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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from                   to                   

Commission file number 001-32389

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

(502) 426-4800

(Registrant’s telephone number, including area code)

Not applicable

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 3, 2010 there were 11,380,760 of the registrant’s limited partnership units outstanding.

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

FORM 10-Q

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements included in this Quarterly Report on Form 10-Q, particularly those included in Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), constitute “forward-looking statements”.  These forward-looking statements include discussion and analysis of our financial condition, including our ability to rent space on favorable terms, our ability to address debt maturities and fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our unit holders and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements and indicate that it is possible that the event may not occur.  If these events do not occur, the result, which we expected, also may, or may not, occur in a different manner, which may be more or less favorable to us.  We do not undertake any obligation to update these forward-looking statements.

Any forward-looking statements included in MD&A, or elsewhere in this report, are not historical facts, but reflect the intent, belief or current expectations of our managing general partner based on its knowledge and understanding of the business and industry, the economy and other future conditions only as of the date of this report and may ultimately prove to be incorrect or false.  These statements are not guarantees of future performance, and we caution unit holders not to place undue reliance on forward-looking statements.  Actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a number of factors, including but not limited to the factors listed and described under “Risk Factors” in our filings with the Securities and Exchange Commission (the “SEC”), particularly our most recent Annual Report on Form 10-K, for the year ended December 31, 2009, as filed with the SEC on March 29, 2010.

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Statement of Equity as of September 30, 2010

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Statements of Operations for the

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The unaudited condensed consolidated financial statements included herein should be read in conjunction with NTS Realty Holdings Limited Partnership’s (“NTS Realty”) 2009 annual report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2010.  The Condensed Consolidated Balance Sheet as of December 31, 2009, has been derived from the audited consolidated financial statements of NTS Realty.  Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  In the opinion of NTS Realty Capital, Inc., our managing general partner, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been made to the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2010 and 2009.  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.  As used in this quarterly report on Form 10-Q, the terms “we,” “us” or “our,” as the context requires, may refer to NTS Realty or its interests in its properties and joint ventures.

Note 1 — Summary of Significant Accounting Policies

Organization and Distribution Policy

We are in the business of developing, constructing, owning and operating multifamily properties, commercial and retail real estate.  As of September 30, 2010, we owned wholly, as a tenant in common with an unaffiliated third party or through joint venture investments with an unaffiliated third party, 22 properties, comprised of 6 commercial properties, 14 multifamily properties and 2 retail properties.  The properties are located in and around Louisville (6) and Lexington (1), Kentucky, Fort Lauderdale (3) and Orlando (2), Florida, Indianapolis (4), Indiana, Memphis (1) and Nashville (2), Tennessee, Richmond (2), Virginia and Atlanta (1), Georgia.  Our commercial properties aggregate approximately 605,000 square feet.  We own multifamily properties containing 4,029 rental units and retail properties containing approximately 47,000 square feet.

We pay distributions if and when authorized by our managing general partner using proceeds from advances drawn on our revolving note payable to a bank.  We are required to pay distributions on a quarterly basis, no less than sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended; provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax.  Any distribution other than a distribution with respect to the final quarter of a calendar year will be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year.  Any distribution with respect to the final quarter of a calendar year will be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year.

“Net cash flow from operations” may be reduced by the amount of reserves as determined by us each quarter.  Our managing general partner will establish these reserves for, among other things, working capital or capital improvement needs.  Therefore, there is no assurance that we will have “net cash flow from operations” from which to pay distributions in the future.  For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures.  Because “net cash flow from operations” is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any “net cash flow from operations” from which to pay distributions.

We paid quarterly distributions of $0.05 per unit to limited partners on April 16, 2010, July 16, 2010 and October 15, 2010.

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Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of all wholly-owned properties and properties that are less than wholly-owned, but which we control or for which we are the primary beneficiary.  We consolidate a variable interest entity, or VIE, when we are determined to be the primary beneficiary based on the qualitative factors affecting:

·                  Our power to direct the activities of a variable interest entity that most significantly affect the variable interest entity’s economic performance; and

·                  Our obligation to absorb losses of the variable interest entity that could potentially be significant to the variable interest entity or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity.

Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements and other contractual arrangements, when determining the party obligated to absorb the majority of the expected losses, as defined, by accounting standards.  Effective January 1, 2010, we adopted the provisions of Auditing Standards Update No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”) which amends the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“FASB ASC Topic 810”).  The amendment to FASB ASC Topic 810 revises the consolidation guidance for variable interest entities (VIE’s) focusing on a qualitative evaluation of the conditions subjecting the entity to consolidation.  There have been no changes during 2010 in conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE.  During the nine months ended September 30, 2010, we did not provide financial or other support to a previously identified VIE that we were not previously contractually obligated to provide.  Our properties owned as a tenant in common with an unaffiliated third party are accounted for under the equity method.  Intercompany transactions and balances have been eliminated.

Fair Value of Financial Instruments

FASB ASC Topic 820 Fair Value Measurements and Disclosures requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.  FASB ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement.

FASB ASC Topic 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

·                  Level 1:  Quoted market prices in active markets for identical assets or liabilities.

·                  Level 2:  Observable market based inputs or unobservable inputs that are corroborated by market data.

·                  Level 3:  Unobservable inputs that are not corroborated by market data.

We did not have any material financial assets or liabilities that are required to be recorded at fair value as of September 30, 2010 or December 31, 2009.

Financial Instruments

The book values of cash and equivalents, trade receivables and trade payables are considered to be representative of their respective fair values because of the immediate or short-term maturity of these financial instruments.

FASB ASC Topic 825 Financial Instruments requires disclosures about fair value of financial instruments in both interim and annual financial statements.

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Certain of our assets and liabilities are considered financial instruments.  Fair value estimates, methods and assumptions are set forth below.

Cash and equivalents and cash and equivalents — restricted — The carrying amount of these assets approximates fair value as of September 30, 2010 and December 31, 2009, due to the short-term nature of such accounts.

Note receivable — As of September 30, 2010 and December 31, 2009, we determined the estimated fair values of our notes receivable were approximately $1.0 million and $0.9 million, respectively, by discounting expected future cash receipts utilizing a discount rate equivalent to the rate at which similar notes receivable would be originated at the reporting date.

Mortgages and notes payable — As of September 30, 2010 and December 31, 2009, we determined the estimated fair values of our mortgages and notes payable were approximately $248.9 million and $246.0 million, respectively, by discounting expected future cash payments utilizing a discount rate equivalent to the rate at which similar instruments would be originated at the reporting date.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 Improving Disclosures About Fair Value Measurements (“ASU 2010-06”), which provides amendments to FASB ASC Subtopic 820-10 Fair Value Measurements and Disclosures — Overall.  ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements.  The revised guidance is effective for interim and annual reporting periods beginning after December 15, 2009.  ASU 2010-06 concerns disclosure only and will not have a material impact on our financial position or results of operations.

Note 2 — Use of Estimates and Reclassifications in the Preparation of Financial Statements

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Certain reclassifications have been made to the prior period financial statements to conform with September 30, 2010 classifications.  Our Outlet Mall retail property and Sears Office Building were reclassified during 2009 from continuing operations to discontinued operations and were classified as held for sale on our balance sheets.  These reclassifications did not have a material impact on the related financial statement line items on our consolidated balance sheets or statement of operations and no effect on previously reported operating results or partners’ equity.

Note 3 — Real Estate Transactions

Acquisitions

Upon acquisition of wholly-owned properties or joint venture investments that are less than wholly-owned, but which we control or for which we are the primary beneficiary, the assets and liabilities purchased are recorded at their fair market value at the date of the acquisition using the acquisition method in accordance with FASB ASC Topic 805 Business Combinations.  We recognize the net tangible and identified intangible assets based on fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities.  The intangible assets recorded are amortized over the weighted average lease lives.  We identify any above or below market leases or customer relationship intangibles that exist at the acquisition date.  We recognize mortgages and other liabilities at fair market value at the date of the acquisition.  We utilize an independent appraiser to assess fair value based on estimated cash flow projections for the tangible assets acquired that utilize discount and capitalization rates deemed appropriate and available market information.

We expense acquisition costs as incurred.  During the three and nine months ended September 30, 2010, we did not acquire any properties.

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During the nine months ended September 30, 2009, we made the following property acquisitions:

(1)         Financed by a mortgage payable to a bank of $9.6 million.  We own a 51% joint venture interest in this property.

(2)         Financed by a mortgage payable to a bank of $14.6 million.  We own a 51% joint venture interest in this property.

