NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2002 OR

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

For the transition period from ___________________ to _____________________

Commission file number 0-12138

New England Realty Associates Limited Partnership
(Exact Name of Registrant as Specified in Its Charter)

Massachusetts 04-2619298
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

39 Brighton Avenue, Allston, Massachusetts 02134
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (617) 783-0039

Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

Indicate by check | | 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 | |

INDEX

PART I - FINANCIAL INFORMATION

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

1

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

See notes to consolidated financial statements

2

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)

See notes to consolidated financial statements

3

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

See notes to consolidated financial statements

4

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

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

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership
interest in each subsidiary except for the limited liability company formed in
November 2001, in which the Partnership has a 50% 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 its 50% owned limited liability company using the equity method.

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

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

RENTAL PROPERTIES: Rental properties are stated at cost less accumulated
depreciation. Maintenance and repairs are charged to expense as incurred;
improvements and additions are capitalized. When assets are retired or otherwise
disposed of, the cost of the asset and related accumulated depreciation is
eliminated from the accounts, and any gain or loss on such disposition is
included in income. Rental properties are depreciated on the straight-line
method over their estimated useful lives. In the event that facts and
circumstances indicate that the carrying value of rental properties may be
impaired, an analysis of recoverability is performed. The estimated future
undiscounted cash flows are compared to the asset's carrying value to determine
if a write-down to fair value or discounted cash flow 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.

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

CASH EQUIVALENTS: The Partnerships consider 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 a
single segment.

5

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 2002 or 2001,
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 year presented. The Partnership
has no dilutive units and, therefore, basic net income is the same as diluted
net income per unit. (See note 7)

CONCENTRATION OF CREDIT RISKS AND FINANCIAL INSTRUMENTS: The Partnerships'
properties are located in New England, and the Partnerships are subject to the
general economic risks related thereto. No single tenant accounted for more than
5% of the Partnerships' revenues in 2002 or 2001. The Partnerships make their
temporary cash investments with high-credit-quality financial institutions or
purchase money market accounts invested in U.S. Government securities or mutual
funds invested in government bonds. At September 30, 2002, substantially all of
the Partnerships cash and cash equivalents were held in interest-bearing
accounts at financial institutions, earning interest at rates from 1.44% to
1.86%. At September 30, 2002 and 2001 approximately $16,300,000 and $15,800,000
of cash and cash equivalents exceeded federally insured amounts.

ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising expense
was $59,457 and $50,578 for the nine months ended September 30, 2002 and 2001,
respectively.

NOTE 2--RENTAL PROPERTIES

As of September 30, 2002, the Partnership and its Subsidiary Partnerships owned
2,192 residential apartment units in 21 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
greater metropolitan Boston, Massachusetts area.

Additionally, as of September 30, 2002, the Subsidiary Partnerships owned
commercial shopping centers in East Hampton, Connecticut and Framingham,
Massachusetts. These properties are referred to collectively as the "Commercial
Properties."

On June 17, 2002, the Partnership purchased a 69-unit residential apartment
complex located in Norwood, Massachusetts for $7,200,000. The Partnership
assumed a first mortgage of approximately $3,650,000 with an interest rate of
7.08%, amortizing over 25 years and maturing in 2007. The seller financed
$1,726,898 at an interest rate of 6%, interest only, for 5 years. This
seller-financed note is collateralized by a mortgage on the previously
unencumbered 19 condominium units described above. The balance of approximately
$1,800,000 was funded from cash reserves.

On June 28, 2002, the Partnership sold a condominium unit located in Brockton,
Massachusetts for $113,000. The net gain of the sale is $92,778 after deducting
basis, a 3% sales commission to the management company (see Note 3), and other
closing costs. The net cash flow to the Partnership was $104,494.

6

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 2 - RENTAL PROPERTIES (CONTINUED)

Rental properties consist of the following:

Included in rental properties is approximately $1,700,000 book value of the East
Hampton Mall for which there is a sales agreement. (See Note 14).

