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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1997 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-12138
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
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<S> <C>
MASSACHUSETTS 04-2619298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
39 BRIGHTON AVE., ALLSTON,
MASSACHUSETTS 02134
(Address of principal executive
offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (617) 783-0039
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------- ---------------------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
(Title of class)
DEPOSITARY RECEIPTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of deliquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of March 4, 1998, the aggregate market value of traded securities held by
non-affiliates of the registrant was $13,116,320, based on the price at which
the securities were sold.
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PART I
ITEM 1. BUSINESS
New England Realty Associates Limited Partnership ("NERA" or the
"Partnership"), a Massachusetts limited partnership, was formed on August 12,
1977 as the successor to five real estate limited partnerships (collectively,
the "Colonial Partnerships"), which filed for protection under Chapter XII of
the Federal Bankruptcy Act in September 1974. The bankruptcy proceedings were
terminated in late 1984.
The authorized capital of the Partnership is represented by three classes of
partnership units ("Partnership Units"). There are two categories of limited
partnership interests ("Class A Units" and "Class B Units"), and one category of
general partnership interests (the "General Partnership Units"). The Class A
Units were issued to creditors and limited partners of the Colonial Partnerships
and have been registered under Section 12(g) of the Securities Exchange Act of
1934. Each Class A Unit is exchangeable for ten publicly traded Depositary
Receipts ("Receipts"). The Class B Units were issued to the original general
partners of the Partnership. The General Partnership Units are held by the
current general partner of the Partnership, NewReal, Inc. (the "General
Partner").
The Partnership is engaged in the business of acquiring, developing, holding
for investment, operating and selling real estate. In connection with various
new mortgages obtained in 1995 by the Partnership on certain of its properties,
the ownership of such properties was placed in various subsidiary limited
partnerships as a requirement by the financing bank. The Partnership directly or
through 19 subsidiary limited partnerships (collectively, the "Subsidiary
Partnerships" and individually, a "Subsidiary Partnership"), owns and operates
various residential apartment buildings, condominium units and commercial
properties located in Massachusetts, Connecticut, New Hampshire and Maine. The
Partnership owns a 99.67% interest in each of the 19 Subsidiary Partnerships.
The remaining .33% interest of each Subsidiary Partnership is held by an
unaffiliated third party. The third party has entered into a lease agreement
with the Partnership, pursuant to which any benefit derived from its ownership
interest in such Subsidiary Partnerships will be returned to the Partnership.
The Partnership continues to maintain an investment in one other real estate
limited partnership. In 1996, the Partnership acquired one apartment complex
containing thirty-six (36) residential units and converted a three (3) bedroom
unit, at another apartment complex, previously occupied by an on-site manager,
to a rental unit.
The long-term goals of the Partnership are to manage, rent and improve its
properties and, as suitable opportunities arise, to acquire additional
properties with income and capital appreciation potential. When appropriate, the
Partnership may sell or refinance selected properties with low debt-to-equity
ratio or raise additional capital. Proceeds from any such sales or refinancings
will be reinvested in acquisitions of other properties, distributed to the
partners, or used for operating expenses or reserves, as determined by the
General Partner.
OPERATIONS OF THE PARTNERSHIP
The Partnership is managed by the General Partner, which is a Massachusetts
corporation wholly-owned by Ronald Brown and Harold Brown. The General Partner
has employed the Hamilton Company, Inc. (the "Hamilton Company"), the successor
to the Hamilton Company Limited Partnership, to perform the management functions
for the Partnership's properties. The Hamilton Company employs Ronald Brown and
Harold Brown. The Hamilton Company is wholly owned by Harold Brown. The
Partnership and its Subsidiary Partnerships currently employ 62 individuals who
are primarily involved in the supervision and maintenance of specific
properties. The General Partner has no employees.
As of March 4, 1998, the Partnership and its Subsidiary Partnerships owned
and leased to residential tenants 1,647 apartment units in 18 residential and
mixed-use complexes (collectively, the "Apartment Complexes"), 19 condominium
units retained by the Partnership as rental properties in a residential
apartment complex formerly owned by the Partnership which has been converted
into condominiums, one
1
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condominium unit in a separate condominium complex and one co-operative
apartment (the condominium unit and co-operative apartment are collectively
referred to as the "Condominium Units"). The Apartment Complexes and the
Condominium Units are located primarily in the greater metropolitan Boston,
Massachusetts area.
Additionally, as of March 4, 1998, the Subsidiary Partnerships owned
commercial shopping centers in East Hampton, Connecticut, Gardner,
Massachusetts, and Lewiston, Maine and commercial space in mixed-use buildings
in Boston and Newton, Massachusetts. These properties are referred to
collectively as the "Commercial Properties." The Partnership also owns an
interest in a real estate limited partnership which owns an office building in
West Peabody, Massachusetts, and is a party to a joint venture which leases
space at the Timpany Plaza Shopping Center (the foregoing properties are
referred to collectively as the "Investment Properties"). See Note 2 to Notes to
Financial Statements included as a part of this Form 10-K.
