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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q/A

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

For the transition period from              to             

 

Commission file number 001-31568

 


 

New England Realty Associates Limited Partnership

(Exact name of registrant as specified in its charter)

 

 

 

 

Massachusetts

 

04-2619298

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

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

 

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 ☒  No ☐

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of August 4, 2017, there were 99,509 of the registrant’s Class A units (2,985,282 Depositary Receipts) of limited partnership issued and outstanding and 23,633 Class B units issued and outstanding.

 

 

 


 

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EXPLANATORY NOTE

 

This amendment to the Quarterly Report on Form 10-Q/A amends the Partnership’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, originally filed with the Securities and Exchange Commission on August 8, 2017.

 

The Partnership is filing this Amendment to correct a clerical error in Note 14. Investment in unconsolidated Joint Ventures.  The chart containing the financial information for the three months ended June 30, 2017 is corrected in this amendment.

 

For the convenience of the reader, this Form 10-Q/A sets forth the Quarterly Report on Form 10-Q as of June 30, 2017 in its entirety.  Except for the correction noted in the preceding paragraph, this Amendment does not alter or restate any of the information presented or disclosed in the Original Filing.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

 

INDEX

 

 

 

 

PART I—FINANCIAL INFORMATION 

Item 1. 

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

5

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016

6

 

Consolidated Statements of Changes in Partners’ Capital for the Six Months ended June 30, 2017 and 2016

7

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

8

 

Notes to Consolidated Financial Statements

9

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. 

Controls and Procedures

39

PART II—OTHER INFORMATION 

Item 1. 

Legal Proceedings

40

Item 1A. 

Risk Factors

40

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3. 

Defaults Upon Senior Securities

40

Item 4. 

Mine Safety Disclosure

40

Item 5. 

Other Information

41

Item 6. 

Exhibits

41

SIGNATURES 

42

 

 

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NEW ENGLAND REALTY ASSOCIATES, L.P.

 

PART 1 -- FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in New England Realty Associates L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

The results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

ASSETS

 

 

  (Unaudited)

 

 

 

 

Rental Properties

 

$

165,745,385

 

$

169,462,811

 

Cash and Cash Equivalents

 

 

10,953,067

 

 

7,463,697

 

Rents Receivable

 

 

472,606

 

 

567,627

 

Insurance Recovery Receivable

 

 

68,270

 

 

700,931

 

Real Estate Tax Escrows

 

 

469,807

 

 

444,625

 

Prepaid Expenses and Other Assets

 

 

4,245,465

 

 

3,585,870

 

Investments in Unconsolidated Joint Ventures

 

 

9,029,232

 

 

8,336,505

 

Total Assets

 

$

190,983,832

 

$

190,562,066

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

Mortgage Notes Payable

 

 

211,934,121

 

 

212,709,080

 

Distribution and Loss in Excess of Investment in Unconsolidated Joint Venture

 

 

2,754,771

 

 

2,577,606

 

Accounts Payable and Accrued Expenses

 

 

2,728,121

 

 

4,052,095

 

Advance Rental Payments and Security Deposits

 

 

5,695,319

 

 

5,448,011

 

Total Liabilities

 

 

223,112,332

 

 

224,786,792

 

Commitments and Contingent Liabilities (Notes 3 and 9)

 

 

 —

 

 

 —

 

Partners’ Capital 124,386 and 124,409 units outstanding in 2017 and 2016 respectively

 

 

(32,128,500)

 

 

(34,224,726)

 

Total Liabilities and Partners’ Capital

 

$

190,983,832

 

$

190,562,066

 

 

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

12,683,517

 

$

12,136,355

 

$

25,314,962

 

$

24,209,211

 

Laundry and sundry income

 

 

104,274

 

 

117,909

 

 

216,436

 

 

228,341

 

 

 

 

12,787,791

 

 

12,254,264

 

 

25,531,398

 

 

24,437,552

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

463,008

 

 

455,160

 

 

988,744

 

 

953,416

 

Depreciation and amortization

 

 

3,009,698

 

 

3,060,994

 

 

5,982,753

 

 

6,088,148

 

Management fee

 

 

518,533

 

 

501,288

 

 

1,055,248

 

 

1,001,495

 

Operating

 

 

1,032,064

 

 

1,069,692

 

 

2,746,025

 

 

2,493,937

 

Renting

 

 

94,532

 

 

155,962

 

 

180,735

 

 

243,226

 

Repairs and maintenance

 

 

2,053,272

 

 

2,193,186

 

 

3,508,894

 

 

3,820,886

 

Taxes and insurance

 

 

1,646,053

 

 

1,583,385

 

 

3,356,457

 

 

3,187,255

 

 

 

 

8,817,160

 

 

9,019,667

 

 

17,818,856

 

 

17,788,363

 

Income Before Other Income (Expense)

 

 

3,970,631

 

 

3,234,597

 

 

7,712,542

 

 

6,649,189

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

404

 

 

203

 

 

716

 

 

405

 

Interest expense

 

 

(2,545,553)

 

 

(2,542,692)

 

 

(5,066,379)

 

 

(5,096,325)

 

Income  from investments in unconsolidated joint ventures

 

 

1,058,225

 

 

288,478

 

 

1,731,062

 

 

658,082

 

 

 

 

(1,486,924)

 

 

(2,254,011)

 

 

(3,334,601)

 

 

(4,437,838)

 

Net Income

 

$

2,483,707

 

$

980,586

 

$

4,377,941

 

$

2,211,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

`

 

$

19.97

 

$

7.85

 

$

35.19

 

$

17.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Units Outstanding

 

 

124,386

 

 

124,923

 

 

124,392

 

 

125,032

 

 

See notes to consolidated financial statements.

 

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units

 

Partners’s Capital

 

 

 

Limited

 

General

 

 

 

Treasury

 

 

 

Limited

 

General

 

 

 

 

 

  

Class A

  

Class B

  

Partnership

  

Subtotal

  

Units

  

Total

  

Class A

  

Class B

  

Partnership

  

Total

 

Balance January 1, 2016

 

144,180

 

34,243

 

1,802

 

180,225

 

54,851

 

125,374

 

$

(24,673,535)

 

$

(5,830,548)

 

$

(306,870)

 

$

(30,810,953)

 

Distribution to Partners

 

 

 

 

 

 —

 

 

 

(1,499,080)

 

 

(356,032)

 

 

(18,738)

 

 

(1,873,850)

 

Stock Buyback

 

 

 

 

 

451

 

(451)

 

 

(558,723)

 

 

(128,874)

 

 

(6,783)

 

 

(694,380)

 

Net Income

 

 

 

 

 

 —

 

 

 

1,769,081

 

 

420,157

 

 

22,113

 

 

2,211,351

 

Balance June 30, 2016

 

144,180

 

34,243

 

1,802

 

180,225

 

55,302

 

124,923

 

$

(24,962,257)

 

 

(5,895,297)

 

 

(310,278)

 

 

(31,167,832)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1 , 2017

 

144,180

 

34,243

 

1,802

 

180,225

 

55,816

 

124,409

 

$

(27,407,924)

 

$

(6,475,961)

 

$

(340,840)

 

$

(34,224,726)

 

Distribution to Partners

 

 

 

 

 

 —

 

 

 

(1,791,334)

 

 

(425,442)

 

 

(22,392)

 

 

(2,239,168)

 

Stock Buyback

 

 

 

 

 

23

 

(23)

 

 

(34,038)

 

 

(8,084)

 

 

(426)

 

 

(42,548)

 

Net Income

 

 

 

 

 

 

 

 

 

3,502,353

 

 

831,809

 

 

43,779

 

 

4,377,941

 

Balance June 30, 2017

 

144,180

 

34,243

 

1,802

 

180,225

 

55,839

 

124,386

 

$

(25,730,943)

 

$

(6,077,678)

 

$

(319,879)

 

$

(32,128,500)

 

 

See notes to consolidated financial statements.

 

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income

 

$

4,377,941

 

$

2,211,351

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,982,753

 

 

6,088,148

 

Amortization of deferred financing costs

 

 

94,269

 

 

93,986

 

(Income)  from investments in joint ventures

 

 

(1,731,062)

 

 

(658,082)

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

Decrease (Increase)   in rents receivable

 

 

95,021

 

 

(65,414)

 

(Decrease) in accounts payable and accrued expense

 

 

(1,323,974)

 

 

(1,940,803)

 

Decrease in insurance recovery receivable

 

 

632,661

 

 

177,514

 

(Increase)  in real estate tax escrow

 

 

(25,182)

 

 

(20,463)

 

(Increase) Decrease in prepaid expenses and other assets

 

 

(90,772)

 

 

600,109

 

Increase in advance rental payments and security deposits

 

 

247,308

 

 

331,900

 

Total Adjustments

 

 

3,881,022

 

 

4,606,895

 

Net cash provided by operating activities

 

 

8,258,963

 

 

6,818,246

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Proceeds from unconsolidated joint ventures

 

 

3,322,250

 

 

1,331,282

 

Distribution in excess of investment in unconsolidated joint ventures

 

 

334,767

 

 

300,000

 

(Investment)  in unconsolidated joint ventures

 

 

(2,441,517)

 

 

(53,782)

 

Deposit and escrow held for the acquisition of real estate

 

 

(620,129)

 

 

 —

 

Improvement of rental properties

 

 

(2,214,020)

 

 

(2,771,798)

 

Net cash (used in) investing activities

 

 

(1,618,649)

 

 

(1,194,298)

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Payment of financing costs

 

 

 —

 

 

(174,718)

 

Proceeds of mortgage notes payable

 

 

 —

 

 

20,071,000

 

Payment of note payable

 

 

 —

 

 

(25,000,000)

 

Principal payments of mortgage notes payable

 

 

(869,228)

 

 

(360,178)

 

Stock buyback

 

 

(42,548)

 

 

(694,380)

 

Distributions to partners

 

 

(2,239,168)

 

 

(1,873,850)

 

Net cash (used in) financing activities

 

 

(3,150,944)

 

 

(8,032,126)

 

Net Increase  (Decrease) in Cash and Cash Equivalents

 

 

3,489,370

 

 

(2,408,178)

 

Cash and Cash Equivalents, at beginning of period

 

 

7,463,697

 

 

10,298,186

 

Cash and Cash Equivalents, at end of period

 

$

10,953,067

 

$

7,890,008

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2017

 

(Unaudited)

 

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

 

Line of Business:  New England Realty Associates Limited Partnership (“NERA” or the “Partnership”) was organized in Massachusetts in 1977. NERA and its subsidiaries own 25 properties which include 17 residential buildings; 4 mixed use residential, retail and office buildings; 3 commercial buildings and individual units at one condominium complex. These properties total 2,506 apartment units, 19 condominium units and 108,043 square feet of commercial space. Additionally, the Partnership also owns a 40- 50% interest in 9 residential and mixed use properties consisting of 754 apartment units, 12,500 square feet of commercial space and a 50 car parking lot. The properties are located in Eastern Massachusetts and Southern New Hampshire.

 

Basis of Presentation: The financial statements have been prepared in conformity with GAAP. The preparation of the financial statements in conformity with GAAP requires management 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 reported period. These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgement. The Partnership’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on the Partnership’s financial results. Judgements and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.

Principles of Consolidation:  The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for the nine limited liability companies (the “Investment Properties” or “Joint Ventures”) in which the Partnership has a 40 - 50% ownership interest. The consolidated group is referred to as the “Partnership”. Minority interests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in the above-mentioned Investment Properties using the equity method of consolidation. (See Note 14: Investment in Unconsolidated Joint Ventures).

 

The Partnership accounts for its investments in joint ventures using the equity method of accounting. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses. In 2013 and beyond, the carrying values of investments fell below zero. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. (See Note 14: Investment in Unconsolidated Joint Ventures.)

 

The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that equity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the

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variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.

 

Impairment:  On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties or investments in unconsolidated subsidiaries may be impaired. In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment. The criteria considered by management include reviewing low leased percentages, significant near term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near term mortgage debt maturities or other factors that might impact the Partnership’s intent and ability to hold property. A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.

 

Revenue Recognition:  Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Contingent rent for commercial properties are received from tenants for certain costs as provided in the lease agreement. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Rental concessions are also accounted for on the straight-line basis.

 

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

 

Rental Properties:  Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions which improve or extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Partnership’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market

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conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

 

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

 

Leasing Fees:  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.

 

Deferred Financing Costs:  Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Deferred financing costs are presented in the balance sheet as a direct deduction from the carrying value of the debt liability to which they relate, except deferred financing costs related to the revolving credit facility, which are presented in prepaid expenses and other assets. In all cases, amortization of such costs is included in interest expense and was approximately $94,000 and $94,000 for the six months ended June 30, 2017 and 2016, respectively.

 

Income Taxes:  The financial statements have been prepared on the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes have been recorded (See Note 13).

 

Cash Equivalents:  The Partnership considers cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less.