Dispositions

During the nine months ended September 30, 2010, we made the following property dispositions:

(1)                   Gain of approximately $0.5 million.

(2)                   Gain of approximately $1.2 million.

Discontinued Operations and Long-Lived Assets and Liabilities Held for Sale

We may engage in transactions structured as “like-kind exchanges” of property to obtain favorable tax treatment under Section 1031 of the Internal Revenue Code.  If we are able to structure an exchange of properties as a “like-kind exchange,” then any gain we realize from the exchange would not be recognized for federal income tax purposes.  The test for determining whether exchanged properties are of “like-kind” is whether the properties are of the same nature or character.

At September 30, 2010, proceeds of approximately $3.6 million from the sale of our Sears Office Building were held by a third party qualified intermediary to be invested in replacement “like-kind” property.  These funds are included in cash and equivalents - restricted at September 30, 2010.  Our ability to successfully invest the proceeds in accordance with Section 1031 of the Internal Revenue Code and qualify the proceeds for deferral of gain recognition for federal income tax purposes is dependent on many factors and there can be no assurance that we will be successful in doing so.  We are required to complete the purchase of replacement property by December 27, 2010 to qualify the Sears Office Building proceeds for deferral of gain recognition.

We have presented separately as discontinued operations in all periods the results of operations for the following properties:

These assets and liabilities held for sale were separately identified on our balance sheet at December 31, 2009.

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The components of discontinued operations are outlined below and include the results of operations for the period in which we owned such assets during the three and nine months ended September 30, 2010 and 2009, respectively.

Note 4 — Concentration of Credit Risk

We own and operate wholly, as a tenant in common with an unaffiliated third party or through joint venture investments with an unaffiliated third party, commercial, multifamily and retail properties in Louisville and Lexington, Kentucky; Fort Lauderdale and Orlando, Florida; Indianapolis, Indiana; Memphis and Nashville, Tennessee; Richmond, Virginia and Atlanta, Georgia.

Our financial instruments that are exposed to concentrations of credit risk consist of cash and equivalents and cash and equivalents - restricted.  We maintain our cash accounts primarily with banks located in Kentucky.

Note 5 — Cash and Equivalents

Cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less.  We have a cash management program, which provides for the overnight investment of excess cash balances.  Under an agreement with a bank, excess cash is invested in a mutual fund for U.S. government and agency securities each night.

Note 6 — Cash and Equivalents - Restricted

Cash and equivalents - restricted represents cash on hand and short-term, highly liquid investments with initial maturities of three months or less which have been escrowed with certain mortgage companies and banks for property taxes, insurance and tenant improvements in accordance with certain loan and lease agreements and certain security deposits.  We also hold the proceeds of our recent property sales with a third party intermediary to be invested in replacement “like-kind” property.  See Note 3 — Real Estate Transactions for a discussion of the restrictions on these proceeds.

Note 7 — Property and Depreciation

Land, buildings and amenities are stated at cost.  Costs directly associated with the development and construction of a project are capitalized.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally 5-30 years for land improvements, 7-30 years for buildings and

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improvements and 5-30 years for amenities.  Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease.  Depreciation expense from continuing operations for the three months ended September 30, 2010 and 2009 was approximately $4.5 million and $4.4 million, respectively.  Depreciation expense from continuing operations for the nine months ended September 30, 2010 and 2009 was approximately $13.4 million and $12.5 million, respectively.

FASB ASC Topic 360 Property, Plant and Equipment specifies circumstances in which certain long-lived assets must be reviewed for impairment.  If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value.  In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates.  The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others.  All of these factors are considered by management in determining the value of any particular investment property.  The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole.  If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.  Application of this standard during the three and nine months ended September 30, 2010 and 2009 did not result in an impairment loss.

Note 8 — Investments in and Advances to Tenants in Common

We own a tenant in common interest in and operate the following properties:

·                  The Overlook at St. Thomas Apartments; a 484-unit luxury apartment complex in Louisville, Kentucky.  We own a 60% interest as a tenant in common with an unaffiliated third party.

·                  Creek’s Edge at Stony Point Apartments; a 202-unit luxury apartment complex in Richmond, Virginia.  We own a 51% interest as a tenant in common with an unaffiliated third party.