The Apartment Complexes, Condominium Units, Commercial Properties, and
Investment Properties are referred to collectively as the "Properties."
Harold Brown and, in certain cases, Ronald Brown, own or have owned
interests in certain of the Properties. See "ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
In general, the Properties face no unusual competition. The Apartment
Complexes and Condominium Units must compete for tenants with other residential
apartments and condominium units in the areas in which they are located. The
Commercial Properties and Investment Properties must compete for commercial
tenants with other shopping malls and office buildings in the areas in which
they are located.
In the opinion of the General Partner, the Properties are adequately covered
by insurance.
The General Partner is not limited in the number or amount of mortgages
which may be placed on any property, nor is there a policy limiting the
percentage of Partnership assets which may be invested in any specific property.
The Second Amended and Restated Contract of Limited Partnership of the
Partnership (the "Partnership Agreement") authorizes the General Partner to
acquire real estate and real estate related investments from or in participation
with either or both of Harold Brown and Ronald Brown, or their affiliates, upon
the satisfaction of certain terms and conditions, including the approval of the
Partnership's Advisory Committee, and limitations on the price paid by the
Partnership for such investments. The Partnership Agreement also permits the
Partnership's limited partners and the General Partner to make loans to the
Partnership, subject to certain limitations on the rate of interest which may be
charged to the Partnership. Except for the foregoing, the Partnership does not
have any policies prohibiting any limited partner, general partner, or any other
person from having any direct or indirect pecuniary interest in any investment
to be acquired or disposed of by the Partnership or in any transaction to which
the Partnership is a party or has an interest in or from engaging for their own
account in business activities of the types conducted or to be conducted by the
Partnership.
During the second quarter of 1996, the Partnership announced a plan to
purchase up to $500,000 of its Depositary Receipts from existing holders of
securities. The purchase of Depositary Receipts took place over a period of
approximately eighteen months. The purchase prices paid for Depositary Receipts
varied and were equal to the prices at which such securities were traded on the
NASDAQ Stock Market at the time of such purchases. Through December 31, 1997,
the Partnership had purchased 31,203 Depositary Receipts for $249,328. See Note
8 to Notes to Financial Statements included as part of this Form 10-K.
RECENT DEVELOPMENTS
In March, 1996 a major tenant in the Timpany Plaza Shopping Center filed for
protection under the Federal Bankruptcy Code, Chapter 11. Subsequently, in
December, 1996 the same tenant closed its doors
2
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to business. This tenant had previously paid approximately $347,000 of rent in
1995 and approximately $188,000 in 1996. In July, 1997 pursuant to an Order of
the United States Bankruptcy Court, this tenant paid the Partnership $118,050
which payment represented all of the post-petition, pre-rejection rents due and
owing by this tenant to the Partnership. The Timpany Plaza is currently 48%
vacant and the Partnership cannot determine the effect the vacancy rate Timpany
Plaza will have on the Partnerships income and net earnings in the future. The
Partnership is in active discussions and negotiations with other retail tenants
to rent the space.
In December, 1996, the Partnership acquired a residential complex containing
thirty-six (36) apartment units in Lowell, Massachusetts for a purchase price of
approximately $790,000. The purchase was paid from the Partnership's cash
reserves.
The Partnership believes it strengthened its portfolio by making significant
acquisitions of residential and mixed-use properties in 1995. The Partnership
acquired six properties for a total purchase price of approximately $32,123,000.
The properties were acquired from trusts, of which the majority shareholder of
the Partnership's general partner was a substantial beneficial owner. In
substance, the properties were owned by the trust's secured lender under a
previous restructuring agreement whereby the lender received all of the
operating income from the properties as well as the proceeds from the sale to
the Partnership. The acquisitions were financed by mortgages on the acquired
properties totaling $23,956,000. Additional funds totaling $22,446,000 were
provided by 13 mortgages on refinanced or debt-free properties. Approximately
$10,900,000 was used to repay existing mortgages and approximately $8,167,000
was used in the acquisition of the above properties. In connection with these
above mortgages, a substantial number of the Partnership's properties were
restructured into separate Subsidiary Partnerships.
The Subsidiary Partnerships recorded the purchase prices at the amount paid
for the properties. An entity owned by the majority shareholder of the
Partnership's General Partner received fees of $311,000 from the sellers of
these properties. See Note 2 to Notes to Financial Statements included as part
of this Form 10-K.
At December 31, 1994 the Partnership made a deposit of $1,898,000 on one of
the properties it acquired in 1995. This deposit was funded from cash reserves
as well as a loan of $1,175,000 from an entity owned by the majority shareholder
of the Partnership's General Partner. In May, 1995 the Partnership repaid the
$1,175,000 loan.
In conjunction with these mortgages, the lender required that escrow
accounts be established to fund future capital improvements. Approximately
$669,000 was used to establish these accounts. The Partnership is required to
make additional monthly payments of $34,000 to fund these escrow accounts.
In 1995, the Partnership sold two unencumbered condominium units located in
Stoneham and Boston, Massachusetts for total proceeds of approximately $220,000
and recorded a gain of approximately $152,000 in 1995 as a result of such sale.