 

Segment Reporting:  Operating segments are revenue producing components of the Partnership for which separate financial information is produced internally for management. Under the definition, NERA operated, for all periods presented, as one segment.

 

Comprehensive Income:  Comprehensive income is defined as changes in partners’ equity, exclusive of transactions with owners (such as capital contributions and dividends). NERA did not have any comprehensive income items in 2017 or 2016 other than net income as reported.

 

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

 

Income Per Unit:  Net income per unit has been calculated based upon the weighted average number of units outstanding during each period presented. The Partnership has no dilutive units and, therefore, basic net income is the same as diluted net income per unit (see Note 7: Partner’s Capital).

 

Concentration of Credit Risks and Financial Instruments:  The Partnership’s properties are located in New England, and the Partnership is subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnership’s revenues in 2017 or 2016. The Partnership makes its temporary cash investments with high-credit quality financial institutions. At June 30, 2017, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from 0.01% to 0.35%. At June 30, 2017 and December 31, 2016, respectively approximately $12,485,000, and $8,911,000 of cash and cash equivalents, and security deposits included in prepaid expenses and other assets exceeded federally insured amounts.

 

Advertising Expense:  Advertising is expensed as incurred. Advertising expense was $98,811and $93,394 for the six months ended June 30, 2017 and 2016, respectively.

 

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Interest Capitalized:  The Partnership follows the policy of capitalizing interest as a component of the cost of rental property when the time of construction exceeds one year. During the six months ended June 30, 2017 and 2016 there was no capitalized interest.

 

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

 

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

 

NOTE 2. RENTAL PROPERTIES

 

As of June 30, 2017, the Partnership and its Subsidiary Partnerships owned 2,506 residential apartment units in 21 residential and mixed-use complexes (collectively, the “Apartment Complexes”). The Partnership also owns 19 condominium units in a residential condominium complex, all of which are leased to residential tenants (collectively referred to as the “Condominium Units”). The Apartment Complexes and Condominium Units are located primarily in the metropolitan Boston area of Massachusetts.

 

Additionally, as of June 30, 2017, the Partnership and Subsidiary Partnerships owned a commercial shopping center in Framingham, commercial buildings in Newton and Brookline and mixed-use properties in Boston, Brockton and Newton, all in Massachusetts. These properties are referred to collectively as the “Commercial Properties.”

 

The Partnership also owned a 40% to 50% ownership interest in nine residential and mixed use complexes (the “Investment Properties”) at June 30, 2017 with a total of 754 units, accounted for using the equity method of consolidation. See Note 14 for summary information on these investments.

 

Rental properties consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

    

Useful Life

 

Land, improvements and parking lots

 

$

52,918,495

 

$

52,612,929

 

15

-

40

years

 

Buildings and improvements

 

 

173,761,734

 

 

173,536,288

 

15

-

40

years

 

Kitchen cabinets

 

 

9,022,944

 

 

8,738,323

 

 5

-

10

years

 

Carpets

 

 

7,962,417

 

 

7,621,292

 

 5

-

10

years

 

Air conditioning

 

 

690,535

 

 

690,535

 

 5

-

10

years

 

Laundry equipment

 

 

274,389

 

 

269,784

 

 5

-

 7

years

 

Elevators

 

 

1,139,296

 

 

1,139,296

 

20

-

40

years

 

Swimming pools

 

 

444,629

 

 

444,629

 

10

-

30

years

 

Equipment

 

 

10,354,242

 

 

10,029,639

 

 5

-

30

years

 

Motor vehicles

 

 

237,954

 

 

237,954

 

 

 

 5

years

 

Fences

 

 

37,465

 

 

37,465

 

 5

-

15

years

 

Furniture and fixtures

 

 

8,371,845

 

 

8,127,100

 

 5

-

 7

years

 

Smoke alarms

 

 

657,369

 

 

174,059

 

 5

-

 7

years

 

Total fixed assets

 

 

265,873,314

 

 

263,659,293

 

 

 

 

 

 

Less: Accumulated depreciation

 

 

(100,127,929)

 

 

(94,196,482)

 

 

 

 

 

 

 

 

$

165,745,385

 

$

169,462,811

 

 

 

 

 

 

 

 

 

NOTE 3. RELATED PARTY TRANSACTIONS

 

The Partnership’s properties are managed by an entity that is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of gross receipts of rental revenue and laundry income on the majority of the Partnership’s properties and 3% on Linewt. Total fees paid were approximately $1,055,000 and $1,001,000 for the six months ended June 30, 2017 and 2016, 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 six months ended June 30,  

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2017 and 2016, approximately $363,000 and $557,000, was charged to NERA for legal, accounting, construction, maintenance, brokerage fees, rental and architectural services and supervision of capital improvements. Of the 2017 expenses referred to above, approximately $95,000 consisted of repairs and maintenance, $184,000 of administrative expense and $1,000 for commercial brokerage fees. Approximately $83,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2017, the Hamilton Company received approximately $798,000 from the Investment Properties of which approximately $352,000 was the management fee, approximately $27,000 was for maintenance services, approximately $14,000 was for administrative services and approximately $405,000 for architectural services and supervision of capital projects. The management fee is equal to 4% of gross receipts of rental income on the majority of investment properties and 2% on Dexter Park.

 

The Partnership reimburses the management company for the payroll and related expenses of the employees who work at the properties. Total reimbursement was approximately $1,671,000 and $1,509,000 for the six months ended June 30, 2017 and 2016, respectively. The Management Company maintains a 401K plan for all eligible employees whereby the employees may contribute the maximum allowed by law. The plan also provides for discretionary contributions by the employer. There were no employer contributions during 2017 and 2016.

 

Bookkeeping and accounting functions are provided by the Management Company’s accounting staff, which consists of approximately 14 people. During the six months ended June 30, 2017 and 2016, the Management Company charged the Partnership $62,500 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses above.

 

The President of the Management Company performs asset management consulting services and receives an asset management fee from the Partnership. The Partnership does not have a written agreement with this individual. During the six months ended June 30, 2017 and 2016 this individual received fees of $37,500.

 

The Partnership has invested in nine limited partnerships, which have invested in mixed use residential apartment complexes. The Partnership has a 40% to 50% ownership interest in each investment property. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 56%. See Note 14 for a description of the properties and their operations.

 

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

 

NOTE 4. OTHER ASSETS

 

Approximately $2,466,000, and $2,381,000 of security deposits are included in prepaid expenses and other assets at June 30, 2017 and December 31, 2016, respectively. The security deposits and escrow accounts are restricted cash.

 

Included in prepaid expenses and other assets at June 30, 2017 and December 31, 2016 is approximately $424,000 and $423,000, respectively, held in escrow to fund future capital improvements.

 

Intangible assets on the acquisition of the Residence at Captain Parkers are included in prepaid expenses and other assets.  Intangible assets are approximately $4,000 net of accumulated amortization of approximately $500,000 and approximately $12,000 net of accumulated amortization of approximately $492,000 at June 30, 2017 and December 31, 2016, respectively.

 

Included in deposits and escrows held for acquisition is approximately $620,000 in connection with the purchase of Woodland Park apartments in Newton, Massachusetts. See Note 16-Subsequent Events.

 

Financing fees in association with the line of credit of approximately $24,000 and $28,000 are net of accumulated amortization of approximately $137,000 and $113,000 at June 30, 2017 and December 31, 2016 respectively.

 

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NOTE 5. MORTGAGE NOTES PAYABLE

 

At June 30, 2017 and December 31, 2016, the mortgages payable consisted of various loans, all of which were secured by first mortgages on properties referred to in Note 2. At June 30, 2017, the interest rates on these loans ranged from 2.80% to 5.97%, payable in monthly installments aggregating approximately $976,000 including principal, to various dates through 2029. The majority of the mortgages are subject to prepayment penalties. At June 30, 2017, the weighted average interest rate on the above mortgages was 4.63%. The effective rate of 4.72% includes the amortization expense of deferred financing costs. See Note 12 for fair value information. The Partnership’s mortgage debt and the mortgage debt of its unconsolidated joint ventures generally is non-recourse except for customary exceptions pertaining to misuse of funds and material misrepresentations.

 

Financing fees of approximately $1,337,000 and $1,454,000 are net of accumulated amortization of approximately $1,179,000 and $1,061,000 at June 30, 2017 and December 31, 2016, respectively.

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

 

Approximate annual maturities at June 30, 2017 are as follows:

 

 

 

 

 

 

2018—current maturities

    

$

1,804,000

 

2019

 

 

7,883,000

 

2020

 

 

4,318,000

 

2021

 

 

2,176,000

 

2022

 

 

2,535,000

 

Thereafter

 

 

194,549,000

 

 

 

 

213,265,000

 

Less: unamortized deferred financing costs

 

 

(1,331,000)

 

 

 

$

211,934,000

 

 

On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). The manager of Captain Parker is NewReal, Inc. (“New Real”), the general partner of New England Realty Associates Limited Partnership (the “Partnership”).  The Partnership is the sole member of Captain Parker. The Loan Agreement provides for a term loan (the “Loan”) in the principal amount of $20,071,000.  The Loan is due on February 1, 2026 (the “Due Date”), unless the due date is accelerated in accordance with the Loan’s terms. Borrowings under the Loan will bear interest at rates equal to (i) the one month LIBOR rate for United States Dollar Deposits, determined monthly, plus 201 basis points. The interest rate increases upon an event of default. 

 

Captain Parker is required to repay the aggregate principal amount of the Loan by the Due Date. Interest payments on the Loans are payable monthly in arrears on specified dates set forth in the Loan Agreement. Principal payments on the Loan are also payable monthly commencing on March 1, 2022.  The note issued by Captain Parker in connection with the Loan Agreement (the “Note”) also contains provisions for optional prepayment with a penalty under certain circumstances.

 

Line of Credit

On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit.  The term of the line is three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The costs associated with the line of credit were approximately $125,000. As of June 30, 2017, the credit line had no outstanding balance. The agreement expired on July 31,2017. The lender has provided a 90 day extension and is working with the Partnership on a renewal agreement.

On September 15, 2015, the Partnership, in connection with the purchase of the Residence at Captain Parker Apartments, used the entire line of credit, along with cash reserve, to purchase the property. (See Note 2: Rental Properties, for the details of the transaction.)

 

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On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). As a result of securing the financing, the Partnership used the proceeds of the loan and cash reserves of the Partnership to pay down the Line of Credit to zero. A payment was made on January 7, 2016 for $23,000,000, and another payment for $2,000,000 was made on January 15, 2016.

 

On July 6, 2017, the Partnership, in connection with the purchase of Woodland Park Apartments, used the entire line of credit, along with a loan from HBC Holdings, LLC, a company controlled by Harold Brown for $16,000,000, and cash reserves, to purchase the property. See Note 16-Subsequent Events.

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

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

The Partnership paid fees to secure the line of credit. Any unused balance of the line of credit is subject to a fee ranging from 15 to 20 basis points per annum. The Partnership paid approximately $25,000 for the six months ended June 30, 2017.

The line of credit agreement has several covenants, such as providing cash flow projections and compliance certificates, as well as other financial information. The covenants include, but are not limited to the following: maintain a leverage ratio that does not exceed 65%; aggregate increase in indebtedness of the subsidiaries and joint ventures should not exceed $15,000,000; maintain a tangible net worth (as defined in the agreement) of a minimum of $150,000,000; a minimum ratio of net operating income to total indebtedness of at least 9.5%; debt service coverage ratio of at least 1.6 to 1, as well as other items.

The Partnership is in compliance with these covenants as of June 30, 2017.

   NOTE 6. ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The Partnership’s residential lease agreements may require tenants to maintain a one-month advance rental payment and/or a security deposit. At June 30, 2017, amounts received for prepaid rents of approximately $2,092,000 are included in cash and cash equivalents, and security deposits of approximately $2,466,000 are included in prepaid expenses and other assets and are restricted cash.

 

NOTE 7. PARTNERS’ CAPITAL

 

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

 

In 2017, the Partnership announced the approval of a quarterly distribution of its Class A Limited Partners and holders of Depositary Receipts of record as of March 15, 2017, and June 15, 2017 and payable on March 31, 2017, and June 30, 2017 of $9.00 per unit ($0.30 per receipt).

In 2016, regular quarterly distributions of $7.50 per unit ($0.25 per receipt) were paid in March, June, September and December. In December 2016, the Partnership paid a special distribution of $24.00 per unit ($0.80 per receipt). In 2016, the Partnership paid a total distribution of an aggregate of $54.00 per unit ($1.80 per Receipt).

