WASHINGTON, DC  20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2004

 

OR

 

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

 

For the transition period  from                            to                          

 

Commission file number 0-12138

 

New England Realty Associates Limited Partnership

(Exact Name of Registrant as Specified in Its Charter)

 

Massachusetts		04-2619298
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
39 Brighton Avenue, Allston, Massachusetts		02134
(Address of Principal Executive Offices)		(Zip Code)
Registrant’s Telephone Number, Including Area Code (617) 783-0039
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Indicate by check ý whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  o   No  ý

 

 

INDEX

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 (audited)
	Consolidated Statements of Income for the Three Months Ended September 30, 2004 and September 30, 2003, and the Nine Months Ended September 30, 2004 and September 30, 2003 (all unaudited)
	Consolidated Statement of Changes in Partners’ Capital for the Nine Months Ended September 30, 2004 and September 30, 2003 (all unaudited)
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and September 30, 2003 (all unaudited)
	Notes to Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

NEW ENGLAND REALTY ASSOCIATES, L.P.

PART I – FINANCIAL INFORMATION

 

Item I. Financial Statements

 

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

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in New England Realty Associates L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

The results of operations for the nine month periods ended September 30, 2004 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, 2004				December 31, 2003
		(Unaudited)
Assets
Rental Properties		$		106,692,314		$	104,192,876
Cash and Cash Equivalents		6,679,544				24,362,328
Rents Receivable		594,270				550,772
Real Estate Tax Escrows		718,355				667,949
Prepaid Expenses and Other Assets		2,594,535				2,649,617
Investment in Partnerships		14,147,375				1,315,383
Financing and Leasing Fees		646,566				725,371
Total Assets		$		132,072,959		$	134,464,296
Liabilities and Partners’ Capital
Mortgage Notes Payable		$		115,375,571		$	115,911,209
Accounts Payable and Accrued Expenses		1,605,881				1,620,023
Advance Rental Payments and Security Deposits		3,394,989				3,371,087
Total Liabilities		120,376,441				120,902,319
Commitments and Contingent Liabilities (Notes 2, 9, 14 and 15)
Partners’ Capital 173,252 units outstanding in 2004 and 2003		11,696,518				13,561,977
Total Liabilities and Partners’ Capital		$	132,072,959			$		134,464,296

 

See notes to consolidated financial statements.

 

3

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2004				2003				2004			2003
Revenue
Rental income		$	7,640,354			$	7,802,000			$	23,094,191		$	23,036,610
Laundry and sundry income		94,201				74,404				255,125			225,470
		7,734,555				7,876,404				23,349,316			23,262,080
Expense
Administrative		329,645				354,565				982,726			1,075,120
Depreciation and amortization		1,559,811				1,509,915				4,481,480			3,884,258
Interest		1,993,616				1,979,737				5,970,652			5,478,199
Management fees		314,599				313,296				952,539			933,655
Operating		675,262				611,553				2,467,742			2,230,580
Renting		272,528				264,570				512,692			469,892
Repairs and maintenance		1,454,709				1,351,568				3,727,362			3,210,507
Taxes and insurance		815,808				830,970				2,578,191			2,485,090
		7,415,978				7,216,174				21,673,384			19,767,301
Income Before Other Income		318,577				660,230				1,675,932			3,494,779
Other Income (Loss)
Interest income		52,140				39,470				186,863			138,498
(Loss) from investment in partnerships		(160,706			)	(47,328			)	(233,758		)	(93,366		)
(Loss) on the write off of property assets		0				(60,000			)	0			(60,000		)
(Loss) on early extinguishments of debt		0				(1,436,238			)	0			(1,436,238		)
		(108,566			)	(1,504,096			)	(46,895		)	(1,451,106		)
Net Income (Loss)		$		210,011		$		(843,866	)	$	1,629,037		$	2,043,673
Net Income (Loss) per Unit		$		1.21		$		(4.87	)	$	9.40		$	11.80
Weighted Average Number of Units Outstanding		173,252				173,252				173,252			173,252

 

See notes to consolidated financial statements.