The Partnership did not sell any properties in 1997 and 1996.
Other than such purchases described above, the Partnership had not acquired
new properties since February, 1989. See "ITEM 2. PROPERTIES--Commercial
Properties." During 1996 the Partnership made certain improvements to its
properties at a total cost of approximately $2,200,000. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
ADVISORY COMMITTEE
The Partnership has an Advisory Committee composed of three limited partners
who are not general partners or affiliates of the Partnership. The Advisory
Committee meets with the General Partner to review the progress of the
Partnership, assist the General Partner with policy formation, review the
appropriateness, timing and amount of proposed distributions, approve or reject
proposed acquisitions and investments with affiliates and advise the General
Partner on various other Partnership affairs. The
3
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Advisory Committee has no binding power except with respect to investments and
acquisitions involving affiliates of the Partnership.
ITEM 2. PROPERTIES
As of March 4, 1998, the Partnership and its Subsidiary Partnerships own the
Apartment Complexes, the Condominium Units, the Commercial Properties, and an
interest in a real estate partnership which owns the West Peabody Limited
Partnership.
See also "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for
further information concerning affiliated transactions.
During 1995, limited partnerships were created to own each of the Apartment
Complexes and the Commercial Properties listed below, exclusive of the Westgate
Apartments and the Condominium Units. In addition to the foregoing, in 1996, the
Partnership acquired the Highland Street Apartment Complex in Lowell,
Massachusetts, which is owned directly by the Partnership and not through any
Subsidiary Partnership.
APARTMENT COMPLEXES
The table below lists the location of the 18 Apartment Complexes, the number
and type of units in each complex, the range of rents and vacancies as of March
4, 1998, the principal amount outstanding under any mortgages as of December 31,
1997, and the maturity dates of such mortgages.
<TABLE>
<CAPTION>
MORTGAGE
BALANCE
AND INTEREST MATURITY
NUMBER AND RATE AS OF DATE
APARTMENT TYPE OF RENT DECEMBER OF
COMPLEX UNITS RANGE VACANCIES 31, 1997 MORTGAGE
- ----------------------------------- -------------------- -------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
Coach LP........................... 48 units 2 $ 1,172,999 2005
53-55 Brook St. 24 two-bedrooms $ 770-860 8.25%
Acton, MA 20 one-bedrooms $ 695-765
4 studios $ 615-635
Westgate Woburn.................... 221 units 10 $ 6,774,608 2000
2-20 Westgate Dr. 1 three-bedroom $ 1,225 10.99%
Woburn, MA 110 two-bedrooms $ 770-995
110 one-bedrooms $ 705-860
Avon Street Apts. LP............... 66 units 4 $ 1,754,711 2005
130 Avon Street 30 two-bedrooms $ 770-850 8.775%
Malden, MA 33 one-bedrooms $ 660-755
3 studios $ 590-605
Middlesex Apts. LP................. 18 units 0 $ 1,083,340 2005
132-144 Middlesex Rd. 18 three-bedrooms $ 1,325-$1,600 8.625%
Newton, MA
Clovelly Apts. LP.................. 103 units 2 $ 2,051,399 2005
160-170 Concord St. 53 two-bedrooms $ 620-755 8.375%
Nashua, NH 50 one-bedrooms $ 555-615
Nashoba Apts. LP................... 32 units 2 $ 1,071,595 2005
284 Great Road 32 two-bedrooms $ 795-1,090 8.625%
Acton, MA
River Drive LP..................... 72 units 1 $ 1,519,773 2005
3-17 River Drive 60 two-bedrooms $ 680-745 8.775%
Danvers, MA 5 one-bedrooms $ 645-650
7 studios $ 535-550
Executive Apts. LP................. 72 units 3 $ 1,760,559 2005
545-561 Worcester Road 48 two-bedrooms $ 735-845 8.775%
Framingham, MA 24 one-bedrooms $ 595-745
</TABLE>
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<TABLE>
<CAPTION>
MORTGAGE
BALANCE
AND INTEREST MATURITY
NUMBER AND RATE AS OF DATE
APARTMENT TYPE OF RENT DECEMBER OF
COMPLEX UNITS RANGE VACANCIES 31, 1997 MORTGAGE
- ----------------------------------- -------------------- -------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
Willard Apts. LP................... 16 units 0 $ 288,589 2005
580 Willard St. 8 two-bedrooms $ 750-825 8.375%
Quincy, MA 8 one-bedrooms $ 650-725
Olde English Apts. LP.............. 84 units 0 $ 1,381,926 2005
703-718 Chelmsford 47 two-bedrooms $ 585-695 8.5%
St.Lowell, MA 30 one-bedrooms $ 560-630
7 studios $ 520-555
Oak Ridge Apts. LP................. 61 units 1 $ 2,068,016 2005
Chestnut St. 41 three-bedrooms $ 780-930 8.5%
Foxboro, MA 20 two-bedrooms $ 685-785
Linhart LP......................... 9 units 0 $ 1,289,359 2005
4-34 Lincoln St. 6 one-bedrooms $ 625-795 9.25%
Newton, MA 3 studios $ 575-590