NOTE 3--RELATED PARTY TRANSACTIONS

The Partnerships' properties are managed by an entity that is owned by the
majority shareholder of the General Partner. The management fee is equal to 4%
of rental revenue and laundry income. Total fees paid were approximately
$913,000 and approximately $855,000 for the nine months ended September 30, 2002
and 2001, respectively. Security deposits are held in escrow by the management
company (see Note 6). The management company also receives a mortgage servicing
fee equal to an annual rate of 1/2% of the monthly outstanding balance of
mortgages receivable resulting from the sale of property. There was no mortgage
servicing fee paid in the year ended December 31, 2001 or the nine months ended
September 30, 2002.

The Partnership Agreement also 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, 2002 and 2001,
approximately $548,000 and $470,000 was charged to NERA for legal, construction,
maintenance, rental and architectural services and supervision of capital
improvements. Of the 2002 expenses referred to above, approximately $181,000
consisted of repairs and maintenance, $147,000 of administrative expense and
approximately $220,000 of architectural services and supervision of capital
projects was capitalized in rental properties. Of the 2001 expenses referred to
above, approximately $140,000 is recorded in repairs and maintenance, $136,000
in administrative expense, approximately $62,000 in renting expense and
approximately $132,000 of architectural services and supervision of capital
projects was capitalized in rental properties. Additionally in each of the nine
months ended September 30, 2001 and 2000, the Partnership paid to the management
company $60,000 for in-house accounting services, which were previously provided
by an outside

7

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)

company. The Partnership Agreement entitles the General Partner or the
management company to receive certain commissions upon the sale of Partnership
property only to the extent that total commissions do not exceed 3%. During the
nine months ended September 30, 2002 the Partnership paid a commission of $3,390
to the management company on the sale of the condominium in Brockton (See Note
2). No commissions were paid during the year ended December 31, 2001.

In 1996, prior to becoming an employee and President of the management company,
the current President performed asset management consulting services to the
Partnership. This individual continues to perform this service and to receive an
asset management fee from the Partnership, receiving $37,500 during the nine
months ended September 30, 2002 and $50,000 during the year ended December 31,
2001.

Included in prepaid expenses and other assets were amounts due from related
parties of approximately $1,051,000 at September 30, 2002 and $1,038,000 at
December 31, 2001 representing Massachusetts tenant security deposits which are
held for the Partnerships by another entity also owned by one of the
shareholders of the General Partner (see Note 6).

On November 8, 2001, the Partnership, the majority shareholder of the General
Partner and the President of the management company formed a limited liability
company to purchase a 40-unit apartment building in Cambridge, Massachusetts.
The ownership percentages are 50%, 47 1/2% and 2 1/2%, respectively. As part of
this transaction, the Partnership advanced funds in excess of its 50% interest
and received interest on this excess at 8%. A mortgage of approximately
$8,000,000 was taken out on this property on December 27, 2001, and the funds in
excess of the required equity were returned to the members in proportion to
their ownership interest so their respective capital contributions are currently
proportionate to their ownership interest. The interest income paid to the
Partnership in 2001 was $30,003.

NOTE 4--OTHER ASSETS

Included in prepaid expenses and other assets at September 30, 2002 and December
31, 2001 is approximately $786,000 and $552,000 respectively, held in escrow to
pay future capital improvements.

Financing and leasing fees of $779,519 and $816,414 are net of accumulated
amortization of $1,257,289 and $1,157,600 at September 30, 2002 and December 31,
2001, respectively.

NOTE 5--MORTGAGES PAYABLE

At September 30, 2002 and December 31, 2001, the mortgages payable consisted
of various loans, substantially all of which were secured by first mortgages
on properties referred to in Note 2. At September 30, 2002 the interest rate
on these loans ranged from 6.0% to 8.78%, payable in monthly installments
aggregating approximately $632,000 including interest, to various dates
through 2016. Although the majority of loans mature within ten years,
pursuant to the applicable loan documents they are being amortized on a basis
between 25 and 27.5 years and require "balloon" payments at the end of the
ten-year maturity period. The majority of the mortgages are subject to
prepayment penalties. See Note 12 for fair value information.

8

NEW ENGLAND REALTY ASSOCIATED LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 5--MORTGAGES PAYABLE (CONTINUED)

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

Approximate annual maturities at September 30, 2002 are as follows:

2003--current maturities $ 918,000
2004 988,000
2005 12,019,000
2006 1,992,000
2007 2,612,000
Thereafter 65,829,000
-------------
$ 84,358,000
=============

NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

The lease agreements for certain properties require tenants to maintain a
one-month advance rental payment plus security deposits. Security deposits are
held by another entity owned by the majority shareholder of the General Partner
(see Note 3).