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The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners’ interests in Class A Units. Under the terms of this agreement, the holders of Class A Units have the right to exchange each Class A Unit for 30 Depositary Receipts. The following is information per Depositary Receipt:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Net Income per Depositary Receipt

 

$

1.17

 

$

0.59

 

Distributions per Depositary Receipt

 

$

0.60

 

$

0.50

 

 

 

 

NOTE 8. TREASURY UNITS

 

Treasury Units at June 30, 2017 are as follows:

 

 

 

 

 

Class A

    

44,671

 

Class B

 

10,609

 

General Partnership

 

559

 

 

 

55,839

 

 

On August 20, 2007, NewReal, Inc., the General Partner authorized an equity repurchase program (“Repurchase Program”) under which the Partnership was permitted to purchase, over a period of twelve months, up to 300,000 Depositary Receipts (each of which is one-tenth of a Class A Unit). Over time, the General Partner has authorized increases in the equity repurchase program. On March 10, 2015, the General Partner authorized an increase in the Repurchase Program from 1,500,000 to 2,000,000 Depository Receipts and extended the Program for an additional five years from March 31, 2015 until March 31, 2020. The Repurchase Program requires the Partnership to repurchase a proportionate number of Class B Units and General Partner Units in connection with any repurchases of any Depositary Receipts by the Partnership based upon the 80%,  19% and 1% fixed distribution percentages of the holders of the Class A, Class B and General Partner Units under the Partnership’s Second Amended and Restate Contract of Limited Partnership. Repurchases of Depositary Receipts or Partnership Units pursuant to the Repurchase Program may be made by the Partnership from time to time in its sole discretion in open market transactions or in privately negotiated transactions. From August 20, 2007 through June 30, 2017, the Partnership has repurchased 1,365,306 Depositary Receipts at an average price of $27.14 per receipt (or $814.20 per underlying Class A Unit), 3,072 Class B Units and 162 General Partnership Units, both at an average price of $926.26 per Unit, totaling approximately $40,274,000 including brokerage fees paid by the Partnership.

 

During the six months ended June 30, 2017, the Partnership purchased a total of 549 Depositary Receipts. The average price was $62.00 per receipt or $1,860.00 per unit. The total cost including commission was $34,038. The Partnership was required to repurchase 4.3 Class B Units and 0.2 General Partnership units at a cost of $8,084 and $425 respectively.

 

NOTE 9. COMMITMENTS AND CONTINGENCIES

 

From time to time, the Partnership is involved in various ordinary routine litigation incidental to its business. The Partnership either has insurance coverage or provides for any uninsured claims when appropriate. The Partnership is not involved in any material pending legal proceedings.

 

On November 19, 2016, a pipe broke at 62 Boylston Street in Boston, MA. resulting in water damage to 24  apartments. The Partnership has insurance coverage on both the repairs and rental loss. As of June 30, 2017, the Partnership has received payments of approximately $344,000 on this claim.

 

NOTE 10. RENTAL INCOME

 

During the six months ended June 30, 2017, approximately 93% of rental income was related to residential apartments and condominium units with leases of one year or less. The majority of these leases expire in June, July and

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August. Approximately 7% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at June 30, 2017 as follows:

 

 

 

 

 

 

 

    

Commercial

 

 

 

Property Leases

 

2018

 

$

3,447,000

 

2019

 

 

2,284,000

 

2020

 

 

1,687,000

 

2021

 

 

1,474,000

 

2022

 

 

594,000

 

Thereafter

 

 

391,000

 

 

 

$

9,877,000

 

 

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $319,000 and $304,000 for the six months ended June 30, 2017 and 2016 respectively. Staples and Trader Joes, tenants at Staples Plaza, are approximately 33% of the total commercial rental income.

 

The following information is provided for commercial leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Annual base

    

 

    

 

    

Percentage of

 

 

 

rent for

 

Total square feet

 

Total number of

 

annual base rent for

 

Throguh June 30,

 

expiring leases

 

for expiring leases

 

leases expiring

 

expiring leases

 

2018

 

$

418,813

 

18,181

 

11

 

14

%

2019

 

 

338,133

 

10,684

 

11

 

12

%

2020

 

 

631,713

 

22,328

 

 9

 

22

%

2021

 

 

621,421

 

25,004

 

 6

 

21

%

2022

 

 

579,164

 

23,267

 

 6

 

20

%

2023

 

 

78,000

 

1,950

 

 1

 

 2

%

2024

 

 

251,627

 

6,629

 

 2

 

 9

%

2025

 

 

 —

 

 —

 

 —

 

 —

%

2026

 

 

 —

 

 —

 

 —

 

 —

%

2027

 

 

 —

 

 —

 

 —

 

 —

%

Totals

 

$

2,918,871

 

108,043

 

46

 

100

%

 

Rents receivable are net of an allowance for doubtful accounts of approximately $686,000 and $523,000 at June 30, 2017 and December 31, 2016. Included in rents receivable at June 30, 2017 is approximately $120,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis. The majority of this amount is for long-term leases at 62 Boylston Street in Boston, Massachusetts.

 

Rents receivable at June 30, 2017 also includes approximately $71,000 representing the deferral of rental concession primarily related to the residential properties.

 

NOTE 11. CASH FLOW INFORMATION

 

During the six months ended June 30, 2017 and 2016, cash paid for interest was approximately $4,985,000, and $4,947,000 respectively.  Cash paid for state income taxes was approximately $37,000 and $41,000 during the six months ended June 30, 2017 and 2016 respectively.

 

NOTE 12. FAIR VALUE MEASUREMENTS

 

Fair Value Measurements on a Recurring Basis

 

At June 30, 2017 and December 31, 2016, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.

 

Financial Assets and Liabilities not Measured at Fair Value

 

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At June 30, 2017 and December 31, 2016 the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, and note payable, accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments or, the recent acquisition of these items.

 

At June 30, 2017 and December 31, 2016, we estimated the fair value of our mortgages payable and other notes based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimated the fair value of our secured mortgage debt that does not have current quoted market prices available by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The differences in the fair value of our debt from the carrying value are the result of differences in interest rates and/or borrowing spreads that were available to us at June 30, 2017 and December 31, 2016, as compared with those in effect when the debt was issued or acquired. The secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

 

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

 

·

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

 

·

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

 

 

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

 

 

 

 

 

 

 

 

 

 

    

Carrying Amount

    

Estimated Fair Value

 

Mortgage Notes Payable

 

 

 

 

 

 

 

Partnership Properties

 

 

 

 

 

 

 

At June 30, 2017

*

$

211,934,121

 

$

219,698,686

 

At December 31, 2016

*

$

212,709,080

 

$

219,086,450

 

Investment Properties

 

 

 

 

 

 

 

At June 30, 2017

*

$

124,938,378

 

$

127,583,710

 

At December 31, 2016

*

$

130,152,297

 

$

133,991,269

 

 

* Net of unamortized deferred financing costs

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2017 and December 31, 2016. 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 June 30, 2017 and current estimates of fair value may differ significantly from the amounts presented herein.

 

NOTE 13. TAXABLE INCOME AND TAX BASIS

 

Taxable income reportable by the Partnership and includable in its partners’ tax returns is different than financial statement income because of tax free exchanges, accelerated depreciation, different tax lives, timing differences related to prepaid rents, allowances and intangible assets related to significant acquisitions. Taxable income of approximately $4,893,000 was approximately $57,000 less than statement income for the year ended December 31, 2016. The primary reason for the difference is due to accelerated depreciation, tax free exchange and other differences in the treatment of certain expenditures. The cumulative tax basis of the Partnership’s real estate at December 31, 2016 is approximately $7,200,000 less than the statement basis. The primary reasons for the lower tax basis are tax free exchanges, and accelerated depreciation. The Partnership’s tax basis in its joint venture investments is approximately $2,100,000 less than statement basis because of accelerated depreciation.

 

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

 

While allowable accelerated depreciation deductions were extended, future tax law changes may significantly affect taxable income.

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

 

In the normal course of business the Partnership or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable. As of June 30, 2017, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2013 forward.

 

NOTE 14. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

 

Since November 2001,the Partnership has invested in nine limited partnerships and limited liability companies, the majority of which have invested in residential apartment complexes, with three partnerships investing in commercial property. The Partnership has between a 40%-50% ownership interest in each investment. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 56%, with the balance owned by the others. A description of each investment is as follows:

 

On October 28, 2009 the Partnership invested approximately $15,925,000 in a joint venture to acquire a 40% interest in a residential property located in Brookline, Massachusetts. The property, Hamilton Park Towers LLC, referred to as Dexter Park, is a 409 unit residential complex. The purchase price was $129,500,000. The total mortgage was $89,914,000 with an interest rate of 5.57% and it matures in 2019. The mortgage calls for interest only payments for the first two years of the loan and amortized over 30 years thereafter. The balance of this mortgage before unamortized deferred financing costs is approximately $82,757,000 at June 30, 2017.  This investment, Hamilton Park Towers, LLC is referred to as Dexter Park.

On October 3, 2005, the Partnership invested $2,500,000 for a 50% ownership interest in a 168-unit apartment complex in Quincy, Massachusetts. The purchase price was $30,875,000. The Joint Venture sold 120 units as condominiums and retained 48 units for long-term investment. In February 2007, the Joint Venture refinanced the 48 units with a new mortgage in the amount of $4,750,000 with an interest rate of 5.57%, interest only for five years. The loan was to be amortized over 30 years thereafter and matured in March, 2017. On March 1, 2017, the mortgage balance was paid in full, with the Partnership contributing its share of the mortgage balance of approximately $2,222,000. As of June 30, 2017, 10 units were sold with a gain on the sales of approximately $1,338,000. An additional ten units are under purchase and sale agreements, and the Partnership still owns 38 units. This investment is referred to as Hamilton Bay Apartments, LLC. In April 2008, the Joint Venture refinanced an additional 20 units and obtained a new mortgage in the amount of $2,368,000 with interest at 5.75%, interest only, which matured in 2013. On October 18, 2013, the Partnership and its joint venture partner each made capital contributions to the entity of $660,000. The capital was used to pay off the outstanding mortgage. During 2017,  1 unit was sold resulting in a gain of approximately $93,000.  As of August 1, 2017, all units have been sold by the Joint Venture. This investment is referred to as Hamilton Bay, LLC.

 

On March 7, 2005, the Partnership invested $2,000,000 for a 50% ownership interest in a building comprising 48 apartments, one commercial space and a 50-car surface parking lot located in Boston, Massachusetts. The purchase price was $14,300,000, with a $10,750,000 mortgage. The Joint Venture planned to operate the building and initiate development of the parking lot. In June 2007, the Joint Venture separated the parcels, formed an additional limited liability company for the residential apartments and obtained a mortgage on the property. The new limited liability company formed for the residential apartments and commercial space is referred to as Hamilton Essex 81, LLC. In August 2008, the Joint Venture restructured the mortgages on both parcels at Essex 81. On September 28, 2015, Hamilton Essex Development, LLC paid off the outstanding mortgage balance of $1,952,286.  The Partnership made a capital contribution of $978,193 to Hamilton Essex Development LLC for its share of the funds required for the transaction.  Additionally, the Partnership made a capital contribution of $100,000 to Hamilton Essex 81, LLC.  On September 30, 2015, Hamilton Essex 81, LLC obtained a new 10 year mortgage in the amount of $10,000,000, interest

19


 

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only at 2.18% plus the one month Libor rate. The proceeds of the note were used to pay off the existing mortgage of $8,040,719 and the Partnership received a distribution of $978,193 for its share of the excess proceeds. As a result of the distribution, the carrying value of the investment fell below zero. The Partnership will continue to account for this investment using the equity method of accounting. Although the Partnership has no legal obligation, the Partnership intends to fund its share of any future operating deficits if needed. The investment in the parking lot is referred to as Hamilton Essex Development, LLC; the investment in the apartments is referred to as Hamilton Essex 81, LLC. At June 30, 2017, the balance on this mortgage before unamortized deferred financing costs is approximately $10,000,000.

 

On March 2, 2005, the Partnership invested $2,352,000 for a 50% ownership interest in a 176‑unit apartment complex with an additional small commercial building located in Quincy, Massachusetts. The purchase price was $23,750,000. The Joint Venture sold 127 of the units as condominiums and retained 49 units for long‑term investment. The Joint Venture obtained a new 10‑year mortgage in the amount of $5,000,000 on the units to be retained by the Joint Venture. The interest on the new loan was 5.67% fixed for the 10 year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan term. On July 8, 2016, Hamilton 1025 LLC paid off the outstanding balance of the mortgage balance. The Partnership made a capital contribution of $2,359,500 to Hamilton 1025, LLC for its share of the funds required for the transaction. Ten units were sold in the year ended December 31, 2016 with a gain on the sales of approximately $1,324,000. As of June 30, 2017, 8 units were sold in 2017 with a gain on the sales of approximately $939,000.  4 units are under purchase and sales agreements and the Partnership still owns 30 units. This investment is referred to as Hamilton 1025, LLC.