Commonwealth 1137 LP............... 35 units 0 $ 1,246,728 2005
1131-1137 Comm. Ave. 28 three-bedrooms $ 1,250-$1,325 8.375%
5 two-bedrooms $ 910-995
1 one-bedrooms $ 435
1 studio $ 550
Redwood Hills LP................... 180 units 4 $ 4,506,727 2005
376-384 Sunderland Rd. 90 two-bedroom $ 715-830 8.375%
Worcester, MA 90 one-bedrooms $ 640-720
Commonwealth 1144 LP............... 261 units 3 $ 5,208,986 2005
1144-1160 Comm. Ave. 11 two-bedrooms $ 600-925 8.375%
Allston, MA 108 one-bedrooms $ 625-835
142 studios $ 450-695
Boylston Downtown LP............... 269 units 10 $ 7,655,690 2005
62 Boylston St. 53 one-bedrooms $ 645-1,250 8.375%
Boston, MA 216 studios $ 450-850
North Beacon 140 LP................ 64 units 3 $ 3,420,710 2005
140-154 North Beacon St. 54 two-bedrooms $ 1,195-$1,550 8.375%
Brighton, MA 10 two-bedrooms $ 1,695-$1,895
Highland Street.................... 36 Units 2 0 0
Apartments 38-40 25 Two-Bedrooms $ 535-625
Highland Street 9 One Bedrooms $ 500-580
Lowell, MA 2 Studios $ 470-530
</TABLE>
See Note 5 to Notes to Financial Statements included as part of this Form
10-K for information relating to the Partnerships' and its Subsidiary
Partnerships' mortgages payable.
CONDOMINIUM UNITS
The Partnership owns and leases to residential tenants 21 Condominium Units
in the greater Boston, Massachusetts area. All of the apartment complexes in
which the Condominium Units are located, with the exception of the Riverside
Apartments, were developed or partially owned by Harold Brown, and in certain
cases by Ronald Brown.
The table below lists the location of the Condominium Units, the number of
units in each complex, the number and type of units owned by the Partnership in
each complex, the range of rents received by the
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Partnership for such units, and the number of vacancies as of March 4, 1998. No
Condominium Unit is subject to an existing mortgage.
<TABLE>
<CAPTION>
NUMBER OF NUMBER AND TYPE OF
UNITS IN UNITS OWNED RENT
APARTMENT COMPLEX COMPLEX BY PARTNERSHIP RANGE VACANCIES
- ------------------------------------------------------- ------------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Riverside Apartments................................... 106 12 two-bedrooms $ 950-1,100 1
8-20 Riverside Street 5 one-bedrooms $ 775-850
Watertown, MA 2 studios $ 650-720
The Kenmore Tower(1)................................... 111 1 one-bedroom $ 1,300 0
566 Commonwealth Avenue
Boston, MA
Chateaux Westgate...................................... 252 1 two-bedroom $ 780 0
Oak Lane
Brockton, MA
</TABLE>
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(1) This is a co-operative apartment. The Kenmore Tower Corporation is subject
to a debt secured by the apartment building, of which approximately $6,300
was allocated to the Partnership as of December 31, 1997.
COMMERCIAL PROPERTIES
EAST HAMPTON MALL LP In 1984, the Partnership acquired the East Hampton
Mall in East Hampton, Connecticut (the "East Hampton Mall"). The shopping center
is set on 4.25 acres of land and consists of 52,500 square feet of rentable
space, rented primarily to commercial retail establishments. During 1995, the
Subsidiary Partnership organized to own this property obtained a mortgage in the
amount of $1,435,000 which carries an interest rate of 8.375% and matures in the
year 2005. As of December 31, 1997, the mortgage had an outstanding balance of
$1,392,992. As of March 4, 1998, the shopping center had a vacancy rate of 7%,
and the average rent per square foot was $5.15.
TIMPANY PLAZA LP In 1985, the Partnership acquired the Timpany Plaza
Shopping Center in Gardner, Massachusetts ("Timpany Plaza"). The shopping center
is set on 16 acres of land and consists of 184,600 square feet of rentable
space. During 1995, the Subsidiary Partnership organized to own this property
obtained a mortgage in the amount of $3,561,000 which carries an interest rate
of 8.375% and matures in 2005. As of December 31, 1997, the mortgage had an
outstanding balance of $3,460,975. As of March 4, 1998, the shopping center had
a vacancy rate of 48%, and the average rent per square foot was $5.13.
In March, 1996 a major tenant in the Timpany Plaza Shopping Center filed for
protection under the Federal Bankruptcy Code, Chapter 11. Subsequently, in
December, 1996 the same tenant closed its doors to business. This tenant had
previously paid approximately $347,000 of rent in 1995 and approximately
$188,000 in 1996. In July, 1997 pursuant to an Order of the United States
Bankruptcy Court, this tenant paid the Partnership $118,050 which represented
all of the post-petition, pre-rejection rents due and owing by this tenant to
the Partnership.