NOTE 7--PARTNERS' CAPITAL

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

In February 2002, the Partnership voted to change its policy from semi-annual to
a quarterly dividend and declared quarterly dividends of $6.40 per unit, payable
on March 31, 2002, June 30, 2002 and September 30, 2002. The Partnership
declared distributions of $17.70 per unit in 2001.

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 on the net
income per Depositary Receipt:

In the third quarter of 2002, 216 units were exchanged for 2,160 depositary
receipts.

9

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 8--TREASURY UNITS

Treasury units at September 30, 2002 are as follows:

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

NOTE 9--COMMITMENTS AND CONTINGENCIES

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

The Partnership made commitments to construct 20 additional residential units
at the Westgate Apartments in Woburn, Massachusetts. The Partnership had
estimated the total cost of these units to be approximately $3,500,000, and
was initially to be funded from cash reserves. At September 30, 2002,
management has decided to defer the project due to vacancies at the Westgate
Apartments. The total costs incurred to date are approximately $238,000 and
are included in rental properties as deferred construction costs.

NOTE 10--RENTAL INCOME

During the nine months ended September 30, 2002, approximately 91% of rental
income was related to residential apartments and condominium units with leases
of one year or less. The remaining 9% was related to commercial properties which
have minimum future rental income on noncancellable operating leases as follows:

The aggregate minimum future rental income does not include contingent rentals
that may be received under various leases in connection with percentage rents,
common area charges, and real estate taxes. Aggregate contingent rentals were
approximately $483,000 and $461,000, for the nine months ended September 30,
2002 and the year ended December 31, 2001, respectively.

Rents receivable are net of allowances for doubtful accounts of $222,616 and
$77,752 at September 30, 2002 and December 31, 2001, respectively. The allowance
was $355,331 at September 30, 2001.

10

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 11--CASH FLOW INFORMATION

During the nine months ended September 30, 2002 and 2001 cash paid for interest
was approximately $4,894,000 and $4,835,000, respectively.

Non-cash investing and financing activities were as follows:

NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

NOTE 13--TAXABLE INCOME AND TAX BASIS

Taxable income reportable by the Partnership is different than financial
statement income because of accelerated depreciation, different tax lives, and
timing differences related to prepaid rents and allowances. Taxable income is
approximately $325,000 greater than statement income for the nine months ended
September 30, 2002 and approximately $500,000 greater than statement income for
the year ended December 31, 2001 because of depreciation differences,
non-deductible allowances and an increase in tenants' prepaid rental deposits.
The cumulative tax basis of the Partnership's real estate at September 30, 2002
is approximately $2,500,000 greater than the statement basis.

11

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 14--SUBSEQUENT EVENT - SALE OF EAST HAMPTON LP SHOPPING MALL

The Partnership has executed a purchase and sale agreement for the sale of the
East Hampton LP shopping mall located in East Hampton, Connecticut for
$3,025,000. The gain on the sale will be approximately $1,200,000 after
deducting basis, a 3% sales commission to the management company (Note 3), and
other estimated expenses of the sale. The net cash flow to the Partnership will
be approximately $1,600,000 after payment of the existing mortgage and estimated
selling expenses. For the years ended December 31, 2001, this property
contributed approximately 2% of rental income and less than 1% of cash flow from
operations. The closing is scheduled for early December 2002 but may be extended
until January 2003 at the buyer's option.

Rental income was approximately $130,000 and $388,000 for the three months and
nine months ended September 30, 2002, respectively. Income from operations was
approximately $36,000 and $88,000 for the three months and nine months ended
September 30, 2002, respectively.

NOTE 15- NEW ACCOUNTING PRONOUNCEMENTS

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

The Partnership's adoption of FAS 144 will result in: (i) the presentation of
net operating results of properties sold during 2002, as income from
discontinued operations for all periods presented and (ii) the presentation of
the gain on the sale of operating properties sold, net of sale costs, as income
from discontinued operations for the year 2002. Implementation of FAS 144 will
only impact the income statement classification but will have no effect on the
results of operations.