 

4

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

 

(UNAUDITED)

 

		Limited								General
		Class A					Class B			Partnership				Total
Balance, January 1, 2003		$	12,699,650				$	3,019,620		$	158,956			$	15,878,226
Distribution to Partners		(3,155,009				)	(749,315		)	(39,437			)	(3,943,761		)
Net Income		1,634,938					388,298			20,437				2,043,673
Balance, September 30, 2003		$	11,179,579				$	2,658,603		$		139,956		$	13,978,138
Units authorized and Issued, net of 6,973 Treasury Units at September 30, 2003		138,602					32,918			1,732				173,252
Balance, January 1, 2004		$		10,846,650			$	2,579,532		$	135,795			$	13,561,977
Distribution to Partners		(2,795,597				)	(663,954		)	(34,945			)	(3,494,496		)
Net Income		1,303,230					309,517			16,290				1,629,037
Balance, September 30, 2004		$			9,354,283		$	2,225,095		$		117,140		$	11,696,518
Units authorized and Issued, net of 6,973 Treasury Units at September 30, 2004		138,602					32,918			1,732				173,252

 

See notes to consolidated financial statements

 

5

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended September 30,
		2004			2003
Cash Flows from Operating Activities
Net income		$	1,629,037		$	2,043,673
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		4,481,480			3,884,258
Loss from investment in partnership		233,758			93,365
Loss on the write off of rental property		—			60,000
Loss from early extinguishments of debt		—			1,436,238
Change in operating assets and liabilities
(Increase) in rents receivable		(43,498		)	(71,341		)
(Increase) in financing fees		—			(141,025		)
(Decrease) in accounts payable		(14,142		)	(159,514		)
(Increase) in real estate tax escrow		(50,406		)	(165,037		)
(Increase)decrease in prepaid expenses and other assets		13,148			(273,667		)
Increase in advance rental payments and security deposits		23,902			75,203
Total Adjustments		4,644,241			4,738,480
Net cash provided by operating activities		6,273,278			6,782,153
Cash Flows from Investing Activities
Distribution from partnership		—			(5,000		)
Purchase and improvement of rental properties		(6,860,178		)	(11,257,777		)
Investment in Partnerships		(13,065,750		)	—
Net cash (used in) investing activities		(19,925,928		)	(11,262,777		)
Cash Flows from Financing Activities
Proceeds of mortgage notes payable		—			16,824,376
Payments of mortgage notes payable		(535,638		)	(614,768		)
Payment of prepayment penalties in connection with the early extinguishment of debt		—			(1,436,238		)
Distributions to partners		(3,494,496		)	(3,943,761		)
Net cash provided by (used in) financing activities		(4,030,134		)	10,829,609
Net Increase in Cash and Cash Equivalents		(17,682,784		)	6,348,985
Cash and Cash Equivalents, at beginning of year		24,362,328			18,974,446
Cash and Cash Equivalents, at end of period		$	6,679,544		$	25,323,431

 

See notes to consolidated financial statements.

 

6

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

 

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Principles of Consolidation:  The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for three limited liability companies in which the Partnership has a 50% ownership interest. The consolidated group is referred to as the “Partnerships.” Minority interests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in the above-mentioned three limited liability companies 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. Fully depreciated assets are removed from the accounts.  Rental properties are depreciated on a straight-line basis over their estimated useful lives.

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

 

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

 

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

 

Cash Equivalents:  The Partnership considers cash equivalents to be all highly liquid instruments purchased with 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.

 

7

 

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 2004 or 2003 other than net income as reported.

 

Income Per Unit:  Net income per unit has been calculated based on 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 2004 or 2003.  The Partnerships make their temporary cash investments with high-credit-quality financial institutions.  At September 30, 2004, substantially all of the Partnerships’ cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from .59% to 1.97%.  At September 30, 2004 and December 31, 2003, approximately $7,000,000 and $24,000,000 of cash and cash equivalents exceeded federally insured amounts.

 

Advertising Expense:  Advertising is expensed as incurred. Advertising expense was $162,288 and $136,702 for the nine months ended September 30, 2004 and 2003, respectively.

 

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

 

NOTE 2—RENTAL PROPERTIES

 

As of September 30, 2004, the Partnership and its Subsidiary Partnerships owned 2,396 residential apartment units in residential and mixed-use complexes (collectively, the “Apartment Complexes”).  The Partnership also owns 24 condominium units in two residential condominium complexes, all of which are leased to residential tenants (collectively referred to as the “Condominium Units”).  The Apartment Complexes and Condominium Units are located primarily in the greater metropolitan Boston, Massachusetts area.

 

Additionally, as of September 30, 2004, the Subsidiary Partnerships owned commercial shopping centers in Framingham, Massachusetts and mixed-use properties in Boston, Brockton and Newton, Massachusetts.  These properties are referred to collectively as the “Commercial Properties.”

 

Additionally on September 30, 2004, the Partnership owned a 50% ownership interest in three residential complexes with a total of 362 units.  See Note 14 for summary information on these investments.