This Subsidiary Partnership has a ground lease with another major tenant of
the Timpany Plaza Shopping Center. Pursuant to the ground lease, this tenant
demolished the existing structure and constructed a new store of approximately
60,000 square feet. The tenant moved into the new store in 1989. The Partnership
entered into a joint venture with this tenant to lease the space formerly
occupied by the tenant. The joint venture pays this Subsidiary Partnership
annual minimum rent of $84,546. The joint venture's net income (as defined in
the ground lease) earned from leasing the tenant's former space is to be split
evenly between this Subsidiary Partnership and the tenant. This Subsidiary
Partnership's share of the joint venture's net loss in 1997 was $10,584.
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The term of the ground lease is 20 years, with automatic extension options
for an additional 30 years. At the termination of the ground lease, this
Subsidiary Partnership will retain sole title to the underlying property.
LEWISTON MALL LP In 1989, the Partnership acquired the Lewiston Mall
shopping center in Lewiston, Maine (the "Lewiston Mall"). The shopping center is
set on 14 acres of land and consists of 181,000 square feet of rentable space.
During 1995, this Subsidiary Partnership obtained a mortgage in the amount of
$2,933,000 which carries an interest rate of 8.375% and matures in the year
2005. As of December 31, 1997, the mortgage had an outstanding balance of
$2,847,139. As of March 4, 1998, the Shopping Center had a 3% vacancy rate, and
the average rent per square foot was $4.02.
LINHART LP During 1995, the Partnership acquired the Linhart property in
Newton, Massachusetts ("Linhart"). The property consists of 21,200 square feet
of rentable space. As of March 4, 1998, the commercial space had a 4% vacancy
rate, and the average rent per square foot was $17.62.
BOYLSTON DOWNTOWN LP During 1995, this Subsidiary Partnership acquired the
Boylston Downtown property in Boston, Massachusetts ("Boylston"). The property
consists of 17,400 square feet of rentable space. As of March 4, 1998, the
commercial space had a 53% vacancy rate, and the average rent per square foot
was $10.68. The Partnership is currently negotiating with a potential tenant to
lease the entire vacant space.
NORTH BEACON 140 LP During 1995, this Subsidiary Partnership acquired the
North Beacon property in Boston, Massachusetts ("North Beacon"). The property
consists of 1,000 square feet of rentable space. As of March 4, 1998, the
commercial space was fully rented, and the average rent per square foot was
$11.39.
See Item 13 "Certain Relationships and Related Transactions" concerning
ownership interest in the above properties.
INVESTMENT PROPERTY
WEST PEABODY LIMITED PARTNERSHIP The Partnership owns a 10% limited
partnership interest in the West Peabody Limited Partnership ("West Peabody
L.P."). West Peabody L.P. owns a 125,000 square foot office and warehouse
building in West Peabody, Massachusetts. As of March 4, 1998, the building had a
8% vacancy rate. The Partnership's share of losses generated by the West Peabody
L.P. through the year ended December 31, 1997 exceeded the Partnership's
investment by approximately $664,000. As a limited partner, the Partnership is
not liable for amounts in excess of its investment and, accordingly, has not
recorded any excess losses. The carrying value of the investment property has
been reduced to zero. There can be no assurance that this investment, which did
not produce any income for the Partnership during 1997, will be realized in the
future in excess of its carrying value.
As of December 31, 1997, the Partnership's investment in West Peabody L.P.,
which owns the Investment Property described above and its interest in the joint
venture with a Timpany Plaza tenant, comprised less than 1% of the Partnership's
total assets.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Each Class A Unit is exchangeable, through Boston EquiServe Limited
Partnership, as Deposit Agent, for ten Depositary Receipts ("Receipts"). The
Receipts are publicly-traded on NASDAQ under the symbol "NEWRZ". There has never
been an established public market for the Class B Units or General Partnership
Units.
In 1997, the high and low bid quotations for the Receipts were $11.50 and
$7.00, respectively. The table below sets forth the high and low bids for each
quarter of 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
<S> <C> <C> <C> <C>
HIGH HIGH
LOW BID BID LOW BID BID
------- ------- -------- -------
First Quarter.................................................................. $ 7 $ 9 $ 5 7/8 $ 6 3/4
Second Quarter................................................................. $ 8 1/8 $ 9 1/4 $ 6 1/16 $ 6 3/4
Third Quarter.................................................................. $ 8 1/4 $11 1/2 $ 6 1/2 $ 7 1/4
Fourth Quarter................................................................. $ 8 3/4 $11 1/2 $ 6 3/4 $ 7 1/2
</TABLE>
These quotations reflect inter-dealer prices without retail markup,
markdown, or commission and do not necessarily represent actual transactions.
Any portion of the Partnership's cash which the General Partner deems not
necessary for cash reserves is distributed to the Partners. The Partnership has
made annual distributions to its Partners since 1978. In each of 1997 and 1996,
the Partnership made total distributions of $8.80 and $6.80 per Partnership
Unit, respectively ($.88 and $.68 per Receipt, respectively) The total value of
the distribution in 1997 was $1,527,813, an amount determined by the General
Partner and the Partnership's Advisory Committee. In March 1998, the Partnership
made a regular semi-annual distribution of $4.10 per Partnership Unit ($.41 per
Receipt). See Note 13 to Notes to Financial Statements included as part of this
Form 10-K.