In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." Under FAS 143, the fair value of a liability for an asset
retirement obligation must be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part the carrying amount of the long-lived
asset. FAS 143 is effective for fiscal years beginning after June 15, 2002. The
Partnership does not believe that FAS 143 will have a material impact on the
Partnership financial position or results of operations.

12

NEW ENGLAND REALTY ASSOCIATED LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(Unaudited)

NOTE 15--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In April 2002, the FASB issued FAS 145 "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FAS Statement No. 13, and Technical Correction." FAS 145
eliminates extraordinary accounting treatment for or loss on debt
extinguishment, and amends other existing authoritative pronouncements to make
various technical corrections, clarifies meanings, or describes their
applicability under changed conditions. The provisions of FAS 145 are effective
for the Partnership with the beginning of fiscal year 2003; however early
application of FAS 145 is encouraged. Debt extinguishments reported as
extraordinary items prior to scheduled or early adoptions of FAS 145 would be
reclassified in most cases following adoption. The Partnership does not
anticipate a significant impact on their results of operations from adopting FAS
145.

In July 2002, the FASB issued FAS 146, "Accounting For Costs Associated With
Exit or Disposal Activities." FAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities. Under FAS 146,
a commitment to an exit or disposal plan no longer will be a sufficient basis
for recording a liability for those activities. The Company does not anticipate
a significant impact on their results of operations from adopting FAS 146.

13

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

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

The Partnership has retained The Hamilton Company ("Hamilton") to manage and
administer the Partnership's properties. Hamilton is a full service real estate
management company, which has legal, construction, maintenance, architectural
and administrative departments. The Partnership's properties represent
approximately 33% of the total properties and 67% of the residential properties
managed by Hamilton. Substantially all of the other properties managed by
Hamilton are owned wholly or partially, directly or indirectly, by Harold
Brown. The Partnership's Second Amended and Restated Contract of Limited
Partnership (the "Partnership Agreement") expressly provides that the general
partner may employ a management company to manage the properties, and that
such management company may be paid a fee of 4% of rental receipts for
administrative and management services (the "Management Fee"). The
Partnership annually pays Hamilton the full Management Fee, in monthly
installments.

Mr. Brown, his brother Ronald Brown and the President of Hamilton, Carl Valeri,
collectively own approximately 16.8% of the depositary receipts representing the
Partnership's Class A Units (including depositary receipts held by trusts for
the benefit of such persons' family members). Harold Brown also owns 75% of the
Partnership's Class B Units, 75% of the capital stock of NewReal, Inc.
("NewReal"), the Partnership's sole general partner, and all of the outstanding
capital stock of Hamilton. Ronald Brown also owns 25% of the Partnership's Class
B Units and 25% of NewReal's capital stock. In addition, Ronald Brown is the
President and a director of NewReal, and Harold Brown is NewReal's Treasurer and
also a director. Two of NewReal's other directors, Thomas Raffoul and Conrad
DiGregorio, also own immaterial amounts of the Partnership's Class A Units.

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

Hamilton provided approximately 5% of the repair and maintenance expense paid
for by the Partnership in 2001, and approximately 8% of such expense paid for
by the Partnership during the first nine months of 2002. Hamilton's maintenance
department includes plumbers, electricians and carpenters, and has equipment for
snow removal and fork lifts where necessary. However, several of the larger
Partnership properties have their own maintenance staff. Further, those
properties that do not have their own maintenance staff but are located more
than a reasonable distance from Hamilton's headquarters in Allston,
Massachusetts are generally serviced by local independent companies.

Hamilton's legal department handles most of the Partnership's eviction and
collection matters. Additionally, it prepares most long-term commercial lease
agreements and represents the Partnership in selected purchase and sale
transactions. Overall, Hamilton provides approximately 67% of the legal services
paid for by the Partnership in 2001, and approximately 62% of such services paid
for by the Partnership during the first nine months of 2002.

The Partnership requires that three bids be obtained for construction contracts
in excess of $5,000. Hamilton may be one of the three bidders on a particular
project, and may be awarded the contract if its bid and its ability to
successfully complete the project are appropriate. For contracts that are not
awarded to Hamilton, Hamilton charges the Partnership a construction supervision
fee equal to 5% of the contract amount. Hamilton's architectural department also
provides services to the Partnership on an as-needed basis. In 2001 and during
the first nine months of 2002, Hamilton provided all of the construction
services and architectural services paid for by the Partnership.