 

On June 30, 2003, the Partnership purchased five condominium units from a group of investors who are also affiliated with the Partnership.  The total purchase price for the five units was $2,421,286 including closing costs.  The Partnership obtained a $1,600,000 mortgage on these condominiums.  See Notes 3 and 5 for a discussion of certain related parties associated with this acquisition.  The majority owner of the General Partner has agreed to indemnify the Partnership for any losses incurred from the sale of any of these units for a three-year period from acquisition.

 

On April 25, 2003, the Partnership acquired a 184-unit residential property located at 9 School Street in Framingham, Massachusetts for a total purchase price of approximately $23,368,000.  The Partnership obtained a mortgage of $17,000,000 with an interest rate of 5.47%.  The balance of the purchase was funded from cash reserves.  The mortgage has a 10-year term and is amortized over 30 years, with interest only payments for the first three years.  There is a significant prepayment penalty if the mortgage is paid prior to maturity.

 

8

 

Rental properties consist of the following:

 

		SEPTEMBER 30, 2004			DECEMBER 31, 2003			USEFUL LIFE
Land, improvements, and parking lots		$	23,058,989		$	22,992,176		10-31 years
Buildings and improvements		104,602,201			101,538,576			15-31 years
Kitchen cabinets		3,544,205			2,403,447			5-10 years
Carpets		2,964,745			2,292,225			5-10 years
Air conditioning		725,535			691,408			7-10 years
Laundry equipment		176,413			79,580			5-7 years
Elevators		474,964			328,097			20 years
Swimming pools		143,353			98,105			10 years
Equipment		1,594,917			1,348,725			5-7 years
Motor vehicles		126,236			126,236			5 years
Fences		249,842			127,276			5-10 years
Furniture and fixtures		3,898,784			3,566,543			5-7 years
Smoke alarms		103,648			88,157			5-7 years
Construction in progress		2,432,857			1,555,960			—
		144,096,689			137,236,511
Less accumulated depreciation		37,404,375			33,043,635
		$	106,692,314		$	104,192,876

 

During the quarter ended September 30, 2004, the Partnership completed the construction of ten residential units at the Westgate Apartments in Woburn, Massachusetts. The total cost of these ten units was approximately $2,400,000 and is included in buildings and improvements above. An additional ten units were completed in October 2004 for a total additional cost of approximately $2,400,000 and are included in construction in progress at September 30, 2004.

 

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 $953,000 and $934,000 for the nine months ended September 30, 2004 and 2003, 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, 2004 and 2003, approximately $3,980,000 and $471,000 was charged to NERA for legal, construction, maintenance,  rental and architectural services and supervision of capital improvements. Of the 2004 expenses referred to above, approximately $160,000 consisted of repairs and maintenance and $128,000 of administrative expense; approximately $3,674,000 of construction, architectural services and supervision of capital projects was capitalized in rental properties and $18,000 for rental commissions.  Of the 2003 expenses referred to above, approximately $207,000 consisted of repairs and maintenance and $168,000 of administrative expense; approximately $96,000 of construction, architectural services and supervision of capital projects was capitalized in rental properties. Additionally in each of the nine months ended September 30, 2004 and 2003 the Partnership paid to the management company $60,000, for in-house accounting services, which were previously provided by an outside company. Included in accounts payable and accrued expenses at September 30, 2004 and December 31, 2003 is $263,216 and $455,299 due to the management company.  The Partnership Agreement entitles the General Partner or the management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%.

 

9

 

No sales commissions were paid during the year ended December 31, 2003 and through September 30, 2004.

 

On January 1, 2004, NERA’S employees were transferred to the management company’s payroll.  The Partnership reimburses the management company for the payroll and related expenses of the employees working directly on NERA properties.  Total reimbursement was approximately $1,230,000 for the nine months ended September 30, 2004.

 

In 1996, prior to becoming an employee and President of the management company, the current President performed asset management consulting services to the Partnership. This individual continues to perform this service and to receive an asset management fee from the Partnership, receiving $37,500 for the nine months ended September 30, 2004 and $50,000 for the year ended December 31, 2003.

 

The Partnership has invested in three limited liability companies to purchase three residential apartment complexes.  The Partnership owns 50% of each entity and the Treasurer of the General Partner owns 47½% and the President of Hamilton owns 2½% respectively.  See Note 14 for a description of the properties and their operations.

 

On June 30, 2003, the Partnership purchased five condominium units in a 42-unit building located in Brookline, Massachusetts.  These were purchased from Harvard 45 Associates LLC (“Harvard 45”) which is owned 70% by the 75% shareholder and treasurer of the General Partner, and 5% by the President of Hamilton.  The total purchase price for these condominiums was approximately $2,416,000 and was approved both by the Partnership’s Advisory Committee and the Audit Committee of the General Partner.  Harvard 45 realized a gain of approximately $648,000 from these sales.  Harvard 45 also sold 16 units to unrelated parties; the prices for all of the 21 units sold are comparable.  See Note 5 for a description of the guarantee given on a $1,600,000 mortgage on these five units.