In September 2004, the Partnership invested approximately $5,075,000 for a 50% ownership interest in a 42‑unit apartment complex located in Lexington, Massachusetts. The purchase price was $10,100,000. In October 2004, the Joint Venture obtained a mortgage on the property in the amount of $8,025,000 and returned $3,775,000 to the Partnership. The Joint Venture obtained a new 10- year mortgage in the amount of $5,500,000 in January 2007. The interest on the new loan was 5.67% fixed for the ten year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan. This loan required a cash contribution by the Partnership of $1,250,000 in December 2006. On September 12, 2016, the property was refinanced with a 15 year mortgage in the amount of $6,000,000, at 3.71%, interest only. The Joint Venture Partnership paid off the prior mortgage of approximately $5,158,000 with the proceeds of the new mortgage and made a distribution of $385,000 to the Partnership. The cost associated with the refinancing was approximately $123,000. This investment is referred to as Hamilton Minuteman, LLC. At June 30, 2017, the balance on this mortgage before unamortized deferred financing costs is approximately $6,000,000. This investment is referred to as Hamilton Minuteman, LLC.

In August 2004, the Partnership invested $8,000,000 for a 50% ownership interest in a 280‑unit apartment complex located in Watertown, Massachusetts. The total purchase price was $56,000,000. The Joint Venture sold 137 units as condominiums. The assets were combined with Hamilton on Main Apartments. Hamilton on Main, LLC is known as Hamilton Place. In 2005, Hamilton on Main Apartments, LLC obtained a ten year mortgage on the three buildings to be retained. The mortgage was $16,825,000, with interest only of 5.18% for three years and amortizing on a 30 year schedule for the remaining seven years when the balance is due. The net proceeds after funding escrow accounts and closing costs on the mortgage were approximately $16,700,000, which were used to reduce the existing mortgage. In August 2014, the property was refinanced with a 10 year mortgage in the amount of $16,900,000 at 4.34% interest only.  The Joint Venture paid off the prior mortgage of approximately $15,205,000 with the proceeds of the new mortgage and distributed $850,000 to the Partnership. The costs associated with the refinancing were approximately $161,000. At June 30, 2017, the balance of the mortgage before unamortized deferred financing costs is approximately $16,900,000.

In November 2001, the Partnership invested approximately $1,533,000 for a 50% ownership interest in a 40-unit apartment building in Cambridge, Massachusetts. In June 2013, the property was refinanced with a 15 year mortgage in the amount of $10,000,000 at 3.87%, interest only for 3 years and is amortized on a 30-year schedule for the balance of the term. The Joint Venture paid off the prior mortgage of approximately $6,776,000 with the proceeds of the new mortgage. After the refinancing, the Joint Venture made a distribution of $1,610,000 to the Partnership. As a result of the distribution, the carrying value of the investment fell below zero. The Partnership will continue to account for this investment using the equity method of accounting. Although the Partnership has no legal obligation, the Partnership intends to fund its share of any future operating deficits if needed. At June 30, 2017, the balance of this mortgage before unamortized deferred financing costs is approximately $9,835,000. This investment is referred to as 345 Franklin, LLC.

 

20


 

Table of Contents

Summary financial information as of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Hamilton

  

 

 

  

 

 

  

Hamilton

  

 

 

  

Hamilton

  

Hamilton

  

 

 

  

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Properties

  

$

7,798,556

  

$

2,622,021

  

$

6,494,266

  

$

2,812,552

  

$

0

  

$

4,484,449

  

$

6,012,338

  

$

17,871,657

  

$

90,669,576

  

$

138,765,415

 

Cash & Cash Equivalents

 

 

95,520

 

 

108,751

 

 

45,291

 

 

684

 

 

212,237

 

 

58,078

 

 

27,620

 

 

541

 

 

975,232

 

 

1,523,954

 

Rent Receivable

 

 

5,529

 

 

 —

 

 

9,470

 

 

10,842

 

 

825

 

 

18,180

 

 

10,991

 

 

20,212

 

 

150,399

 

 

226,448

 

Real Estate Tax Escrow

 

 

111,718

 

 

 —

 

 

18,889

 

 

 —

 

 

 —

 

 

0

 

 

19,216

 

 

238,391

 

 

273,553

 

 

661,767

 

Prepaid Expenses & Other Assets

 

 

105,580

 

 

1533

 

 

42,394

 

 

770,237

 

 

0

 

 

487,987

 

 

23,196

 

 

108,507

 

 

1,667,709

 

 

3,207,143

 

Total Assets

 

$

8,116,903

 

$

2,732,305

 

$

6,610,310

 

$

3,594,315

 

$

213,062

 

$

5,048,694

 

$

6,093,361

 

$

18,239,308

 

$

93,736,469

 

$

144,384,727

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Notes Payable

 

$

9,886,240

 

$

 —

 

$

9,761,919

 

$

 —

 

$

 —

 

$

 —

 

$

5,883,726

 

$

16,784,966

 

$

82,621,527

 

$

124,938,378

 

Accounts Payable & Accrued Expense

 

 

62,932

 

 

850

 

 

63,851

 

 

10,978

 

 

1,182

 

 

35,122

 

 

48,956

 

 

140,046

 

 

642,256

 

 

1,006,173

 

Advance Rental Pmts & Security Deposits

 

 

251,183

 

 

 —

 

 

210,629

 

 

42,231

 

 

101

 

 

65,705

 

 

119,247

 

 

377,911

 

 

3,412,120

 

 

4,479,127

 

Total Liabilities

 

 

10,200,355

 

 

850

 

 

10,036,399

 

 

53,209

 

 

1,283

 

 

100,827

 

 

6,051,929

 

 

17,302,923

 

 

86,675,903

 

 

130,423,678

 

Partners’ Capital

 

 

(2,083,452)

 

 

2,731,455

 

 

(3,426,089)

 

 

3,541,106

 

 

211,779

 

 

4,947,867

 

 

41,432

 

 

936,385

 

 

7,060,566

 

 

13,961,049

 

Total Liabilities and Capital

 

$

8,116,903

 

$

2,732,305

 

$

6,610,310

 

$

3,594,315

 

$

213,062

 

$

5,048,694

 

$

6,093,361

 

$

18,239,308

 

$

93,736,469

 

$

144,384,727

 

Partners’ Capital %—NERA

 

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

40

%  

 

 

 

Investment in Unconsolidated Joint Ventures

 

$

 

 

$

1,365,727

 

$

 —

 

$

1,770,552

 

$

105,889

 

$

2,473,933

 

$

20,716

 

$

468,192

 

$

2,824,225

 

 

9,029,232

 

Distribution and Loss in Excess of investments in Unconsolidated Joint Ventures

 

$

(1,041,726)

 

$

 —

 

$

(1,713,045)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

(2,754,771)

 

Total Investment in Unconsolidated Joint Ventures (Net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,274,462

 

Total units/condominiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apartments

 

 

48

 

 

 —

 

 

40

 

 

175

 

 

120

 

 

48

 

 

42

 

 

148

 

 

409

 

 

1,030

 

Commercial

 

 

 1

 

 

 1

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

 

Total

 

 

49

 

 

 1

 

 

40

 

 

176

 

 

120

 

 

48

 

 

42

 

 

148

 

 

409

 

 

1,033

 

Units to be retained

 

 

49

 

 

 1

 

 

40

 

 

 1

 

 

 —

 

 

 —

 

 

42

 

 

148

 

 

409

 

 

690

 

Units to be sold

 

 

 —

 

 

 —

 

 

 —

 

 

175

 

 

120

 

 

48

 

 

 —

 

 

 —

 

 

 —

 

 

343

 

Units sold through August 1, 2017

 

 

 —

 

 

 —

 

 

 —

 

 

148

 

 

120

 

 

10

 

 

 —

 

 

 —

 

 

 —

 

 

278

 

Unsold units

 

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

 —

 

 

38

 

 

 —

 

 

 —

 

 

 —

 

 

65

 

Unsold units with deposits for future sale as of  August 1, 2017

 

 

 —

 

 

 —

 

 

 —

 

 

 4

 

 

 —

 

 

 9

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


 

Table of Contents

 

Financial information for the six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Hamilton

    

 

 

    

 

 

    

Hamilton

    

 

 

    

Hamilton

    

Hamilton

    

 

 

    

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

723,284

 

$

120,000

 

$

727,167

 

$

237,200

 

$

5,282

 

$

397,962

 

$

516,798

 

$

1,655,234

 

 

7,545,962

 

$

11,928,889

 

Laundry and Sundry Income

 

 

7,590

 

 

 —

 

 

2,136

 

 

 —

 

 

 —

 

 

 —

 

 

1,270

 

 

18,368

 

 

48,939

 

 

78,303

 

 

 

 

730,874

 

 

120,000

 

 

729,303

 

 

237,200

 

 

5,282

 

 

397,962

 

 

518,068

 

 

1,673,602

 

 

7,594,901

 

 

12,007,192

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

9,929

 

 

850

 

 

14,039

 

 

2,184

 

 

2,148

 

 

5,197

 

 

2,411

 

 

17,237

 

 

95,269

 

 

149,264

 

Depreciation and Amortization

 

 

226,998

 

 

1,415

 

 

173,435

 

 

91,251

 

 

(38,440)

 

 

202,598

 

 

173,810

 

 

490,218

 

 

1,668,723

 

 

2,990,008

 

Management Fees

 

 

31,978

 

 

4,800

 

 

29,464

 

 

8,803

 

 

207

 

 

14,869

 

 

20,466

 

 

66,082

 

 

175,469

 

 

352,138

 

Operating

 

 

39,707

 

 

 —

 

 

36,420

 

 

100

 

 

38

 

 

1,374

 

 

52,003

 

 

183,191

 

 

617,663

 

 

930,496

 

Renting

 

 

9,516

 

 

 —

 

 

12,248

 

 

332

 

 

181

 

 

181

 

 

4,104

 

 

21,398

 

 

50,757

 

 

98,717

 

Repairs and Maintenance

 

 

49,551

 

 

3,180

 

 

51,430

 

 

115,717

 

 

3,100

 

 

192,826

 

 

39,286

 

 

327,427

 

 

590,844

 

 

1,373,361

 

Taxes and Insurance

 

 

121,101

 

 

29,080

 

 

66,970

 

 

56,565

 

 

1,213

 

 

87,349

 

 

62,894

 

 

218,416

 

 

859,625

 

 

1,503,213

 

 

 

 

488,780

 

 

39,325

 

 

384,006

 

 

274,952

 

 

(31,553)

 

 

504,394

 

 

354,974

 

 

1,323,969

 

 

4,058,350

 

 

7,397,197

 

Income Before Other Income

 

 

242,094

 

 

80,675

 

 

345,297

 

 

(37,752)

 

 

36,835

 

 

(106,432)

 

 

163,094

 

 

349,633

 

 

3,536,551

 

 

4,609,995

 

Other Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(164,394)

 

 

 —

 

 

(197,793)

 

 

(777)

 

 

(2)

 

 

(41,741)

 

 

(118,019)

 

 

(382,898)

 

 

(2,381,971)

 

 

(3,287,595)

 

Gain on Sale of Real Estate

 

 

 —

 

 

 —

 

 

 —

 

 

939,332

 

 

93,392

 

 

1,337,920

 

 

 —

 

 

 —

 

 

 —

 

 

2,370,644

 

 

 

 

(164,394)

 

 

 —

 

 

(197,793)

 

 

938,555

 

 

93,390

 

 

1,296,179

 

 

(118,019)

 

 

(382,898)

 

 

(2,381,970)

 

 

(916,951)

 

Net Income (Loss)

 

$

77,700

 

$

80,675

 

$

147,504

 

$

900,803

 

$

130,225

 

$

1,189,747

 

$

45,075

 

$

(33,265)

 

$

1,154,581

 

$

3,693,044

 

Net Income (Loss)—NERA 50%

    

$

38,851

 

$

40,338

 

$

73,751

 

$

450,401

 

$

65,113

 

$

594,874

 

$

22,538

 

$

(16,633)

 

 

 

 

 

1,269,232

 

Net Income —NERA 40%

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

461,830

 

 

461,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,731,062

 

 

 

Financial information for the three months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Hamilton

    

 

 

    

 

 

    

Hamilton

    

 

 

    

Hamilton

    

Hamilton

    

 

 

    

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

322,090

 

$

60,000

 

$

354,750

 

$

106,802

 

$

2,415

 

$

175,926

 

$

260,009

 

$

828,931

 

$

3,735,167

 

$

5,846,090

 

Laundry and Sundry Income

 

 

4,059

 

 

 —

 

 

1,192

 

 

 —

 

 

 —

 

 

 —

 

 

595

 

 

9,421

 

 

24,606

 

 

39,873

 

 

 

 

326,149

 

 

60,000

 

 

355,942

 

 

106,802

 

 

2,415

 

 

175,926

 

 

260,604

 

 

838,352

 

 

3,759,773

 

 

5,885,963

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

4,729

 

 

425

 

 

7,649

 

 

1,220

 

 

1,325

 

 

2,131

 

 

1,206

 

 

6,219

 

 

45,082

 