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 Hamilton's accounting staff, which consists of
approximately 10 people. Hamilton currently charges the Partnership $80,000 per
year for bookkeeping and accounting services.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Consolidation: See note 1 to the financial statements, Principles of
Consolidation.

The preparation of consolidated financial statements, in accordance with
accounting principles generally accepted in the United States of America,
requires the Partnership to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. The Partnership regularly and
continually evaluates its estimates, including those related to acquiring,
developing and assessing the carrying values of its real estate properties and
its investments in and advances to joint ventures. The Partnership bases its
estimates on historical experience, current market conditions, and on various
other assumptions that are believed to be reasonable under the circumstances.

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

Real Estate and Depreciation: Real estate assets are stated at the lower of cost
or fair value, as appropriate, less accumulated depreciation. Costs related to
the acquisition, development, construction and improvement of properties are
capitalized including interest, internal wages and benefits, real estate taxes
and insurance. Capitalization usually begins with commencement of development
activity and ends when the property is ready for leasing.

Replacements and improvements, such as HVAC equipment, structural replacements,
windows, appliances, flooring, carpeting and kitchen/bath replacements and
renovations are capitalized and depreciated over their estimated useful lives as
follows:

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

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

14

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

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

Legal Contingencies

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

Results of Operations

The following is a comparison of the three months ended September 30, 2002 to
the three months ended September 30, 2001.

The Partnership and its Subsidiary Partnerships earned income from operations
of $1,358,801 during the three months ended September 30, 2002 compared to
$1,505,416 for the three months ended September 30, 2001, a decrease of
$146,615 (10%). This decrease in operating income is largely due to an
increase in operating expenses and a leveling off of rental income. Due to a
softening residential rental market, vacancies have increased and rental rates
at many of the properties remained unchanged in the three months ended
September 30, 2002.

15

The rental activity is summarized as follows:

RENTAL INCOME (IN THOUSANDS)

Rental income for the three months ended September 30, 2002 was $7,375,399
compared to $7,030,896 for the three months ended September 30, 2001, an
increase of $344,503 (5%). The increase is due in large part to the acquisition
of the Dean Street property in June 2002, which had rental income of
approximately $220,000 for the three months ended September 30, 2002. The
balance of the increase in rental income is due to higher rental rates in 2002
compared to the same period in 2001 partially offset by increased vacancies. The
Partnership is offering incentives to prospective and renewing tenants to stay
competitive in a relatively soft rental market.

16

Total expenses for the three months ended September 30, 2002 were $6,076,243
compared to $5,602,856 for the three months ended September 30, 2001, an
increase of $473,387 (8%). Expenses related to the Dean Street acquisition
represent approximately $210,000 of this increase. Unrelated to the acquisition
of Dean Street, there was an increase in operating expenses of $265,491. The
rental market has continued to weaken in the third quarter of 2002 resulting in
higher tenant turnover and an increase in vacancies. In an effort to sustain
occupancy levels, the Partnership's renting expenses increased $96,295 as a
result of commissions paid to unaffiliated parties. During the first nine months
of 2001, the rental real estate market was fairly strong and the Partnership
paid less commissions than in 2002. Taxes and insurance increased $85,464 (13%)
due to increases in real estate taxes from reassessments and increased insurance
premiums. Depreciation and amortization increased $55,663 (5%) due to ongoing
capital projects. Administrative expenses increased $31,245(11%) due to an
increase in salaries and wages as well as professional fees.

The Partnership has a 50% ownership interest in a limited liability Partnership
that owns a 40 unit residential property in Cambridge, Massachusetts. For the
three months ended September 30, 2002, the Partnership's share of loss on this
investment is $30,837 due to an increase in operating expenses and a decrease in
rental rates. Repairs and maintenance expenses increased due to tenant turnover,
and rental commissions totaling $9,000 were paid in the third quarter of 2002.
This investment was made in November 2001 so the Partnership had no income or
loss for the three months ended September 30, 2001. The property has a 5%
vacancy rate at November 5, 2002.