 

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

 

NOTE 4—OTHER ASSETS

 

Included in prepaid expenses and other assets at September 30, 2004 and December 31, 2003 is approximately $499,000 and $653,000, respectively, held in escrow to fund future capital improvements.

 

Financing and leasing fees of $646,566 and $725,371 are net of accumulated amortization of $364,909 and $286,104 at September 30, 2004 and December 31, 2003, respectively.

 

NOTE 5—MORTGAGES NOTES PAYABLE

 

At September 30, 2004 and December 31, 2003, 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, 2004, the fixed interest rates on these loans ranged from 4.84% to 8.46%, payable in monthly installments aggregating approximately $732,000, including interest, to various dates through 2016.  The majority of the mortgages are subject to prepayment penalties.  At December 31, 2003, the weighted average effective interest rate on the above mortgages was 6.86%.  The effective rate includes the amortization expense of deferred financing costs.  The weighted average of the fixed debt interest rate was 6.78%.  See Note 12 for fair value information.

 

10

 

The Partnerships have pledged tenant leases as additional collateral for certain of these loans.
Approximate annual maturities at September 30, 2004 are as follows:

 

2005- current maturities		$		763,000
2006		2,490,000
2007		2,853,000
2008		4,413,000
2009		5,631,000
Thereafter		99,225,000
		$	115,375,000

 

On August 1, 2003, the Partnership refinanced four mortgage loans with outstanding balances totaling approximately $11,526,000 and interest rates that ranged from 8.38% to 8.75%. These four mortgages were scheduled to mature in 2005, with final payments totaling approximately $11,000,000 due in 2005. The total of the four new mortgage loans is $26,750,000, with interest rates from 4.84% to 5.30%.  These new loans require interest payments for ten years, when the entire $26,750,000 becomes due.  The total monthly payments on the old loans were approximately $101,000 including principal of approximately $20,000.  The total monthly interest payments on the new mortgages are approximately $109,000, resulting in an increased monthly payment for these four properties of $8,000 or $96,000 per year.  Annual interest expense increased approximately $340,000 due to the increased debt.  The new mortgages also contain substantial prepayment penalties if paid before maturity.  The Partnership’s cash reserves were increased approximately $13,000,000 as a result of these refinancings.

 

The Partnership recorded a loss in the third quarter of 2003 on the early extinguishment of debt of approximately $1,435,000 because of prepayment penalties of approximately $1,355,000, and the write-off of deferred financing fees of approximately $80,000.  Deferred financing fees on the new mortgages, of approximately $132,000 will be amortized over their ten year term.

 

In August 2003, the Partnership obtained a $1,600,000 mortgage loan for three years, with interest - - only payments at 5.25% and no prepayment penalties, secured by the five condominium units acquired by the Partnership in June 2003. Total origination and closing costs of approximately $18,000, will be amortized over three years.  The majority owner of the General Partner has guaranteed to the bank 50% of the outstanding mortgage.

 

NOTE 6—ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The lease agreements require the majority of tenants to maintain a one-month advance rental payment plus security deposits.  Amounts received for prepaid rents of approximately $2,100,000 are included with cash and cash equivalents and security deposits of approximately $1,100,000 are included with other assets.

 

NOTE 7—PARTNERS’ CAPITAL

 

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

 

11

 

In February 2003, the Partnership voted to increase the quarterly distribution to $6.60 per unit and pay an additional one-time distribution of $3.00 per unit for a total distribution of $9.60 per unit payable on March 31, 2003.  Additionally, the Partnership paid quarterly distributions of $6.60 per unit on June 30, September 30 and December 31, for a total distribution of $29.40 for 2003.

 

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

 

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

 

		Nine months ended September 30,
		2004			2003
Net income per depositary receipt		$	.94		$	1.18

 

NOTE 8—TREASURY UNITS

 

Treasury units at September 30, 2004 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.

 

NOTE 10—RENTAL INCOME

 

During the nine months ended September 30, 2004, approximately 93% of rental income was related to residential apartments and condominium units with leases of one year or less.  The remaining 7% was related to commercial properties, which have minimum future rental income on non-cancelable operating leases as follows:

 

12

 

		Commercial Property Leases
2005		$		1,515,000
2006		1,307,000
2007		1,335,000
2008		1,284,000
2009		1,170,000
Thereafter		4,749,000
		$	11,360,000

 

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with percentage rents, common area charges and real estate taxes.  Aggregate contingent rentals were approximately $275,000 for the nine months ended September 30, 2004 and $382,000 for the year ended December 31, 2003, respectively.

