Development, LLC, or the parking lot is approximately $2,001,000 with a variable interest rate of 2.25% over the daily Libor rate (0.156%) at September 30, 2014. This loan was extended to August 2013 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 $6,000. In September 2013, the loan was extended for an additional two years to August 2015 with the same conditions except for the increased principal payments of $4,443 per month. The costs associated with the extension were approximately $9,000. 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. 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. The balance of this mortgage is approximately $4,824,000 at September 30, 2014. This investment is referred to as Hamilton 1025, 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.  The Partnership sold 137 units as condominiums. The assets were combined with Hamilton on Main Apartments. Hamilton on Main, LLC is known as Hamilton Place.

 

In 2005, Hamilton on Main Apartments, LLC obtained a ten year mortgage on the three buildings to be retained. The mortgage was $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. In August 2014, the property was refinanced with a 10 year mortgage in the amount of $16,900,000 at 4.34% interest only.  The Joint Venture Partnership paid off the prior mortgage of approximately $15,205,000 with the proceeds of the new mortgage and distributed $850,000 to the Partnership.

 

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 Joint Venture 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. At September 30, 2014, the balance of this mortgage is approximately $5,312,000. This investment is referred to as Hamilton Minuteman,  LLC.

 

In November 2001, the Partnership invested approximately $1,533,000 for a 50% ownership interest in a 40-unit apartment building in Cambridge, Massachusetts. In June 2013, the property was refinanced with a 15 year mortgage in the amount of $10,000,000 at 3.87%, interest only for 3 years and is amortized on a 30-year schedule for the balance of the term. The Partnership paid off the prior mortgage of approximately $6,776,000 with the proceeds of the new mortgage. After the refinancing, the property made a distribution of $1,610,000 to the Partnership. As a result of the distribution, the carrying value of the investment fell below zero. The Partnership will continue to account for this investment using the equity method of accounting. Although the Partnership has no legal obligation, the Partnership intends to fund its share of any future operating deficits if needed. This investment is referred to as 345 Franklin, LLC.

 

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Table of Contents

 

Summary financial information as of September 30, 2014

 

					Hamilton															Hamilton			Hamilton
		Hamilton			Essex			345			Hamilton			Hamilton			Hamilton			Minuteman			on Main			Dexter
		Essex 81			Development			Franklin			1025			Bay Sales			Bay Apts			Apts			Apts			Park			Total
ASSETS
Rental Properties		$	8,619,846		$	2,622,203		$	7,230,839		$	5,215,054		$	1,011,453		$	6,473,921		$	6,628,931		$	19,644,258		$	98,343,487		$	155,789,992
Cash & Cash Equivalents		28,937			149,705			203,001			7,697			741,509			4,188			111,378			2,404,047			1,231,163			4,881,625
Rent Receivable		17,700			—			1,703			14,718			3,049			1,102			2,326			9,845			149,200			199,643
Real Estate Tax Escrow		98,555			—			41,934			71,690			—			43,591			40,212			52,130			356,155			704,267
Prepaid Expenses & Other Assets		95,311			895			50,550			44,962			27,327			44,461			44,558			96,377			1,657,149			2,061,590
Financing & Leasing Fees		33,515			7,753			91,554			10,849			—			15,110			9,005			159,175			295,874			622,835
Total Assets		$	8,893,864		$	2,780,556		$	7,619,581		$	5,364,970		$	1,783,338		$	6,582,373		$	6,836,410		$	22,365,832		$	102,033,028		$	164,259,952
LIABILITIES AND PARTNERS’ CAPITAL
Mortgage Notes Payable		$	8,140,592		$	2,001,159		$	10,000,000		$	4,823,762		$	—		$	4,590,276		$	5,311,923		$	16,900,000		$	86,566,934		$	138,334,646
Accounts Payable & Accrued Expense		150,481			55,616			172,833			27,905			724,100			16,076			123,765			2,142,549			931,507			4,344,832
Advance Rental Pmts & Security Deposits		174,103			—			197,412			103,182			13,487			88,756			95,052			301,976			2,205,078			3,179,046
Total Liabilities		8,465,176			2,056,775			10,370,245			4,954,849			737,587			4,695,108			5,530,740			19,344,525			89,703,519			145,858,524
Partners’ Capital		428,688			723,781			(2,750,664		)	410,121			1,045,751			1,887,265			1,305,670			3,021,307			12,329,509			18,401,428
Total Liabilities and Capital		$	8,893,864		$	2,780,556		$	7,619,581		$	5,364,970		$	1,783,338		$	6,582,373		$	6,836,410		$	22,365,832		$	102,033,028		$	164,259,952
Partners’ Capital % - NERA		50		%	50		%	50		%	50		%	50		%	50		%	50		%	50		%	40		%
Investment in Unconsolidated Joint Ventures		$	214,344		$	361,891		$	—		$	205,061		$	522,876		$	943,633		$	652,833		$	1,510,654		$	4,931,804		9,343,093
Distribution and Loss in Excess of investments in Unconsolidated Joint Ventures		$	—		$	—		$	(1,375,332	)	$	—		$	—		$	—		$	—		$	—		$	—		(1,375,332		)
Total Investment in Unconsolidated Joint Ventures (Net)																													$	7,967,761
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 November 1, 2014		—			—			—			127			111			—			—			—			—			238
Unsold units		—			—			—			—			9			—			—			—			—			9
Unsold units with deposits for future sale as of November 1, 2014		—			—			—			—			—			—			—			—			—			—

 

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