Interest income decreased $67,947 (48%) due to a decline in interest rates in
2002.

As a result of the changes discussed above, net income for the three months
ended September 30, 2002 was $1,400,264 compared to $1,645,663 for the three
months ended September 30, 2001, a decrease of $245,399(15%). As a result of the
negative impact discussed above and decreasing occupancy rates, excluding Dean
Street and the gain on the sale of a condo in the second quarter, the profit for
the three months ended September 30, 2002 is approximately $170,000 less than
the second quarter of 2002. Management anticipates that operating profits in the
foreseeable future will approximate those of the third quarter of 2002.

The following is a comparison of the nine months ended September 30, 2002 to
the nine months ended September 30, 2001.

For the nine months ended September 30, 2002, rental income was $22,038,367
compared to $20,445,897 for the nine months ended September 30, 2001, an
increase of $1,592,470 (8%). The Dean Street acquisition made in June 2002
represents approximately $255,000 of this increase. The property located at 62
Boylston Street had an increase of approximately $237,000(8%) due to major
construction at this property in 2001 resulting in rental rate increases.
Increases of approximately $215,000 (10%) at 1144 Commonwealth Avenue and
approximately $21,000 (10%) at Highland Street Apartments are due to rental rate
increases which took effect in

17

the fourth quarter of 2001. The Partnership does not anticipate additional
increases in the foreseeable future.

The following is a summary of the Partnership's rental income for the nine
months ended September 30, 2002 and 2001:

RENTAL INCOME (IN THOUSANDS)

As indicated in the chart above, the Partnership has seen a slight shift in
rental income with a decrease in revenue from residential properties due to
increased vacancies. The average rental rates in 2002 are higher than 2001,
however the Partnership anticipates that the average rental rates will
remain unchanged for the foreseeable future.

Expenses for the nine months ended September 30, 2002 were $17,311,705 compared
to $16,412,668 for the nine months ended September 30, 2001, an increase of
$899,037(5%). The Dean Street acquisition represents approximately $255,000 of
this increase. Unrelated to the purchase of Dean Street, operating expenses
increased approximately $644,000. The most significant increases include renting
expense of $186,470, taxes and insurance of approximately $384,000 and
depreciation and amortization of $186,724. The reason for these increases is
discussed above in the related section comparing three-month periods.

These increases were offset by a decrease in operating expenses of $216,052 due
to a milder winter, and a decrease in interest expense of $34,334 on the
existing properties due to a reduction in the principal balance.

Interest income was $209,939 for the nine months ended September 30, 2002,
compared to $507,192 for the nine months ended September 30, 2001, a decrease of
$297,253. This decrease is due to a decline in the interest rates.

Included in other income for the nine months ended September 30, 2002 is a
gain of $92,778 on the sale of a condominium located in Brockton,
Massachusetts and the loss on the investment in the joint venture was $40,470
for the nine months ended September 30, 2002.

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As a result of the changes discussed above, net income for the nine months ended
September 30, 2002 was $5,171,743 compared to $4,748,683 for the nine months
ended September 30, 2001 an increase of $423,060 (9%).

LIQUIDITY AND CAPITAL RESOURCES

The Partnership's principal source of cash during 2002 and 2001 was the
collection of rents.

The majority of cash and cash equivalents of $16,736,662 at September 30, 2002
and $16,690,943 at December 31, 2001 was held in interest bearing accounts at
credit worthy financial institutions.

This increase of $45,719 at September 30, 2002 is summarized as follows:

The increase in cash provided by operating activities is primarily due to the
increase in operating income before depreciation expense. The decrease in cash
from investing activities is due to a reduction in cash reserves available for
investment as a result of the acquisition of the rental property in Norwood,
Massachusetts in June 2002 (discussed below) as well as the capital improvements
to certain of the Partnership's properties. The decrease in cash used in
financing activities is due to the dividend distribution and reduction in
mortgage debt.

On June 17, 2002, the Partnership purchased a 69-unit residential apartment
complex located in Norwood, Massachusetts for $7,200,000. The Partnership
assumed a first mortgage of approximately $3,650,000 with an interest rate of
7.08%, amortizing over 25 years and maturing in 2007. The seller financed
$1,726,898 at an interest rate of 6%, interest only, for 5 years, which is
secured by a mortgage on 19 condominium units owned by the Partnership. The
balance of approximately $1,800,000 was funded from cash reserves.