 

Rents receivable are net of allowances for doubtful accounts of $466,096 and $221,942 at September 30, 2004 and December 31, 2003, respectively.  Included in rents receivable is approximately $386,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis.  The majority of this amount is for a long-term lease with Staples at Staples Plaza in Framingham, Massachusetts.

 

NOTE 11—CASH FLOW INFORMATION

 

During the nine months ended September 30, 2004 and 2003, cash paid for interest was approximately $5,940,982 and $5,413,959 respectively.

 

NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

•                  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 which are 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.

		Carrying Amount			Estimated Fair Value
Mortgage notes payable
At September 30, 2004		$	115,375,571		$	123,147,006
At December 31, 2003		115,911,209			121,997,197

 

13

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2004 and December 31, 2003.  Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 2004 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 partner’s tax returns is different than financial statement income because of accelerated depreciation, different tax lives, and timing differences related to prepaid rents and allowances.  Taxable income is approximately $900,000 less than statement income for the nine months  ended September 30, 2004 and approximately $700,000 less than statement income for the year ended December 31, 2003.  The cumulative tax basis of the Partnership’s real estate at September 30, 2004 is approximately $400,000 greater than the statement basis.

 

14

 

NOTE 14—INVESTMENT IN PARTNERSHIPS

 

In August 2004, the Partnership invested approximately $13,000,000 in two joint ventures for which the Partnership has a 50% ownership interest.  The first joint venture purchased a 280 unit apartment complex in Watertown, Massachusetts for $56,000,000.  Each investor invested approximately $8,000,000, and a mortgage of approximately $43,000,000 was obtained to finance the acquisition and improvements to the property.  This investment is referred to as Hamilton Place.

 

The second joint venture purchased a 42 unit apartment complex in Lexington, Massachusetts for $10,100,000. The Partnership invested $5,050,000 in this joint venture.  In October 2004, the Partnership refinanced the investment and obtained a mortgage on the property.  This investment is referred to as Hamilton Minuteman.

 

In November 2001, the Partnership formed a limited liability company to purchase a 40 unit apartment building in Cambridge, Massachusetts. The Partnership is a 50% owner in this investment and is referred to as Franklin Street.

 

		Franklin Street			Hamilton Place				Hamilton Minuteman
Acquisition date		November 2001			August 2004				September 2004			Total
Property assets – net		$	10,329,093		$		55,832,256		$	10,160,313		$	76,321,662
Mortgages payable		7,950,704			40,211,506				0		*	48,162,210
Partnership equity		2,387,590			15,797,932				10,109,228		*	28,294,750
NERA - 50% ownership		1,193,795			7,898,966				5,054,614		*	14,147,375
Summary income statement
Rental income		$	707,594		$	443,756			$	41,717		$		1,193,067
Operating expenses		227,994			176,381				9,974			414,349
Management fees		29,535			17,659				1,611			48,805
Interest expense		416,045			159,464				—			575,509
Miscellaneous expense		5,549			—				—			5,549
Depreciation & amortization		271,645			323,819				20,906			616,370
Net profit (loss)		(243,174		)	(233,567			)	9,226			(467,515			)
NERA - 50% ownership		$	(121,587	)	$	(116,784		)	$	4,613		$		(233,758	)
Total rental units		40			280				42
Vacancies - November 8, 2004		0			17				5

 

Hamilton Place is planning to sell, over time, three buildings with a total of 136 units as condominiums commencing in January 2005.  Hamilton Minuteman may also, from time to time, sell units.   Minuteman is not being marketed at this time.  The majority of the proceeds from these sales will be used to reduce their mortgages.  Commencing in 2005, these mortgages require minimum principal payments (“Curtailment Payments”) and additional investment by the Partnership will be required if the proceeds from sales cannot provide for these payments. An entity partially owned by the majority shareholder of the General Partner and the President of the management company, 31% and 5% respectively, is the sales agent and will receive a variable commission on each sale of between 3% and 5%.

 

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

 

*On October 21, 2004, Hamilton Minuteman obtained a mortgage of $8,025,000 and $3,775,000 was paid to the Partnership.

 

NOTE 15—NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

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 Corrections.” FAS 145 eliminates extraordinary accounting treatment for or loss on debt extinguishment and amends other existing authoritative pronouncements; it makes various technical corrections, clarifies meanings, and describes their applicability under changed conditions. The provisions of FAS 145 became effective for the Partnership beginning in 2003. However, early application of FAS 145 was encouraged, and the Partnership adopted FAS 145 in 2002. Debt extinguishments reported as extraordinary items prior to scheduled or early adoptions of FAS 145 would be reclassified in most cases following adoption.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is

 

16

 

effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Partnership does not expect the adoption of SFAS No. 149, if required, to have a material impact on the Partnership’s financial position or results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer require classification as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after September 15, 2003. The Partnership does not expect the adoption of SFAS No. 150, if required, to have a material impact on the Partnership’s financial position or results of operations or cash flows.