In the past, assuming Partners hold Partnership Units or Receipts on the
record date for a distribution, distributions have exceeded the amount of the
individual income tax payable by Partners as a result of Partnership income
allocated to them. However, in 1997 and 1996, the taxable income exceeded
statement income by approximately $71,000 and $1,000,000, respectively. The
Partnership declared a special distribution in March 1997 to assist partners
with any negative tax consequences (as described above and in Note 13 to Notes
to Financial Statements included as part of this Form 10-K).
During the second quarter of 1996, the Partnership announced a plan to
purchase up to $500,000 of its Depositary Receipts from existing holders of
securities. The purchase of Depositary Receipts took place over a period of
approximately eighteen months. The purchase prices paid for Depositary Receipts
varied and were equal to the price at which such securities are traded on the
NASDAQ Stock Market at the time of such purchases. Through December 31, 1997,
the Partnership had purchased 31,203 Depositary Receipts for $249,328. In order
to restore the classes of Partnership Units to the required ratios, the
Partnership purchased from the General Partner 39 General Partnership Units and
purchased from Harold Brown and Ronald Brown 556 and 185 Class B Units
respectively, at an aggregate cost of $62,335.
See "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" for certain information relating to the number of holders of each
class of Partnership Units.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included on page 24 of this Form
10-K.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
New England Realty Associates Limited Partnership and its Subsidiary
Partnerships incurred income from operations of $1,123,654 during the year ended
December 31, 1997, compared to $725,649 during the year ended December 31, 1996,
an increase of $398,005.
The rental activity is summarized as follows:
<TABLE>
<CAPTION>
OCCUPANCY DATE
-----------------------------
<S> <C> <C>
MARCH 4, 1998 MARCH 14, 1997
------------- --------------
Residential
Units....................................................... 1,668 1,668
Vacancies................................................... 48 56
Vacancy rate................................................ 2.9% 3.4%
Commercial
Total square feet........................................... 457,700 457,700
Vacancy..................................................... 107,850 94,000
Vacancy rate................................................ 24% 21%
</TABLE>
<TABLE>
<CAPTION>
RENTAL INCOME
-----------------------------
<S> <C> <C>
1997 1996
------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Total rents................................................... $ 17,313 $ 16,449
Residential percentage........................................ 88% 86%
Commercial percentage......................................... 12% 14%
Contingent rentals............................................ $ 907 $ 927
</TABLE>
Rental income for the year ended December 31, 1997 was approximately
$17,313,000 compared to approximately $16,449,000 for the year ended December
31, 1996, an increase of approximately $864,000. Rental income increased at the
residential properties approximately $1,042,000 which is offset by a decrease in
rental income from the commercial properties of approximately $178,000. Rental
rates at the residential properties have increased 3-10% since 1996. Vacancies
at the residential properties have decreased 14% to 48 vacancies at March 1998.
Rental rates as well as occupancy levels have remained relatively stable at the
commercial properties except for the Timpany Plaza Shopping Center. A major
tenant who occupied approximately 71,000 square feet of space and paid to the
Partnership approximately $188,000 in 1996 vacated the premises and at March 4,
1998 the space remains vacant. The Partnership continues to actively market the
space.
Expenses for the year ended December 31, 1997 were approximately $16,383,000
compared to approximately $15,909,000 for the year ended December 31, 1996, an
increase of approximately $474,000. Administrative expenses increased to
approximately $991,000 for the year ended December 31, 1997 from approximately
$854,000 for the year ended December 31, 1996, an increase of approximately
$137,000. This represents an increase in staffing levels as well as related
employee benefits. Taxes and insurance increased to approximately $1,882,000 for
the year ended December 31, 1997 from approximately $1,795,000 for the year
ended December 31, 1996, an increase of approximately $87,000. Real estate taxes
increased in 1997 at a majority of the Partnership properties and the
Partnership received an abatement of approximately $30,000 in 1996 on one of the
residential properties. Renting expense increased to approximately $318,000 at
December 31, 1997 from approximately $287,000 at December 31, 1996, an increase
of approximately $31,000. This represents an increase in rental commissions paid
in 1997.
9
<PAGE>
Depreciation and amortization increased to approximately $3,239,000 at December
31, 1997 from $3,056,000 at December 31, 1996, an increase of approximately
$183,000. This represents a full year of depreciation on the Highland Street
property acquired in December 1996, as well as depreciation expense on the
capital improvements to the properties. These increases are offset by a decrease
in interest expense to approximately $4,651,000 at December 31, 1997 from
approximately $4,730,000 at December 31, 1996, a decrease of approximately
$79,000. This is due to a lower level of debt, as well as a reduction in
interest paid on tenant security deposits.
Interest income was approximately $133,000 for the year ended December 31,
1997 compared to approximately $156,000 for the year ended December 31, 1996, a
decrease of approximately $23,000. This decrease is due to a decrease in the
average cash balance available for investment in 1997.