 

69,986

 

Depreciation and Amortization

 

 

113,698

 

 

707

 

 

87,013

 

 

45,625

 

 

(39,670)

 

 

121,346

 

 

87,136

 

 

247,902

 

 

837,036

 

 

1,500,793

 

Management Fees

 

 

14,598

 

 

2,400

 

 

13,506

 

 

4,039

 

 

73

 

 

6,219

 

 

9,326

 

 

31,979

 

 

90,917

 

 

173,057

 

Operating

 

 

16,070

 

 

 —

 

 

13,275

 

 

138

 

 

19

 

 

721

 

 

24,128

 

 

79,032

 

 

264,809

 

 

398,192

 

Renting

 

 

5,794

 

 

 —

 

 

10,112

 

 

270

 

 

119

 

 

119

 

 

2,783

 

 

11,372

 

 

29,431

 

 

60,000

 

Repairs and Maintenance

 

 

28,820

 

 

3,180

 

 

32,130

 

 

60,214

 

 

1,118

 

 

86,223

 

 

18,432

 

 

163,301

 

 

359,211

 

 

752,629

 

Taxes and Insurance

 

 

60,634

 

 

14,549

 

 

30,253

 

 

27,188

 

 

351

 

 

41,255

 

 

31,450

 

 

108,603

 

 

428,167

 

 

742,450

 

 

 

 

244,343

 

 

21,261

 

 

193,938

 

 

138,694

 

 

(36,665)

 

 

258,014

 

 

174,461

 

 

648,408

 

 

2,054,653

 

 

3,697,107

 

Income Before Other Income

 

 

81,806

 

 

38,739

 

 

162,004

 

 

(31,892)

 

 

39,080

 

 

(82,088)

 

 

86,143

 

 

189,944

 

 

1,705,120

 

 

2,188,856

 

Other Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(85,403)

 

 

 —

 

 

(98,390)

 

 

(274)

 

 

 —

 

 

(216)

 

 

(58,928)

 

 

(192,214)

 

 

(1,194,800)

 

 

(1,630,225)

 

Interest Income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Gain on sale of real estate

 

 

 —

 

 

 —

 

 

 —

 

 

228,573

 

 

93,392

 

 

1,337,920

 

 

 —

 

 

 —

 

 

 —

 

 

1,659,885

 

 

 

 

(85,403)

 

 

 —

 

 

(98,390)

 

 

228,299

 

 

93,392

 

 

1,337,704

 

 

(58,928)

 

 

(192,214)

 

 

(1,194,800)

 

 

29,660

 

Net Income (Loss)

 

$

(3,597)

 

$

38,739

 

$

63,614

 

$

196,407

 

$

132,472

 

$

1,255,616

 

$

27,215

 

$

(2,270)

 

$

510,320

 

$

2,218,516

 

Net Income (Loss)—NERA 50%

    

$

(1,798)

 

$

19,370

 

$

31,806

 

$

98,204

 

$

66,236

 

$

627,807

 

$

13,607

 

$

(1,135)

 

 

 

 

 

854,096

 

Net Income (Loss)—NERA 40%

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

204,129

 

 

204,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,058,225

 

22


 

Table of Contents

Future annual mortgage maturities at June 30, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hamilton

 

345

 

Hamilton

 

Hamilton

 

Hamilton

 

Hamilton on

 

Dexter

 

 

 

 

Period End

    

Essex 81

    

Franklin

    

1025

    

Bay Apts

    

Minuteman

    

Main Apts

    

Park

    

Total

 

6//30/2018

 

$

 —

 

$

186,608

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

1,630,749

 

$

1,817,357

 

6/30/2019

 

 

 —

 

 

193,959

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,723,938

 

 

1,917,897

 

6/30/2020

 

 

 —

 

 

201,599

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

79,402,271

 

 

79,603,870

 

6/30/2021

 

 

 —

 

 

209,541

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

209,541

 

6/30/2022

 

 

 —

 

 

217,796

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

217,796

 

Thereafter

 

 

10,000,000

 

 

8,825,660

 

 

 —

 

 

 —

 

 

6,000,000

 

 

16,900,000

 

 

 —

 

 

41,725,660

 

 

 

 

10,000,000

 

 

9,835,163

 

 

 —

 

 

 —

 

 

6,000,000

 

 

16,900,000

 

 

82,756,958

 

 

125,492,121

 

Less: unamortized deferred financing costs

 

 

(113,760)

 

 

(73,244)

 

 

 —

 

 

 —

 

 

(116,274)

 

 

(115,034)

 

 

(135,431)

 

 

(553,743)

 

 

 

$

9,886,240

 

$

9,761,919

 

$

 —

 

$

 —

 

$

5,883,726

 

$

16,784,966

 

$

82,621,527

 

$

124,938,378

 

 

At June 30, 2017 the weighted average interest rate on the above mortgages was 5.00%. The effective rate was 5.08% including the amortization expense of deferred financing costs.

 

23


 

Table of Contents

 

 

Summary financial information as of June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Hamilton

  

 

 

  

 

 

  

Hamilton

  

 

 

  

Hamilton

  

Hamilton

  

 

 

  

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Properties

 

$

8,233,823

 

$

2,617,251

 

$

6,607,281

 

$

4,829,662

 

$

241,741

 

$

6,017,735

 

$

6,200,372

 

$

18,146,220

 

$

93,105,409

 

$

145,999,494

 

Cash & Cash Equivalents

 

 

111,271

 

 

42,323

 

 

183,078

 

 

288

 

 

28,695

 

 

4,943

 

 

170

 

 

172,519

 

 

1,096,874

 

 

1,640,161

 

Rent Receivable

 

 

46,713

 

 

 —

 

 

8,347

 

 

18,732

 

 

2,400

 

 

12,257

 

 

 —

 

 

13,230

 

 

81,431

 

 

183,110

 

Real Estate Tax Escrow

 

 

83,814

 

 

 —

 

 

16,713

 

 

83,537

 

 

 —

 

 

37,780

 

 

46,263

 

 

37,745

 

 

233,654

 

 

539,506

 

Prepaid Expenses & Other Assets

 

 

105,562

 

 

1351

 

 

37,218

 

 

68,884

 

 

1,891

 

 

74,021

 

 

159,492

 

 

109,424

 

 

2,132,688

 

 

2,690,531

 

Total Assets

 

$

8,581,183

 

$

2,660,925

 

$

6,852,637

 

$

5,001,103

 

$

274,727

 

$

6,146,736

 

$

6,406,297

 

$

18,479,138

 

$

96,650,056

 

$

151,052,802

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Notes Payable

 

$

9,872,451

 

$

 —

 

$

9,920,098

 

$

4,693,693

 

$

 —

 

$

4,463,701

 

$

5,169,696

 

$

16,768,914

 

$

84,018,197

 

$

134,906,750

 

Accounts Payable & Accrued Expense

 

 

54,553

 

 

850

 

 

67,207

 

 

28,749

 

 

1,395

 

 

9,232

 

 

57,401

 

 

130,506

 

 

636,852

 

 

986,745

 

Advance Rental Pmts& Security Deposits

 

 

196,372

 

 

 —

 

 

259,754

 

 

89,470

 

 

2,373

 

 

98,765

 

 

110,976

 

 

357,657

 

 

3,027,025

 

 

4,142,392

 

Total Liabilities

 

 

10,123,376

 

 

850

 

 

10,247,059

 

 

4,811,912

 

 

3,768

 

 

4,571,698

 

 

5,338,073

 

 

17,257,077

 

 

87,682,074

 

 

140,035,887

 

Partners’ Capital

 

 

(1,542,193)

 

 

2,660,075

 

 

(3,394,422)

 

 

189,191

 

 

270,959

 

 

1,575,038

 

 

1,068,224

 

 

1,222,061

 

 

8,967,982

 

 

11,016,915

 

Total Liabilities and Capital

 

$

8,581,183

 

$

2,660,925

 

$

6,852,637

 

$

5,001,103

 

$

274,727

 

$

6,146,736

 

$

6,406,297

 

$

18,479,138

 

$

96,650,056

 

$

151,052,802

 

Partners’ Capital %—NERA

 

 

50

%

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

50

%  

 

40

%  

 

 

 

Investment in Unconsolidated Joint Ventures

 

$

 

 

$

1,330,037

 

$

 —

 

$

94,595

 

$

135,479

 

$

787,518

 

$

534,111

 

$

611,031

 

$

3,587,193

 

$

7,079,963

 

Distribution and Loss in Excess of investments in Unconsolidated Joint Ventures

 

$

(771,097)

 

$

 —

 

$

(1,697,211)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

(2,468,308)

 

Total Investment in Unconsolidated Joint Ventures (Net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,611,654

 

Total units/condominiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apartments

 

 

48

 

 

 —

 

 

40

 

 

175

 

 

120

 

 

48

 

 

42

 

 

148

 

 

409

 

 

1,030

 

Commercial

 

 

1

 

 

1

 

 

 —

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3

 

Total

 

 

49

 

 

1

 

 

40

 

 

176

 

 

120

 

 

48

 

 

42

 

 

148

 

 

409

 

 

1,033

 

Units to be retained

 

 

49

 

 

1

 

 

40

 

 

49

 

 

 —

 

 

48

 

 

42

 

 

148

 

 

409

 

 

786

 

Units to be sold

 

 

 —

 

 

 —

 

 

 —

 

 

127

 

 

120

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

247

 

Units sold through May1, 2016

 

 

 —

 

 

 —

 

 

 —

 

 

127

 

 

118

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

245

 

Unsold units

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2

 

Unsold units with deposits for future sale as of May 1, 2016

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24


 

Table of Contents

 

Financial information for the six months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Hamilton

    

 

 

    

 

 

    

Hamilton

    

 

 

    

Hamilton

    

Hamilton

    

 

 

    

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

767,917

 

$

120,000

 

$

724,962

 

$

472,476

 

$

27,690

 

$

494,357

 

$

491,754

 

$

1,604,997

 

$

7,411,976

 

$

12,116,129

 

Laundry and Sundry Income

 

 

8,357

 

 

 —

 

 

2,097

 

 

 —

 

 

 —

 

 

 —

 

 

299

 

 

20,634

 

 

54,646

 

 

86,033

 

 

 

 

776,274

 

 

120,000

 

 

727,059

 

 

472,476

 

 

27,690

 

 

494,357

 

 

492,053

 

 

1,625,631

 

 

7,466,622

 

 

12,202,162

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

20,096

 

 

889

 

 

16,198

 

 

2,745

 

 

2,984

 

 

5,870

 

 

2,600

 

 

20,131

 

 

97,201

 

 

168,714

 

Depreciation and Amortization

 

 

225,194

 

 

1,415

 

 

173,831

 

 

118,064

 

 

12,584

 

 

158,855

 

 

169,581

 

 

477,061

 

 

1,618,053

 

 

2,954,638

 

Management Fees

 

 

30,050

 

 

4,800

 

 

30,825

 

 

17,927

 

 

1,076

 

 

19,604

 

 

19,922

 

 

64,262

 

 

165,333

 

 

353,799

 

Operating

 

 

50,358

 

 

 —

 

 

36,666

 

 

585

 

 

200

 

 

1,008

 

 

46,231

 

 

151,015

 

 

608,261

 

 

894,324

 

Renting

 

 

6,839

 

 

 —

 

 

10,540

 

 

1,789

 

 

 —

 

 

954

 

 

4,802

 

 

9,516

 

 

55,595

 

 

90,035

 

Repairs and Maintenance

 

 

76,084

 

 

3,150

 

 

29,334

 

 

155,898

 

 

13,569

 

 

200,605

 

 

110,941

 

 

227,253

 

 

593,075

 

 

1,409,909

 

Taxes and Insurance

 

 

115,308

 

 

30,602

 

 

64,423

 

 

86,209

 

 

7,071

 

 

83,979

 

 

59,499

 

 

255,822

 

 

733,758

 

 

1,436,671

 

 

 

 

523,929

 

 

40,856

 

 

361,817

 

 

383,217

 

 

37,484

 

 

470,875

 

 

413,576

 

 

1,205,060

 

 

3,871,276

 

 

7,308,090

 

Income Before Other Income

 

 

252,345

 

 

79,144

 

 

365,242

 

 

89,259

 

 

(9,794)

 

 

23,482

 

 

78,477

 

 

420,571

 

 

3,595,346

 

 

4,894,072

 

Other Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(141,647)

 

 

 —

 

 

(199,009)

 

 

(138,688)

 

 

(59)

 

 

(130,978)

 

 

(152,347)

 

 

(383,871)

 

 

(2,434,648)

 

 

(3,581,247)

 

Interest Income

 

 

 —

 

 

 —

 

 

 —

 

 

 9

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 9

 

Gain on sale of real estate

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

235,470

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

235,470

 

 

 

 

(141,647)

 

 

 —

 

 

(199,009)

 

 

(138,679)

 

 

235,411

 

 