 

In January 2003, the FASB issued FIN No. 46, which provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity’s consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. In December 2003, the FASB reissued FIN No. 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs commonly referred to as special-purpose entities (SPEs) as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. The Partnership does not believe that the application of FIN No. 46, if required, will have a material impact on its financial position, results of operations, or liquidity.

 

NOTE 16—PARTNERSHIP TERMINATION DATE

 

In July 2004, the General Partner extended the termination date of the Partnership until 2057, an additional 40 years, as allowed in the Partnership agreement.

 

NOTE 17—SUBSEQUENT EVENTS

 

As of November 11, 2004, the Partnership has committed to obtain two new mortgages. The first is for the refinancing of the Dean Street apartments in Norwood, Massachusetts for $5,650,000 at 5.25% interest only for two years. The existing mortgage to be repaid is approximately $3,600,000. It is anticipated that this transaction will occur in December 2004. The second mortgage is for $2,000,000 at 5.25%, interest only, on the unencumbered 20 unit addition in Woburn, Massachusetts which is anticipated to occur in January 2005.

 

Additionally, in 2005, the Partnership is planning to sell the 18 apartment units of the Middlesex Apartments in Newton, Massachusetts.

 

17

 

Item 2 – MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

 

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

 

The Partnership has retained The Hamilton Company (“Hamilton”) to manage and administer the Partnership’s properties.  Hamilton is a full-service real estate management company, which has legal, construction, maintenance, architectural, accounting and administrative departments.  The Partnership’s properties represent approximately 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.

 

Harold Brown, his brother Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 20% of the depositary receipts representing the Partnership Class A Units (including depositary receipts held by trusts for the benefit of such persons’ family members).  Harold Brown also owns 75% of the Partnership’s Class B Units, 75% of the capital stock of NewReal, Inc. (“NewReal”), the Partnership’s sole general partner, and all of the outstanding stock of Hamilton.  Ronald Brown also owns 25% of the Partnership’s Class B Units and 25% of NewReal’s capital stock.  In addition, Ronald Brown is the President and director of NewReal and Harold Brown is NewReal’s Treasurer and also a director.  Three of NewReal’s other directors, Thomas Raffoul, Conrad DiGregorio, and Edward Sarkesian, also own immaterial amounts of the Partnership’s Class A Units.

 

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

 

Hamilton accounted for approximately 4% and 6% of the repair and maintenance expense paid for by the Partnership in the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively.  Of the funds paid to Hamilton for this purpose, the great majority was to cover the cost of services provided by the Hamilton maintenance department, including plumbing, electrical, and carpentry services, snow removal and the use of equipment such as fork lifts.   However, several of the

 

18

 

larger Partnership properties have their own maintenance staff.  Further, those properties that do not have their own maintenance staff but are located more than a reasonable distance from Hamilton’s headquarters in Allston, Massachusetts are generally serviced by local, independent companies.

 

Hamilton’s legal department handles most of the Partnership’s eviction and collection matters.  Additionally, it prepares most long-term commercial lease agreements and represents the Partnership in selected purchase and sale transactions.  Overall, Hamilton provided approximately 82% of the legal services paid for by the Partnership during the nine months ended September 30, 2004 and approximately 66% for the year ended December 31, 2003.

 

The Partnership requires that three bids be obtained for construction contracts in excess of $5,000.  Hamilton may be one of the three bidders on a particular project and may be awarded the contract if its bid and its ability to successfully complete the project are deemed appropriate.  For contracts that are not awarded to Hamilton, Hamilton charges the Partnership a construction supervision fee equal to 5% of the contract amount.  The architectural department at Hamilton also provides services to the Partnership on an as-needed basis.  In 2004 and 2003, Hamilton provided the majority of the construction services and architectural services paid for by the Partnership including approximately $3,500,000 for the construction of 20 additional residential units at Westgate Apartments in Woburn, Massachusetts.

 

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 ten people.  Hamilton currently charges the Partnership $80,000 ($20,000 per quarter) per year for bookkeeping and accounting services.

 

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

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  The Partnership regularly and continually evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures.  The Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances.  See Note 1 to the Consolidated Financial Statements, Principles of Consolidation.