On June 28, 2002, the Partnership sold a condominium located in Brockton,
Massachusetts for $113,000. The net gain on the sale was $92,778 and the net
cash flow to the Partnership was

19

$104,494.

In February 2002, the Partnership voted to change its dividend policy from
semi-annual to a quarterly distribution and declared a quarterly dividend of
$6.40 per Unit($0.64 per depositary receipt), payable on March 31, 2002, June
30, 2002 and September 30, 2002. Total dividends paid in 2001 were $17.70 per
unit ($1.77 per depositary receipt).

On November 8, 2001, the Partnership, the major shareholder of the General
Partner and the President of The Hamilton Company, the company which manages the
Partnership's Properties, formed a limited liability Partnership to purchase a
40-unit residential property in Cambridge, Massachusetts. The ownership
percentages are 50%, 47 1/2% and 2 1/2%, respectively. As part of this
transaction, the Partnership initially advanced funds in excess of its 50%
interest and received interest income on this excess, at 8%. This interest
income totaled $30,003 in 2001. The excess amount was repaid to the Partnership
upon the closing of the new financing for this property in 2001.

During the nine months ended September 30, 2002, the Partnership and its
Subsidiary Partnerships completed certain improvements to their properties at
a total cost of approximately $2,700,000. The most significant improvements
were made at the following properties: $1,603,947 at 62 Boylston Street in
Boston, Massachusetts; $126,816 at Clovelly Apartments in Nashua, New
Hampshire; $100,951 at 1144 Commonwealth Avenue Apartments in Allston,
Massachusetts; $89,082 at North Beacon Street Apartments in Brighton,
Massachusetts; $80,238 at Redwood Hills Apartments in Worcester,
Massachusetts and $78,437 at the Hamilton Oaks Apartments in Brockton,
Massachusetts. All such improvements were funded from the Partnership's cash
reserves and escrow accounts established in connection with the refinancing
of applicable properties.

In addition to the improvements made to date in 2002, the Partnership and its
Subsidiary Partnerships plan to invest an additional $800,000 in capital
improvements during 2002, the majority of which will be spent at 62 Boylston
Street, Hamilton Oaks, and Redwood Hills. These improvements will be funded from
escrow accounts established in connection with the refinancing of applicable
properties, as well as from the Partnership's cash reserves.

The Partnership anticipates that cash from operations and interest-bearing
investments will be sufficient to fund its current operations and to finance
current improvements to its properties. The Partnership's net income and cash
flow may fluctuate dramatically from year to year as a result of the sale of
properties, unanticipated increases in expenses, or the loss of significant
tenants.

The Partnership had plans to construct 20 additional residential units at the
Westgate Apartments

20

in Woburn, Massachusetts. As of September 30, 2002, the Partnership has put
that project on hold due to the general softening of the residential rental
market resulting in a decrease in occupancy rates at Westgate. The
pre-construction costs incurred to date of approximately $238,000 of a
projected total of $3,500,000 have been capitalized and included in rental
properties. At this point, management is unsure when the project will
commence.

In July 2002, the Partnership, through a subsidiary limited partnership, signed
a purchase and sales agreement for the sale of the East Hampton shopping mall
located in East Hampton, Connecticut for $3,025,000. The buyer has completed all
inspections and the closing is scheduled for early December 2002 but may be
deferred until January 2003 at the option of the buyer. The gain on the sale
will be approximately $1,200,000 after deducting basis, a 3% commission to The
Hamilton Company (see Note 3 to the Financial Statements), and other estimated
expenses of the sale. The net cash to the Partnership will be approximately
$1,600,000 after payment of the existing mortgage and estimated selling
expenses. For the year ended December 31, 2001, this property contributed
approximately 2% of rental income and less than 1% of cash flow from operations.

Factors That May Affect Future Results

Certain information contained herein includes forward-looking statements, which
are made pursuant to the safe harbor provisions of the Private Securities
Liquidation Reform Act of 1995 (the "Act"). While forward looking statements
reflect management's good faith beliefs when those statements are made, caution
should be exercised in interpreting and relying on such forward looking
statements, the realization of which may be impacted by known and unknown risks
and uncertainties, events that may occur subsequent to the forward-looking
statements, and other factors which may be beyond the Partnership's control and
which can materially affect the Partnership's actual results, performance or
achievements for 2002 and beyond.