(130,978)

 

 

(152,347)

 

 

(383,871)

 

 

(2,434,648)

 

 

(3,345,768)

 

Net Income (Loss)

 

$

110,698

 

$

79,144

 

$

166,233

 

$

(49,420)

 

$

225,617

 

$

(107,496)

 

$

(73,870)

 

$

36,700

 

$

1,160,698

 

$

1,548,304

 

Net Income (Loss)—NERA 50%

    

$

55,350

 

$

39,572

 

$

83,116

 

$

(24,710)

 

$

112,809

 

$

(53,749)

 

$

(36,936)

 

$

18,350

 

 

 

 

 

193,802

 

Net Income (Loss)—NERA 40%

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

464,280

 

 

464,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

658,082

 

 

 

 

 

 

 

Financial information for the three months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Hamilton

    

 

 

    

 

 

    

Hamilton

    

 

 

    

Hamilton

    

Hamilton

    

 

 

    

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

369,120

 

$

60,000

 

$

358,043

 

$

237,156

 

$

11,025

 

$

245,530

 

$

243,193

 

$

806,669

 

$

3,694,670

 

$

6,025,406

Laundry and Sundry Income

 

 

4,375

 

 

 —

 

 

507

 

 

 —

 

 

 —

 

 

 —

 

 

53

 

 

10,051

 

 

29,114

 

 

44,100

 

 

 

373,495

 

 

60,000

 

 

358,550

 

 

237,156

 

 

11,025

 

 

245,530

 

 

243,246

 

 

816,720

 

 

3,723,784

 

 

6,069,506

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

4,545

 

 

464

 

 

6,211

 

 

1,319

 

 

1,085

 

 

3,890

 

 

1,293

 

 

8,623

 

 

47,931

 

 

75,361

Depreciation and Amortization

 

 

113,230

 

 

707

 

 

86,915

 

 

58,999

 

 

6,291

 

 

79,462

 

 

84,896

 

 

239,165

 

 

813,046

 

 

1,482,711

Management Fees

 

 

15,366

 

 

2,400

 

 

15,988

 

 

8,402

 

 

406

 

 

9,362

 

 

9,588

 

 

32,337

 

 

84,237

 

 

178,086

Operating

 

 

19,855

 

 

 —

 

 

16,542

 

 

220

 

 

48

 

 

714

 

 

22,568

 

 

81,925

 

 

248,392

 

 

390,264

Renting

 

 

6,299

 

 

 —

 

 

10,355

 

 

1,789

 

 

 —

 

 

477

 

 

947

 

 

4,013

 

 

27,106

 

 

50,986

Repairs and Maintenance

 

 

42,149

 

 

3,150

 

 

12,627

 

 

78,417

 

 

5,551

 

 

100,814

 

 

57,281

 

 

131,233

 

 

329,444

 

 

760,666

Taxes and Insurance

 

 

57,873

 

 

15,431

 

 

30,407

 

 

43,260

 

 

2,855

 

 

42,070

 

 

30,075

 

 

128,012

 

 

365,599

 

 

715,582

 

 

 

259,317

 

 

22,152

 

 

179,045

 

 

192,406

 

 

16,236

 

 

236,789

 

 

206,648

 

 

625,308

 

 

1,915,755

 

 

3,653,656

Income Before Other Income

 

 

114,178

 

 

37,848

 

 

179,505

 

 

44,750

 

 

(5,211)

 

 

8,741

 

 

36,598

 

 

191,412

 

 

1,808,029

 

 

2,415,850

Other Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(71,039)

 

 

 —

 

 

(99,505)

 

 

(69,173)

 

 

(11)

 

 

(65,065)

 

 

(76,031)

 

 

(191,988)

 

 

(1,214,929)

 

 

(1,787,741)

Interest Income

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 5

Gain on sale of Real Estate

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

67,462

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

67,462

 

 

 

(71,039)

 

 

 —

 

 

(99,505)

 

 

(69,168)

 

 

67,451

 

 

(65,065)

 

 

(76,031)

 

 

(191,988)

 

 

(1,214,929)

 

 

(1,720,274)

Net Income (Loss)

 

$

43,139

 

$

37,848

 

$

80,000

 

$

(24,418)

 

$

62,240

 

$

(56,324)

 

$

(39,433)

 

$

(576)

 

$

593,100

 

$

695,576

Net Income (Loss)—NERA 50%

    

$

21,570

 

$

18,924

 

$

40,000

 

$

(12,209)

 

$

31,120

 

$

(28,162)

 

$

(19,717)

 

$

(288)

 

 

 

 

 

51,238

Net Income (Loss)—NERA 40%

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

237,240

 

 

237,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

288,478

 

 

 

 

 

 

 

 

 

 

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NOTE 15. IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS

In February 2016, the FASB issued ASU 2016-02, modifying the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for in the same manner as operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The guidance supersedes previously issued guidance under ASC Topic 840 “Leases”. The guidance is effective on January 1, 2019, with early adoption permitted.  The Partnership is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the Partnership’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-07, which eliminates a requirement for the retroactive adjustment on a step by step basis of the investment, results of operations, and retained earnings as if the equity method had been effective during all previous periods that the investment had been held when an investment qualifies for equity method accounting due to an increase in the level of ownership or degree of influence. The cost of acquiring the additional interest in the investee is to be added to the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. This guidance is to be applied on a prospective basis and is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU 2016-07 will have no significant impact on the Partnership’s consolidated financial statements. 

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues and intends to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. The Partnership is currently in the process of evaluating the impact the adoption of ASU 2016-15 will have on the Partnership’s consolidated statement of cash flows.

 

 

NOTE 16. SUBSEQUENT EVENTS

 

On July 6, 2017, Woodland Park Partners, LLC, a newly formed subsidiary of the Partnership, purchased the Woodland Park Apartments, a 126-unit apartment complex located at 264-290 Grove Street, Newton, Massachusetts (the “Property”), for a purchase price of $45,500,000.   

 

To fund the purchase price, the Partnership borrowed $25,000,000 under its outstanding line of credit with KeyBank, NA, and $16,000,000 from HBC Holdings, LLC, a Massachusetts limited liability company controlled by Harold Brown. The loan from HBC Holdings will mature on July 16, 2018, with interest only at 4.75%.  The balance of the purchase price was funded by the Partnership’s cash reserves.

 

 

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Certain information contained herein includes forward looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Liquidation Reform Act of 1995 (the “Act”). Forward looking statements in this report, or which management may make orally or in written form from time to time, reflect management’s good faith belief when those statements are made, and are based on information currently available to management. Caution should be exercised in interpreting and relying on such forward looking statements, the realization of which may be impacted by known and unknown risks and uncertainties, events that may occur subsequent to the forward looking statements, and other factors which may be beyond the Partnership’s control and which can materially affect the Partnership’s actual results, performance or achievements for 2017 and beyond. Should one or more of the risks or uncertainties mentioned below materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update our forward looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Since the Partnership’s long-term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose.  If available acquisitions do not meet the Partnership’s investment criteria, the Partnership may purchase additional depositary receipts.  The Partnership will consider refinancing existing properties if the Partnership’s cash reserves are insufficient to repay existing mortgages or if the Partnership needs additional funds for future acquisitions.

 

The second quarter performance is consistent with Management’s expectations as noted in the first quarter 10Q.  Revenue growth for the first and second quarters has come from both the previous year’s rental cycle and improved renewal rates during this current season.  At the beginning of the year, Management focused on forward looking leasing exposure and market/renewal revenue opportunities throughout the portfolio.  The past six months have begun to yield improved results compared to last year on same store sales.  Management expects the current revenue growth to continue for the balance of the year and will be evident over the next four quarters. Excluding Depreciation and Amortization from operating expenses, same store operating expenses grew by 1.2%, NOI (Net Operating Income = Income before Other Income and Discontinued Operations plus Depreciation and Amortization) grew by 7.5% and revenue grew by 4.5%.  Management anticipates similar performance of the Partnership holdings for the balance of 2017.  

Management started marketing the remaining condominiums at Hamilton Bay and 1025 Hancock Street in 2016 and expects a complete sellout by the end of 2018.  As expected, unit sale prices have exceeded the unit sales prices when the buildings were converted 10 years ago and have steadily risen since marketing began in June 2016.  Management originally estimated a sellout of both properties totaling $23 million and now has raised expectations to $25 million.  With the past retirement of debt of approximately $8 million, rehab and other costs, Management anticipates that nearly $16 million will be returned to the Joint Ventures resulting in approximately $8 million to the Partnership by 2018.

The acquisition of Woodland Park on July 6th was a key purchase for the Partnership.  The use of the Partnership’s line of credit, loan from HBC Holdings, LLC (a related party) and partnership funds allowed the Partnership to acquire a well-run and extremely well located, transit oriented property in Newton, Massachusetts.   Management immediately engaged in improving revenue and reducing operating costs.  The property has already begun to meet expectations on revenue for new incoming residents and upcoming renewals.  Modest capital improvements designed to improve curb appeal and improve utility costs are slated for the next three months.   The Partnership’s line of credit with an original expiration date of July 31, 2017 has been extended for 90 days.  Management is currently working on refinancing the debt with HBC Holdings and obtaining a new long-term debt on the property.  This refinancing is expected to close during the third quarter of 2017. 

 

 

 

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The Stock Repurchase Program that was initiated in 2007 has purchased 1,365,306 Depositary Receipts through June 30, 2017 or approximately 32% of the outstanding Class A Depositary Receipts.  During the second quarter, the Partnership did not purchase any Depositary Receipts. Management anticipates purchases for 2017  to be less than 2016.

 

At August 1, 2017, Harold Brown, his brother Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 47% 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 controls 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 a director. The 75% of the issued and outstanding Class B units of the Partnership, controlled by Harold Brown, are owned by HBC Holdings LLC, an entity of which he is the manager.

 

In addition to 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. Additionally, 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.

 

Residential tenants sign a one year lease. During the six months ended June 30, 2017, tenant renewals were approximately 63% with an average rental increase of approximately 4.0%, new leases accounted for approximately 37% with rental rate increases of approximately 2.9 %.  During the six months ended June 30, 2017, leasing commissions were approximately $53,000 compared to approximately $101,000 for the six months ended June 30, 2016, a decrease of approximately $48,000 (48.0%) from 2016. Tenant concessions were approximately $18,000 for the six months ended June 30, 2017, compared to approximately $32,000 for the six months ended June 30, 2016, a decrease of approximately $14,000 (44.0%).  Tenant improvements were approximately $870,000 for the six months ended June 30, 2017, compared to approximately $1,145,000 for the six months ended June 30, 2016, a decrease of approximately $275,000 (24.0%).

 

Hamilton accounted for approximately 2.7% of the repair and maintenance expenses paid for by the Partnership during the six months ended June 30, 2017 and 5.2 % during the six months ended June 30, 2016. 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, carpentry services, and snow removal for those properties close to Hamilton’s headquarters. Several of the larger Partnership properties have their own maintenance staff. Those properties that do not have their own maintenance staff and 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 $122,000 (82.2 %) and approximately $102,000 (86.4%) of the legal services paid for by the Partnership during the six months ended June 30, 2017 and 2016, respectively.

 

Additionally, as described in Note 3 to the consolidated financial statements, The Hamilton Company receives similar fees from the Investment Properties.

 

The Partnership requires that three bids be obtained for construction contracts in excess of $15,000. 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. Hamilton’s architectural department also provides services to the Partnership on an as-needed basis. During the six months ended June 30, 2017, Hamilton provided the Partnership approximately $83,000 in construction and architectural services, compared to approximately $128,000 for the six months ended June 30, 2016.

 

Hamilton’s accounting staff perform bookkeeping and accounting functions for the Partnership. During the six months ended June 30, 2017 and 2016, Hamilton charged the Partnership $62,500 for bookkeeping and accounting services. For more information on related party transactions, see Note 3 to the Consolidated Financial Statements.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the 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. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. The Partnership’s critical accounting policies are those which require assumptions to be made about such matters that are highly uncertain. Different estimates could have a material effect on the Partnership’s financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances. See Note 1 to the Consolidated Financial Statements, Principles of Consolidation.

 

Revenue Recognition:  Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Concessions made on residential leases are also accounted for on the straight-line basis.

 

Rental Properties:  Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

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

 

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

 

Impairment:  On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties may be impaired. A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the

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carrying amount of the property over the fair value of the property. The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved. The Partnership has not recognized an impairment loss during the first six months of 2017.

 

Investments in Joint Ventures:  The Partnership accounts for its 40%‑50% ownership in the Investment Properties under the equity method of accounting, as it exercises significant influence over, but does not control these entities. These investments are recorded initially at cost, as Investments in Joint Ventures, and subsequently adjusted for the Partnership’s share in earnings, cash contributions and distributions. Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss from the Partnership is included on the consolidated statements of income. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses.

The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that equity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.