 

Revenue Recognition: Revenues from rental property are recognized when due from tenants. Residential leases are generally for terms of one year or less, 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.

 

19

 

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.

 

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

 

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

 

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

 

20

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended September 30, 2004 to the three months ended September 30, 2003

 

The Partnership and its Subsidiary Partnerships earned income before other income of $318,568 during the three months ended September 30, 2004 compared to $660,230 for the three months ended September 30, 2003, a decrease of $341,662 (52%).  As more fully described in the schedules below, this decrease in operating income is due to both decreases in rental income and increases in operating expenses.  Due to the softening residential rental market, rental income at many of the properties decreased in the three months ended September 30, 2004 and expenses continued to increase.

 

The rental activity is summarized as follows:

 

		Occupancy Date
		November 8, 2004		August 4, 2004		May 3, 2004		October 31, 2003
Residential
Units		2,420		2,400		2,400		2,400
Vacancies		95		99		72		95
Vacancy rate		3.9	%	4.1	%	3.0	%	4.0	%
Commercial
Total square feet		85,275		85,275		85,275		85,275
Vacancy		850		4,700		4,700		0
Vacancy rate		1	%	5.5	%	5.5	%	0	%

 

		Rental Income (in thousands) Three Months Ended September
		2004			2003
Total rents		$	7,640		$	7,802
Residential percentage		93		%	93		%
Commercial percentage		7		%	7		%
Contingent rentals		$	90		$	89

 

21

 

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

 

		September 30, 2004				2003				Dollar Change				Percent Change
Revenues:
Rental income		$	7,640,354			$		7,802,000		$		(161,646	)	-2.1	%
Laundry and sundry income		94,201				74,404				19,797				26.6	%
		7,734,555				7,876,404				(141,849			)	-1.8	%
Expenses:
Administrative		329,645				354,565				(24,920			)	-7.0	%
Depreciation and amortization		1,559,811				1,509,915				49,896				3.3	%
Interest		1,993,616				1,979,737				13,879				0.7	%
Management fees		314,599				313,296				1,303				0.4	%
Operating		675,262				611,553				63,709				10.4	%
Renting		272,528				264,570				7,958				3.0	%
Repairs and maintenance		1,454,709				1,351,568				103,141				7.6	%
Taxes and insurance		815,808				830,970				(15,162			)	-1.8	%
		7,415,978				7,216,174				199,804				2.8	%
Income before other income		318,577				660,230				(341,653			)	-51.7	%
Other Income
Interest income		52,140				39,470				12,670				32.1	%
(Loss) from investment in partnerships		(160,706			)	(47,328			)	(113,378			)	239.6	%
(Loss) on the write off of property assets		—				(60,000			)	60,000				-100.0	%
(Loss) on early extinguishments of debt		—				(1,436,238			)	1,436,238				-100.0	%
		(108,566			)	(1,504,096			)	1,395,530				-92.8	%
Net Income (Loss)		$		210,011		$	(843,866		)	$	1,053,877			-124.9	%

 

22

 

Rental income for the three months ended September 30, 2004 was approximately $7,640,000 compared to approximately $7,802,000 for the three months ended September 30, 2003, a decrease of approximately $162,000 (2%). The properties with the most significant decreases are the apartments at North Beacon Street for a decrease of approximately $29,000, a decrease of approximately $12,000 at Oak Ridge, a decrease of approximately $65,000 at Westgate Apartments, a decrease of approximately $17,000 at Westside Colonial and a decrease of approximately $12,000 at Brookside. There were smaller decreases at most other properties.  The decrease in rental income is due to increased vacancies, rental concessions and some reductions in rents for new leases.

 

Total expenses for the three months ended September 30, 2004 were approximately $7,416,000 compared to approximately $7,216,000 for the three months ended September 30, 2003, an increase of approximately $200,000 (3%). Repairs and maintenance expenses increased approximately $103,000 (8%) due to ongoing refurbishment, repair and clean up of rental units in an effort to reduce vacancies. Operating expenses increased approximately $64,000 (10%) due to increased heat, water and other utilities. Renting expenses increased approximately $8,000 (3%) due to increases in rental commissions and other rental related expenses. Total depreciation and amortization increased approximately $50,000 (3%) primarily due to continuing improvements in 2004.

 

These increases are offset by a decrease in administrative expenses of approximately $25,000 (7%) due to a decrease in salaries and related employee benefits. Taxes and insurance decreased approximately $15,000 (2%) due to a tax refund related to one of the Partnership properties.

 

The operations of the 20 new units at Westgate in Woburn commenced in September 2004 and was insignificant for the quarter ended September 30, 2004.