The Partnership is a partner in a joint venture with a tenant at the Timpany
Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the
agreement, the two parties have agreed to relet the space formerly leased by the
tenant, and divide the net income or loss after paying to the Partnership an
annual rent of approximately $84,000. The Partnership's investment in the
Timpany Plaza joint venture represents less than 1% of the Partnership's assets.
The Partnership's share of loss for 1997 in the joint venture at the Timpany
Plaza Shopping Center was approximately $11,000 compared to income of
approximately $12,000 in 1996, a fluctuation of approximately $23,000. The
rental income from the joint venture is down significantly due to an increase in
vacancies in the relet space. As of March 4, 1998 the joint venture at the
Timpany Plaza Shopping Center relating to the previously vacant space was
completely relet.
Included in other income in 1997 is approximately $37,000 in unrealized
appreciation in the Partnership's short-term investments and approximately
$18,000 in 1996 from the sale of real estate partnership interests whose
carrying value had previously been reduced to zero.
As a result of the changes discussed above, net income for the year ended
December 31, 1997 was approximately $1,269,000 compared to approximately
$912,000 for the year ended December 31, 1996, an increase of approximately
$357,000.
YEARS ENDED DECEMBER 31, 1996 AND 1995
New England Realty Associates Limited Partnership and its Subsidiaries
incurred income from operations of $725,649 during the year ended December 31,
1996, compared to a loss from operations of $3,116,087 for the year ended
December 31, 1995, an increase of $3,841,736. This was principally a result of a
special non-cash impairment loss of $3,250,000 on the Lewiston Mall in 1995,
relating to an early adoption of Statement of Financial Standards No. 121 (FAS
No. 121) (See Note 2 to Notes to Financial Statements included with this Form
10-K). Income from operations before depreciation and amortization and
impairment loss was approximately $3,800,000 in 1996 compared to $2,474,000 in
1995, an increase of approximately $1,326,000.
10
<PAGE>
The rental activity is summarized as follows:
<TABLE>
<CAPTION>
OCCUPANCY DATE
------------------------------
<S> <C> <C>
MARCH 14, 1997 MARCH 14, 1996
-------------- --------------
Residential
Units...................................................... 1,668 1,631
Vacancies.................................................. 56 46
Vacancy rate............................................... 3.4% 2.8%
Commercial
Total square feet.......................................... 457,700 457,700
Vacancy.................................................... 94,000 18,700
Vacancy rate............................................... 21% 4%
<CAPTION>
RENTAL INCOME
------------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total rents.................................................. $ 16,449 $ 12,297
Residential percentage....................................... 86% 80%
Commercial percentage........................................ 14% 20%
Contingent rentals........................................... $ 927 $ 730
</TABLE>
Rental income for the year ended December 31, 1996 was approximately
$16,449,000, compared to approximately $12,297,000 for the year ended December
31, 1995, an increase of approximately $4,152,000. This increase was primarily
due to rental income of $3,973,000 from the properties acquired in 1995. Rental
income at the Partnerships' commercial properties increased approximately
$164,000 due to increases in percentage rents and common area maintenance
charges. Rental income from the existing residential properties increased
primarily due to rental rates and occupancy levels at Westgate Woburn, Chestnut
Square and Olde English apartments. Laundry and sundry income increased
approximately $23,000 due to the properties acquired in 1995.
Expenses for the year ended December 31, 1996 were approximately
$15,909,000, compared to approximately $15,576,000 for the year ended December
31, 1995, an increase of approximately $333,000. Expenses before the impairment
loss were approximately $12,326,000 in 1995, an increase of approximately
$3,583,000. The year ended December 31, 1996 included twelve months of expenses
for the properties acquired in 1995 compared to six months for the year ended
December 31, 1995. Interest expense increased to approximately $4,730,000 for
the year ended December 31, 1996 from approximately $3,432,000 for the year
ended December 31, 1995, an increase of approximately $1,298,000. This increase
was due to interest expense of $952,000 from the properties acquired in 1995.
Significant changes to expenses due to these properties included an increase in
depreciation and amortization expense of approximately $664,000; an increase in
repairs and maintenance expense of approximately $310,000; an increase in
operating expenses of approximately $651,000; an increase in taxes and insurance
of approximately $386,000; and an increase in management fees of approximately
$177,000. These increases were partially offset by decreased renting expenses of
approximately $72,000 which was due to reduced rental advertising and commission
costs.
Interest income was approximately $156,000 for the year ended December 31,
1996, compared to approximately $60,000 for the year ended December 31, 1995, an
increase of approximately $96,000. This increase was due to an increase in the
funds available for investment during the year.
The Partnership also sold two condominium units during 1995, for a total
gain of approximately $152,000.
The Partnership is a partner in a joint venture with a tenant at the Timpany
Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the
agreement, the two parties have agreed to relet the space,
11
<PAGE>
and divide the net income or loss after paying to the Partnership an annual
minimum rent of approximately $84,000. The Partnership's investment in the
Timpany Plaza joint venture represents less than 1% of the Partnership's assets.