 

With respect to investments in and advances to the Investment Properties, 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 management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.

 

Legal Proceedings:  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.

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RESULTS OF OPERATIONS

 

Three Months Ended June 30,  2017 and June 30, 2016

 

The Partnership and its Subsidiary Partnerships earned income before interest expense, income from investments in unconsolidated joint ventures, gain on sale of real estate and other income and expense of approximately $3,971,000 during the three months ended June 30, 2017, compared to approximately $3,235,000 for the three months ended June 30, 2016, an increase of approximately $736,000 (22.8%).

 

The rental activity is summarized as follows, excluding the subsequent acquisition of Woodland Park Apartments:

 

 

 

 

 

 

 

 

 

Occupancy Date

 

 

    

August 1, 2017

    

August 1, 2016

 

Residential

 

 

 

 

 

Units

 

2,525

 

2,525

 

Vacancies

 

101

 

75

 

Vacancy rate

 

4.0

%  

3.0

%

Commercial

 

 

 

 

 

Total square feet

 

108,043

 

108,043

 

Vacancy

 

 —

 

1,950

 

Vacancy rate

 

0.0

%  

1.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income (in thousands)

 

 

 

Three Months Ended  June 30, 

 

 

 

2017

 

2016

 

 

    

Total

    

Continuing

    

Total

    

Continuing

 

 

 

Operations

 

Operations

 

Operations

 

Operations

 

Total rents

 

$

12,684

 

$

12,684

 

$

12,136

 

$

12,136

 

Residential percentage

 

 

93

%

 

93

%

 

93

%

 

93

%

Commercial percentage

 

 

 7

%  

 

 7

%  

 

 7

%  

 

 7

%

Contingent rentals

 

$

166

 

$

166

 

$

146

 

$

146

 

 

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Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Dollar

 

Percent

 

 

    

2017

    

2016

    

Change

    

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

12,683,517

 

$

12,136,355

 

$

547,162

 

4.5

%

Laundry and sundry income

 

 

104,274

 

 

117,909

 

 

(13,635)

 

(11.6)

%

 

 

 

12,787,791

 

 

12,254,264

 

 

533,527

 

4.4

%

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

463,008

 

 

455,160

 

 

7,848

 

1.7

%

Depreciation and amortization

 

 

3,009,698

 

 

3,060,994

 

 

(51,296)

 

(1.7)

%

Management fee

 

 

518,533

 

 

501,288

 

 

17,245

 

3.4

%

Operating

 

 

1,032,064

 

 

1,069,692

 

 

(37,628)

 

(3.5)

%

Renting

 

 

94,532

 

 

155,962

 

 

(61,430)

 

(39.4)

%

Repairs and maintenance

 

 

2,053,272

 

 

2,193,186

 

 

(139,914)

 

(6.4)

%

Taxes and insurance

 

 

1,646,053

 

 

1,583,385

 

 

62,668

 

4.0

%

 

 

 

8,817,160

 

 

9,019,667

 

 

(202,507)

 

(2.2)

%

Income Before Other Income  (Expense)

 

 

3,970,631

 

 

3,234,597

 

 

736,034

 

22.8

%

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

404

 

 

203

 

 

201

 

99.0

%

Interest expense

 

 

(2,545,553)

 

 

(2,542,692)

 

 

(2,861)

 

0.1

%

Income  from investments in unconsolidated joint ventures

 

 

1,058,225

 

 

288,478

 

 

769,747

 

266.8

%

 

 

 

(1,486,924)

 

 

(2,254,011)

 

 

767,087

 

(34.0)

%

Net Income

 

$

2,483,707

 

$

980,586

 

$

1,503,121

 

153.3

%

 

Rental income for the three months ended June 30, 2017 was approximately $12,683,000, compared to approximately $12,136,000 for the three months ended June 30, 2016, an increase of approximately $547,000 (4.5%). The factors that can be attributed to this increase are as follows:   Rental income has increased at a number of properties due to increased demand and increases in rental rates. The Partnership Properties with the most significant increases in rental income include, Westgate Apartments, 1144 Commonwealth Avenue, Hamilton Oaks, Westside Colonial, School Street, Hamilton Green, and Captain Parker, with increases of approximately $87,000, $74,000, $51,000, $47,000, $41,000, $36,000 and $36,000 respectively. Included in rental income is contingent rentals collected on commercial properties. Contingent rentals include such charges as bill backs of common area maintenance charges, real estate taxes, and utility charges.

 

Operating expenses for the three months ended June 30, 2017 were approximately $8,817,000 compared to approximately $9,020,000 for the three months ended June 30, 2016, a decrease of approximately $203,000 (2.2%).  The factors contributing to this net decrease are a decrease in repairs and maintenance costs of approximately $ 140,000 (6.4%), a decrease in renting expenses of approximately $61,000 (39.4%), and a decrease in depreciation and amortization costs of approximately $51,000 (1.7%), partially offset by an increase in taxes and insurance of approximately $63,000 (4.0%).

 

Interest expense for the three months ended June 30, 2017 was approximately $2,546,000 compared to approximately $2,543,000 for the three months ended June 30, 2016,  an increase of approximately $3,000 (0.1%). 

 

At June 30, 2017, the Partnership has between a 40% and 50% ownership interests in nine different Investment Properties. See a description of these properties included in the section titled Investment Properties as well as Note 14 to the Consolidated Financial Statements for a detail of the financial information of each Investment Property.

 

As described in Note 14 to the Consolidated Financial Statements, the Partnership’s share of the net income  from the Investment Properties was approximately $1,058,000 for the three months ended June 30, 2017, compared to net income of approximately $288,000 for the three months ended June 30, 2016,  an increase in income of approximately $770,000 (266.8%). This increase is primarily due to a gain on the sale of real estate of approximately $1,660,000 on the sale of 13 units at Hamilton Bay LLC,  Hamilton 1025, and Hamilton Bay Sales, compared to a gain of approximately $67,000  for the sale of one unit at Hamilton Bay LLC for the three months ended June 30, 2016. Included in the income for the three months ended June 30, 2017 is depreciation and amortization expense of

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approximately $1,501,000. The proportional income for the three months ended June 30, 2017 from the investment in Dexter Park is approximately $204,000.

 

As a result of the changes discussed above, net income for the three months ended June 30, 2017 was approximately $2,483,000 compared to income of approximately $980,000 for the three months ended June 30, 2016, an increase in income of approximately $1,503,000 (153.3 %).

 

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Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016:

 

The Partnership and its Subsidiary Partnerships earned income before interest expense, income from investments in unconsolidated joint ventures and other income and expense of approximately $7,712,000 during the six months ended June 30, 2017, compared to approximately $6,649,000 for the six months ended June 30, 2016, an increase of approximately $1,063,000 (16.0  %).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Dollar

 

Percent

 

 

    

2017

    

2016

    

Change

    

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

25,314,962

 

$

24,209,211

 

$

1,105,751

 

4.6

%

Laundry and sundry income

 

 

216,436

 

 

228,341

 

 

(11,905)

 

(5.2)

%

 

 

 

25,531,398

 

 

24,437,552

 

 

1,093,846

 

4.5

%

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

988,744

 

 

953,416

 

 

35,328

 

3.7

%

Depreciation and amortization

 

 

5,982,753

 

 

6,088,148

 

 

(105,395)

 

(1.7)

%

Management fee

 

 

1,055,248

 

 

1,001,495

 

 

53,753

 

5.4

%

Operating

 

 

2,746,025

 

 

2,493,937

 

 

252,088

 

10.1

%

Renting

 

 

180,735

 

 

243,226

 

 

(62,491)

 

(25.7)

%

Repairs and maintenance

 

 

3,508,894

 

 

3,820,886

 

 

(311,992)

 

(8.2)

%

Taxes and insurance

 

 

3,356,457

 

 

3,187,255

 

 

169,202

 

5.3

%

 

 

 

17,818,856

 

 

17,788,363

 

 

30,493

 

0.2

%

Income Before Other Income ( Expense)

 

 

7,712,542

 

 

6,649,189

 

 

1,063,353

 

16.0

%

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

716

 

 

405

 

 

311

 

76.8

%

Interest (expense)

 

 

(5,066,379)

 

 

(5,096,325)

 

 

29,946

 

(0.6)

%

Income  from investments in unconsolidated joint ventures

 

 

1,731,062

 

 

658,082

 

 

1,072,980

 

163.0

%

 

 

 

(3,334,601)

 

 

(4,437,838)

 

 

1,103,237

 

(24.9)

%

Net Income

 

$

4,377,941

 

$

2,211,351

 

$

2,166,590

 

98.0

%

 

Rental income for the six months ended June 30, 2017 was approximately $25,315,000, compared to approximately $24,209,000 for the six months ended June 30, 2016, an increase of approximately $1,106,000 (4.6 %).                             Rental income has increased at a number of properties due to increased demand and increases in rental rates. The Partnership Properties with the most significant increases in rental income include, Westgate Apartments, 1144 Commonwealth Avenue, School Street,  Hamilton Oaks, Captain Parker, Westside Colonial, and 140 North Beacon Street,  with increases of approximately $203,000, $156,000, $98,000, $93,000, $86,000,  $76,000 and $65,000 respectively. Included in rental income is contingent rentals collected on commercial properties. Contingent rentals include such charges as bill backs of common area maintenance charges, real estate taxes, and utility charges.

 

Operating expenses for the six months ended June 30, 2017 were approximately $17,818,000 compared to approximately $17,788,000 for the six months ended June 30, 2016, an increase of approximately $ 30,000, (0.2%). The factors contributing to this net increase are an increase in operating costs of approximately $252,000 (10.1%), due to an increase in utility costs and snow removal, an increase in taxes and insurance of approximately $169,000 (5.3%), partially offset by a decrease in repairs and maintenance costs of approximately $ 312,000 (8.2%), and a decrease in depreciation and amortization expense of approximately $105,000 (1.7%).

 

Interest expense for the six months ended June 30, 2017 was approximately $5,066,000 compared to approximately $5,096,000 for the six months ended June 30, 2016, a decrease of approximately $30,000 (0.6%). 

 

At June 30, 2017, the Partnership has between a 40% and 50% ownership interests in nine different Investment Properties. See a description of these properties included in the section titled Investment Properties as well as Note 14 to the Consolidated Financial Statements for a detail of the financial information of each Investment Property.

 

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As described in Note 14 to the Consolidated Financial Statements, the Partnership’s share of the net income  from the Investment Properties was approximately $1,731,000 for the six months ended June 30, 2017, compared to net income of approximately $658,000 for the six months ended June  30, 2016,  an increase in income of approximately $1,073,000 (163.0%). This increase is primarily due to an increase in the gain on the sale of 17 units of real estate of approximately $2,371,000 at Hamilton Bay Apartments, Hamilton 1025, and Hamilton Bay LLC,  compared to a gain of approximately $235,000 on the sale of three units at Hamilton Bay LLC for the six months ended June 30, 2016. Included in the income for the six months ended June 30, 2017 is depreciation and amortization expense of approximately $2,990,000. The allocable income for the six months ended June 30, 2017 from the investment in Dexter Park is approximately $462,000.

 

As a result of the changes discussed above, net income for the six months ended June 30, 2017 was approximately $4,378,000 compared to income of approximately $2,211,000 for the six months ended June 30, 2016, an increase in income of approximately $2,167,000 (98.0 %).

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

The Partnership’s principal source of cash during the first six months of 2017 was the collection of rents.  The Partnership’s principal source of cash in 2016 was the collection of rents and the proceeds from the mortgage for Captain Parker.  The majority of cash and cash equivalents of $10,953,067 at June 30, 2017 and $7,463,697 at December 31, 2016 were held in interest bearing accounts at creditworthy financial institutions.

 

The increase in cash of $3,489,370 for the six months ended June 30, 2017 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2017

    

2016

 

Cash provided by operating activities

 

$

8,258,963

 

$

6,818,246

 

Cash (used in) investing activities

 

 

(1,618,649)

 

 

(1,194,298)

 

Cash  (used in) financing activities

 

 

(869,228)

 

 

(5,463,896)

 

Repurchase of Depositary Receipts, Class B and General Partner Units

 

 

(42,548)

 

 

(694,380)

 

Distributions paid

 

 

(2,239,168)

 

 

(1,873,850)

 

Net  increase (decrease) in cash and cash equivalents

 

$

3,489,370

 

$

(2,408,178)

 

 

The increase in cash provided by operating activities is primarily due to an increase in rent collections and a decrease in cash operating expenses. The decrease in cash used in investing activities is due primarily to the Partnership contributing $2,222,000 to pay off the principal of the mortgage on Hamilton Bay Apartments. The change in cash used in financing activities is due to the payment of mortgage notes payable. During the six months ended June 30, 2017, the Partnership purchased 549 Depositary Receipts for an average price of $62.00 for a total cost of $34,038; 4.3 Class B Units for a cost of $8,084 and 0.2 General Partnership Units for a cost of $426, for a total cost of $42,548.