 

The Partnership has a 50% ownership interest in three different investments.  One of the investments is a limited liability Partnership that owns a 40 unit residential property in Cambridge, Massachusetts.  For the three months ended September 30, 2004, the Partnership’s share of loss on this investment is $48,536 compared to a loss of $47,328 for the three months ended September 30, 2003, an increase of $1,208 (3%). There were no units vacant at November 8, 2004.

 

In August and September 2004, the Partnership invested approximately $13,000,000 for a 50% ownership interest in two joint ventures. The first joint venture is a 280 unit residential complex located in Watertown, Massachusetts, referred to as “Hamilton Place”. The total cost of the property was $56,000,000.  The Partnership invested $8,000,000.  The other investors invested $8,000,000 and the joint venture obtained a mortgage of $43,000,000 to fund the acquisition and capital improvements.  The joint venture plans to sell 120 units and use the funds to pay down the debt on the property.  At November 8, 2004, there are 23 vacant units, nine of which are to be sold. The Partnership’s net loss on this investment is $116,784 for the period ended September 30, 2004.

 

The second joint venture purchased a 42 unit residential complex in Lexington, Massachusetts referred to as “Hamilton Minuteman”.  The total cost of the property was $10,100,000. Originally, the Partnership invested $5,050,000 and the other investors invested $5,050,000. The property was refinanced for $8,025,000 in October 2004, and the Partnership received $3,775,000 as part of this

 

23

 

financing. The Partnership’s net income on this investment is $4,613 for the period ended September 30, 2004. There were five units vacant at November 8, 2004.

 

On August 1, 2003, the Partnership refinanced four mortgages with outstanding balances totaling approximately $11,526,000.  The Partnership recorded a loss on the early extinguishment of debt of $1,436,238 due to the prepayment penalties of approximately $1,355,000 and deferred financing fees of approximately $81,000 on the mortgages paid.

 

During the three months ended September 30, 2003, the Partnership recorded a non-cash charge of $60,000 due to the write-off of air conditioning and heating equipment replaced at 62 Boylston Street.

 

Interest income was approximately $52,000 for the three months ended September 30, 2004 compared to approximately $39,000 for the three months ended September 30, 2003 an increased $13,000 (33%).  This is due primarily due to an increase in the cash available for investment and some increases in rates earned.  Total interest expense increased approximately $14,000 due to the increased mortgage debt.

 

As a result of the changes discussed above, net income for the three months ended September 30, 2004 was $210,011 compared to a loss of $843,866 for the three months ended September 30, 2003, a change of $1,053,877.

 

Comparison of the nine months ended September 30, 2004 to the six months ended September 30, 2003

 

The Partnership and its Subsidiary Partnerships earned income before other income of  $1,675,932 for the nine months ended September 30, 2004 compared to $3,494,779 for the nine months ended September 30, 2003 a decrease of $1,818,847 (52%).  The following is a summary of the Partnership’s rental income for the nine months ended September 30, 2004 and 2003.  As more fully described in the schedules below, this decrease is primarily due to increased vacancies and increases in operating expenses including significant depreciation, repairs and maintenance, and interest expense.

 

24

 

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

 

		September 30,						Dollar Change			Percent Change
		2004			2003
Revenues:
Rental income		$	23,094,191		$	23,036,610		$	57,581		0.2	%
Laundry and sundry income		255,125			225,470			29,655			13.2	%
		23,349,316			23,262,080			87,236			0.4	%
Expenses
Administrative		982,726			1,075,120			(92,394		)	-8.6	%
Depreciation and amortization		4,481,480			3,884,258			597,222			15.4	%
Interest		5,970,652			5,478,199			492,453			9.0	%
Management fees		952,539			933,655			18,884			2.0	%
Operating		2,467,742			2,230,580			237,162			10.6	%
Renting		512,692			469,892			42,800			9.1	%
Repairs and maintenance		3,727,362			3,210,507			516,855			16.1	%
Taxes and insurance		2,578,191			2,485,090			93,101			3.7	%
		21,673,384			19,767,301			1,906,083			9.6	%
Income before other income		1,675,932			3,494,779			(1,818,847		)	-52.0	%
Other Income (Loss)
Interest income		186,863			138,498			48,365			34.9	%
(Loss) from investment in partnerships		(233,758		)	(93,366		)	(140,392		)	150.4	%
(Loss) on the write off of property assets		—			(60,000		)	60,000			-100.0	%
(Loss) on early extinguishments of debt		—			(1,436,238		)	1,436,238			-100.0	%
		(46,895		)	(1,451,106		)	1,404,211			-96.8	%
Net Income (Loss)		$	1,629,037		$	2,043,673		$	(414,636	)	-20.3	%

 

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