Along with risks detailed from time to time in the Partnership's filings with
the Securities and Exchange Commission, some factors that could cause the
Partnership's actual results, performance or achievements to differ materially
from those expressed or implied by forward-looking statements include but are
not limited to the following:

The Partnership depends on the real estate markets where its properties are
located and these markets may be adversely affected by local economic
market conditions, which are beyond the Partnership's control. In this
vein, there has recently been news coverage regarding certain tenants
rights groups advocating the reinstatement of rent control in the greater
Boston area.

The Partnership is subject to the general economic risks affecting the real
estate industry, such as dependence on tenant's financial condition and the
need to enter into new leases or renew leases on terms favorable to tenants
in order to generate rental revenues.

The Partnership is subject to increases in heating and utility costs that
my arise as a result of economic and market conditions.

21

The Partnership may fail to identify, acquire, construct, or develop
additional properties; may develop properties that do not produce a desired
yield on invested capital; or may fail to effectively integrate
acquisitions of properties or portfolios of properties.

Financing or refinancing of Partnership properties may not be available to
the extent necessary or desirable, or may not be available on favorable
terms.

Given the nature of the real estate business, the Partnership is subject to
potential environmental liabilities, although management is not aware of
any material environmental liabilities at this time.

Market interest rates could adversely affect the market prices for Class A
Partnership Units and Depositary Receipts as well as performance and cash
flow.

The foregoing factors should not be construed as exhaustive or as an admission
regarding the adequacy of disclosures made by the Partnership prior to the date
hereof or the effectiveness of said Act. The Partnership expressly disclaims any
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.

The residential real estate market in the Greater Boston area has softened and
the Partnership anticipates the climate will remain the same in the foreseeable
future. This may result in increases in vacancy rates and or/a reduction in some
rents. The Partnership believes its present cash reserves as well as anticipated
rental revenue will be sufficient to fund its current operations, and to finance
current planned improvements to its properties and continue dividend payments in
the foreseeable future.

Since the Partnership's long-term goals include the acquisition of additional
properties, a portion of the proceeds from the refinancing and sale of
properties is reserved for this purpose. The Partnership will consider
refinancing existing properties if the Partnership's cash reserves are
insufficient to repay existing mortgages or if the Partnership needs additional
funds for future acquisitions.

Item 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2002, the Partnership and its subsidiary Partnerships
collectively have approximately $84,400,000 in long-term debt, all of which pays
interest at fixed rates. Accordingly, the fair value of these debt instruments
is affected by changes in market interest rates. For information regarding the
fair value and maturity dates of these debt obligations, see Notes 5 and 12 to
the Consolidated Financial Statements.

For additional disclosures about market risk, see "Item 2--Management's
Discussion and Analysis

22

of Financial Condition and Results of Operations--Factors that May Affect
Future Results."

Item 4--CONTROLS AND PROCEDURES

The General Partner of the Partnership has within 90 days of the filing date
of this quarterly report, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-14(C) and 15d-14(C) under the
Securities and Exchange Act of 1934, as amended) and has determined that
such disclosure controls and procedures are adequate. There has been no
significant changes in internal controls or in other factors that could
significantly affect our internal controls since the date of evaluation. We
do not believe any significant deficiencies or material weaknesses exist in
our internal controls. Accordingly, no corrective actions have been taken.

23

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

None.

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: November 14, 2002

NEW ENGLAND REALTY ASSOCIATES
LIMITED PARTNERSHIP

By: NEW REAL, INC.,
its General Partner*

By: /s/ RONALD BROWN
-----------------------------------
Ronald Brown, President

* Functional equivalent of Chief
Executive Officer, Principal
Financial Officer and Principal
Accounting Officer

25

CERTIFICATION

I, Ronald Brown, certify that:

1. I have reviewed this quarterly report on Form 10-Q of New England Realty
Associates Limited Partnership;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.

4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to a the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/s/ Ronald Brown
- -------------------------------------
Ronald Brown,
President of NewReal Associates, Inc.
General Partner of the Partnership

26