Presented below are the unaudited condensed balance sheets and statements of operations for these properties:

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Note 9 — Mortgages and Notes Payable

Mortgages and notes payable consist of the following:

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On February 1, 2010, we amended our $24.0 million mortgage payable to a bank.  The amendment converted $8.2 million of the balance to a revolving note payable due June 1, 2011.  On February 12, 2010, we made a principal payment of $8.2 million from our proceeds from refinancing on December 17, 2009, on our $8.2 million revolving note payable to a bank.  The revolver proceeds may be used to fund capital improvements and were used to payoff our mortgage payable to GE Commercial Finance Business Property on April 30, 2010.  Both the $15.2 million mortgage and the $8.2 million revolving note payable are secured by our Lakeshore Business Center properties.

In addition to the $8.2 million revolving note payable to a bank due June 1, 2011, we continue to have our $10.0 million revolving note payable to a bank due May 31, 2011.  As of September 30, 2010 we did not have an outstanding balance on either the $8.2 million revolving note payable or the $10.0 million revolving note payable.

Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of long-term debt at September 30, 2010 was approximately $248.9 million.

Interest paid for the nine months ended September 30, 2010 and 2009 was approximately $8.7 million and $8.9 million, respectively.

Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.  Certain mortgages and notes payable contain covenants and requirements that we maintain specified debt limits and ratios related to our debt balances and property values, as well as, specified financial performance requirements.  We

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complied with all covenants and requirements at September 30, 2010.  We anticipate renewing or refinancing our mortgages and notes payable coming due within the next twelve months.

Mortgages payable on our properties owned as a tenant in common with an unaffiliated third party consist of the following:

(1) We are proportionately liable for this mortgage, limited to our 60% interest as a tenant in common.

(2) We are jointly and severally liable under this mortgage.

                Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of long-term debt at September 30, 2010, was approximately $64.0 million.

Note 10 — Accounts Payable and Accrued Expenses Due to Affiliate

Accounts payable and accrued expenses due to affiliate includes amounts owed to NTS Development Company for reimbursement of employee costs and overhead expenses and fees for services rendered as provided for in our collective management agreements.

Note 11 — Related Party Transactions

Pursuant to our collective management agreements, NTS Development Company receives fees for a variety of services performed for our benefit.  NTS Development Company also receives fees under separate management agreements for each of our unconsolidated joint venture properties owned as a tenant in common with an unaffiliated third party, each of our consolidated joint venture properties and each of our eight wholly-owned subsidiaries financed through Federal Home Loan Mortgage Corporation, or FHLMC.  Property management fees are paid in an amount equal to 5% of the gross collected revenue from our properties.  This includes our wholly-owned properties, consolidated joint venture properties and properties owned by our eight wholly-owned subsidiaries financed through FHLMC.  Fees are paid in an amount equal to 3.5% of the gross collected revenue from our unconsolidated joint venture properties owned as a tenant in common with an unaffiliated third party.  We were the beneficiary of a preferential ownership interest, disproportionately greater than our initial cash investment in each property owned as a tenant in common with an unaffiliated third party.  Construction supervision fees are paid in an amount equal to 5% of the costs incurred which relate to capital improvements and significant repairs.  NTS Development Company receives commercial leasing fees equal to 4% of the gross rental amount for new leases and 2% of the gross rental amount for new leases in which a broker is used and for renewals or extensions.  Disposition fees are paid to NTS Development Company in an amount of 1% to 4% of the aggregate sales price of a property pursuant to our management agreements and up to a 6% fee upon disposition on our properties owned as a tenant in common with an unaffiliated third party under their respective management agreements.  NTS Development Company has agreed to accept a lower management fee for the properties we own as a tenant in common with an unaffiliated third party in exchange for a larger potential disposition fee.  NTS Development Company is reimbursed its actual costs for services rendered to NTS Realty.

Employee costs are allocated among NTS Realty, other affiliates of our managing general partner and for the benefit of third parties, so that a full time employee can be shared by multiple entities.  Each employee’s services, which are dedicated to a particular entity’s operations, are allocated as a percentage of each employee’s costs to that entity.  We only reimburse charges from NTS Development Company for actual costs of employee services incurred for our benefit.

We were charged the following approximate amounts pursuant to our management agreements with NTS Development Company for the three and nine months ended September 30, 2010 and 2009.  These charges include items, which have been expensed as operating expenses reimbursed to affiliate or professional and administrative

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expenses reimbursed to affiliate and items, which have been capitalized as other assets or as land, buildings and amenities.  Certain of these items are included in our results of discontinued operations.