 

During 2017, the Partnership and its Subsidiary Partnerships have completed improvements to certain of the Properties at a total cost of approximately $2,214,000. These improvements were funded from cash reserves. Cash reserves have been adequate to fully fund improvements. The most significant improvements were made at 1144 Commonwealth, Westside Colonial, Hamilton Oaks, Redwood Hills, 62 Boylston Street, and School Street Associates  at a cost of approximately $571,000, $324,000, $250,000, $220,000, $168,000 and $150,000 respectively. The Partnership plans to invest approximately $1,532,000 in additional capital improvements in 2017.

 

On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). The manager of Captain Parker is NewReal, Inc. (“New Real”), the general partner of New England Realty Associates Limited Partnership (the “Partnership”).  The Partnership is the sole member of Captain Parker. The Loan Agreement provides for a term loan (the “Loan”) in the principal amount of $20,071,000.  The Loan is due on February 1, 2026 (the “Due Date”), unless the due date is accelerated in accordance with the Loan’s terms.  The proceeds of the Loan were used to refinance existing indebtedness. The Partnership is a limited guarantor of certain of the Captain Parker obligations under the Loan Agreement.

During the six months ended June 30, 2017 the Partnership received distributions of approximately $3,657,000 from the investment properties. For the six months ended June 30, 2016, the Partnership received distributions of approximately $1,631,000 from the investment properties. Included in these distributions is the amount from Dexter Park of approximately $1,160,000 and $740,000 for the six months ended June 30, 2017 and 2016 respectively.

 

On July 6, 2017, Woodland Park Partners, LLC, a newly formed subsidiary of the Partnership, purchased the Woodland Park Apartments, a 126-unit apartment complex located at 264-290 Grove Street, Newton, Massachusetts (the “Property”), for a purchase price of $45,500,000.   

 

To fund the purchase price, the Partnership borrowed $25,000,000 under its outstanding line of credit with KeyBank, NA, and $16,000,000 from HBC Holdings, LLC, a Massachusetts limited liability company controlled by Harold Brown. The loan from HBC Holdings will mature on July 16, 2018, with interest only at 4.75%.  The balance of the purchase price was funded by the Partnership’s cash reserves.

 

 

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On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit.  The term of the line is three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The costs associated with the line of credit were approximately $125,000. As of June 30, 2017, the credit line had no outstanding balance. The agreement expired on July 31,2017. The lender has provided a 90 day extension and is working with the Partnership on a renewal agreement

 

The Partnership anticipates that cash from operations and interest bearing accounts will be sufficient to fund its current operations, pay distributions, make required debt payments and finance current improvements to its properties. The Partnership may also sell or refinance properties. The Partnership’s net income and cash flow may fluctuate dramatically from year to year as a result of the sale or refinancing of properties, increases or decreases in rental income or expenses, or the loss of significant tenants.

 

Off-Balance Sheet Arrangements—Joint Venture Indebtedness

 

As of June 30, 2017, the Partnership had a 40%-50% ownership interest in nine Joint Ventures, all of which have mortgage indebtedness. We do not have control of these partnerships and therefore we account for them using the equity method of consolidation. At June 30, 2017, our proportionate share of the non-recourse debt related to these investments was approximately $54,470,000. See Note 14 to the Consolidated Financial Statements.

 

Contractual Obligations

 

As of June 30, 2017, we are subject to contractual payment obligations as described in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long -term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage debt

 

$

1,803,695

 

$

7,882,668

 

$

4,317,962

 

$

2,176,096

 

$

2,535,875

 

$

194,548,667

 

$

213,264,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total Contractual Obligations

 

$

1,803,695

 

$

7,882,668

 

$

4,317,962

 

$

2,176,096

 

$

2,535,875

 

$

194,548,667

 

$

213,264,963

 

 

We have various standing or renewable service contracts with vendors related to our property management. In addition, we have certain other contracts we enter into in the ordinary course of business that may extend beyond one year. These contracts are not included as part of our contractual obligations because they include terms that provide for cancellation with insignificant or no cancellation penalties.

 

See Notes 5 and 14 to the Consolidated Financial Statements for a description of mortgage notes payable. The Partnerships has no other material contractual obligations to be disclosed.

 

Factors That May Affect Future Results

 

Along with risks detailed in Item 1A and from time to time in the Partnership’s filings with the Securities and Exchange Commission, some factors that could cause the Partnership’s actual results, performance or achievements to differ materially from those expressed or implied by forward looking statements include but are not limited to the following:

 

·

The Partnership depends on the real estate markets where its properties are located, primarily in Eastern Massachusetts, and these markets may be adversely affected by local economic market conditions, which are beyond the Partnership’s control.

 

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·

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

 

·

The Partnership is also impacted by changing economic conditions making alternative housing arrangements more or less attractive to the Partnership’s tenants, such as the interest rates on single family home mortgages and the availability and purchase price of single family homes in the Greater Boston metropolitan area.

 

·

The Partnership is subject to significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs, which are generally not reduced when circumstances cause a reduction in revenues from a property.

 

·

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

 

·

Civil disturbances, earthquakes and other natural disasters may result in uninsured or underinsured losses.

 

·

Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.

 

·

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

 

·

The Partnership properties face competition from similar properties in the same market. This competition may affect the Partnership’s ability to attract and retain tenants and may reduce the rents that can be charged.

 

·

Given the nature of the real estate business, the Partnership is subject to potential environmental liabilities. These include environmental contamination in the soil at the Partnership’s or neighboring real estate, whether caused by the Partnership, previous owners of the subject property or neighbors of the subject property, and the presence of hazardous materials in the Partnership’s buildings, such as asbestos, lead, mold and radon gas. Management is not aware of any material environmental liabilities at this time.

 

·

Insurance coverage for and relating to commercial properties is increasingly costly and difficult to obtain. In addition, insurance carriers have excluded certain specific items from standard insurance policies, which have resulted in increased risk exposure for the Partnership. These include insurance coverage for acts of terrorism and war, and coverage for mold and other environmental conditions. Coverage for these items is either unavailable or prohibitively expensive.

 

·

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

 

·

Changes in income tax laws and regulations may affect the income taxable to owners of the Partnership. These changes may affect the after-tax value of future distributions.

 

·

The Partnership may fail to identify, acquire, construct or develop additional properties; may develop or acquire properties that do not produce a desired or expected yield on invested capital; may be unable to sell poorly- performing or otherwise undesirable properties quickly; or may fail to effectively integrate acquisitions of properties or portfolios of properties.

 

·

Risk associated with the use of debt to fund acquisitions and developments.

 

·

Competition for acquisitions may result in increased prices for properties.

 

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·

Any weakness identified in the Partnership’s internal controls as part of the evaluation being undertaken could have an adverse effect on the Partnership’s business.

 

·

Ongoing compliance with Sarbanes-Oxley Act of 2002 may require additional personnel or systems changes.

 

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

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the exposure to loss resulting from changes in interest rates and equity prices.  In pursuing its business plan, the primary market risk to which the Partnership is exposed is interest rate risk.  Changes in the general level of interest rates prevailing in the financial markets may affect the spread between the Partnership’s yield on invested assets and cost of funds and, in turn, its ability to make distributions or payments to its investors.

 

As of June 30, 2017, the Partnership, its Subsidiary Partnerships and the Investment Properties collectively have approximately $338,757,000 in long-term debt, substantially all of which require payment of interest at fixed rates. Accordingly, the fair value of these debt instruments is affected by changes in market interest rates. This long term debt matures through 2029. The Partnership, its Subsidiary Partnerships and the Investment Properties collectively have variable rate debt of $30,071,000 (without taking out unamortized deferred financing costs) as of June 30, 2017 ranged from LIBOR plus 201 basis points to LIBOR plus 350 basis points. Assuming interest- rate caps are not in effect, if market rates of interest on the Partnership’s variable rate debt increased or decreased by 100 basis points, then the increase or decrease in interest costs on the Partnership’s variable rate debt would be approximately $301,000 annually and the increase or decrease in the fair value of the Partnership’s fixed rate debt as of June 30, 2017 would be approximately $15 million. For information regarding the fair value and maturity dates of these debt obligations,  See Note 5 to the Consolidated Financial Statements — “Mortgage Notes Payable,” Note 12 to the Consolidated Financial Statements — “Fair Value Measurements” and Note 14 to the Consolidated Financial Statements — “Investment in Unconsolidated Joint Ventures.”

 

For additional disclosure about market risk, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results”.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures.  The Partnership’s management, with the participation of the Partnership’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on such evaluation, the Partnership’s principal executive officer and principal financial officer have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Partnership in the reports that it files or submits under the Exchange Act.

 

Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the second quarter of 2017 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II  —  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Partnership is a party to or to which any of the Properties is subject.

 

Item 1A.  Risk Factors

 

There were no material changes to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2016.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)None

 

(b)None

 

(c)Issuer Purchase of Equity Securities during the second quarter of 2017:

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Remaining number of Depositary

 

 

 

 

 

 

Depositary Receipts

 

Receipts that may be purchased

 

Period

 

Average Price Paid

 

Purchased as Part of Publicly Announced Plan

 

Under the Plan (as Amended)

 

 

 

 

 

 

 

 

 

 

April 1-30, 2017

 

$

 —

 

 —

 

634,694

 

May 1-31, 2017

 

$

 —

 

 —

 

634,694

 

June 1-30, 2017

 

$

 —

 

 —

 

634,694

 

Total

 

 

 

 

 —

 

 

 

 

On August 20, 2007, NewReal, Inc., the General Partner authorized an equity repurchase program (“Repurchase Program”) under which the Partnership was permitted to purchase, over a period of twelve months, up to 300,000 Depositary Receipts (each of which is one‑tenth of a Class A Unit). Over time, the General Partner has authorized increases in the equity repurchase program. On March 10, 2015, the General Partner authorized an increase in the Repurchase Program to 2,000,000 Depository Receipts and extended the Program for an additional five years from March 31, 2015 until March 31, 2020. The Repurchase Program requires the Partnership to repurchase a proportionate number of Class B Units and General Partner Units in connection with any repurchases of any Depositary Receipts by the Partnership based upon the 80%, 19% and 1% fixed distribution percentages of the holders of the Class A, Class B and General Partner Units under the Partnership’s Second Amended and Restate Contract of Limited Partnership. Repurchases of Depositary Receipts or Partnership Units pursuant to the Repurchase Program may be made by the Partnership from time to time in its sole discretion in open market transactions or in privately negotiated transactions. From August 20, 2007 through June 30, 2017, the Partnership has repurchased 1,365,306 Depositary Receipts at an average price of $27.14 per receipt (or $814.20 per underlying Class A Unit), 3,072 Class B Units and 162 General Partnership Units, both at an average price of $926.26 per Unit, totaling approximately $40,274,000 including brokerage fees paid by the Partnership.

 

 

 

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosure

 

Not applicable.

 

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Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

See the exhibit index below.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

 

By:

/s/ NEWREAL, INC.

 

 

 

 

 

Its General Partner

 

 

 

 

By:

/s/ RONALD BROWN

 

 

Ronald Brown, President

 

Dated: August 14, 2017

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

Signature

 

Title

 

Date

/s/ RONALD BROWN

 

President and Director of the General Partner

 

August 14, 2017

Ronald Brown

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ HAROLD BROWN

 

Treasurer and Director of the General Partner

 

August 14, 2017

Harold Brown

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ GUILLIAEM AERTSEN

 

Director of the General Partner

 

August 14, 2017

Guilliaem Aertsen

 

 

 

 

 

 

 

 

 

/s/ DAVID ALOISE

 

Director of the General Partner

 

August 14, 2017

David Aloise

 

 

 

 

 

 

 

 

 

/s/ EUNICE HARPS

 

Director of the General Partner

 

August 14, 2017

Eunice Harps

 

 

 

 

 

 

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EXHIBIT INDEX

 

 

 

 

Exhibit No.

 

Description of Exhibit

(31.1)

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Ronald Brown, Principal Executive Officer of the Partnership (President and a Director of NewReal, Inc., sole General Partner of the Partnership)

(31.2)

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Harold Brown, Principal Financial Officer of the Partnership (Treasurer and a Director of NewReal, Inc., sole General Partner of the Partnership)

(32.1)

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Ronald Brown, Principal Executive Officer of the Partnership (President and a Director of NewReal, Inc., sole General Partner of the Partnership) and Harold Brown, Principal Financial Officer of the Partnership (Treasurer and a Director of NewReal, Inc., sole General Partner of the Partnership).

(101.1)

 

The following financial statements from New England Realty Associates Limited Partnership Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (unaudited) (ii) Consolidated Statements of Income, (unaudited) (iii) Consolidated Statements of Changes in Partners’ Capital, (unaudited) (iv) Consolidated Statements of Cash Flows, (unaudited) and (v) Notes to Consolidated Financial Statements, (unaudited).

 

 

 

 

 

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