The Partnership's share of income for 1996 in the joint venture at the
Timpany Plaza Shopping Center was approximately $13,000, compared to
approximately $29,000 in 1995, a decrease of approximately $16,000. This
decrease was due to an increase in vacancies of the joint venture.
In 1996, the Partnership reported other income of approximately $18,000 from
the sale of real estate partnership interests whose carrying value had
previously been reduced to zero. In 1994, the Partnership reported other income
of $130,000, of which $100,000 represented the cost of energy-saving devices
installed at the Partnership's properties by utility companies at no cost to the
Partnership. The additional $30,000 of income represents the elimination of a
provision for estimated liabilities in connection with the Partnership's
investment in a partnership.
As a result of the changes discussed above, net income for the year ended
December 31, 1996 was approximately $912,000, compared to net loss for the year
ended December 31, 1995 of approximately $2,875,000, an increase of
approximately $3,787,000.
In March 1996, a major tenant at the Timpany Plaza Shopping Center filed for
protection under Chapter 11 of the Federal Bankruptcy Code and the tenant
subsequently vacated the premises on or about December, 1996. The tenant
occupied approximately 71,000 square feet of space, and paid the Partnership
approximately $188,000 in 1996. This tenant has ceased making payments to the
Partnership, and at March 4, 1998, this location is currently unoccupied. In
addition, the Partnership is actively marketing the space.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash during 1997 and 1996 were the
collection of rents. The majority of cash and cash equivalents of approximately
$456,000 at December 31, 1997 is held in interest bearing accounts. At December
31, 1996, the majority of cash and cash equivalents totaling $1,830,605 was
invested in a U.S. government money market account. The Partnership's short-term
investments of $2,055,429 at December 31, 1997 is invested in a Massachusetts
Municipal Bond Fund. The short-term investment of $51,528 at December 31, 1996
is a certificate of deposit which matured in February 1997.
In December 1996, the Partnership and its subsidiaries acquired a
residential apartment complex consisting of 36 apartments in Lowell,
Massachusetts. The total purchase price of this property was approximately
$790,000 and was funded from the Partnership's cash reserves.
In 1996, the Partnership announced a plan to purchase up to $500,000 of its
Depositary Receipts from existing holders of securities. The purchase plan took
place over a period of approximately eighteen months. The purchase prices paid
for such Depositary Receipts were equal to the price at which such securities
are traded on the NASDAQ Stock Market at the time of the purchase. During 1997
and 1996, the Partnership purchased 15,288 and 15,915 Depositary Receipts for a
total cost of $139,268 and $110,060, respectively. In addition, 363 Class B and
19 General Partnership units were purchased for a total cost of $34,818 in 1997
and 378 Class B and 20 General Partnership units for a total cost $27,517 in
1996 to maintain the ownership percentages required by the current form of
partnership agreement.
During 1997, the Partnership and its Subsidiary Partnerships completed
certain improvements to their properties at a total cost of approximately
$2,164,000. The most significant improvements were made at the Linhart property,
located in Newton, Massachusetts, for a total cost of approximately $309,000.
Additional capital improvements of approximately $294,000, $266,000, $223,000,
$199,000 and $187,000 were made to the Apartments at North Beacon, the Westgate
Apartments, Redwood Apartments, 1144-1160 Commonwealth Avenue, and Boylston
Downtown, respectively.
12
<PAGE>
In 1998, the Partnership and its Subsidiary Partnerships plan to invest
approximately $2,800,000 in capital improvements, of which approximately
$2,500,000 is designated for residential properties and approximately $300,000
for commercial properties. These improvements will be funded from escrow
accounts as well as from the Partnership's cash reserves.
The Partnership anticipates that cash from operations and interest-bearing
investments will be sufficient to fund its current operations and to finance
current improvements to its properties. The Partnership's net income and cash
flow may fluctuate dramatically from year to year as a result of the sale of
properties, unanticipated increases in expenses, or the loss of significant
tenants.
Since the Partnership's long-term goals include the acquisition of
additional properties, a portion of the proceeds from the refinancing and sale
of properties is reserved for this purpose. The Partnership will consider
refinancing existing properties if insufficient funds exist from cash reserves
to repay existing mortgages or if funds for future acquisitions are not
available or the Partnership may raise additional capital.
READINESS FOR YEAR 2000
All of the Partnership records are maintained by the Hamilton Company, which
has taken actions to understand the nature and extent of the work required to
make its systems and infrastructure Year 2000 compliant. Management has
ascertained that the majority of related operating issues will be addressed
through routine computer software and hardware updates, which the Hamilton
Company performs in the normal course of business. The Hamilton Company
believes, based on available information, that it will be able to manage its
Year 2000 transition without any material adverse effect on its operations or
those of the Partnership.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The discussions above contain information based upon management's belief and
forward-looking statements that involve a number of risks, uncertainties, and
assumptions. There can be no assurances that actual results will not differ
materially as a result of various factors, including, but not limited to, the
following:
A major tenant of the Lewiston Mall in Lewiston, Maine, which paid
approximately $269,000 in 1997, can terminate its lease with nine months'
notice. The Partnership is currently negotiating to obtain a long-term lease.
The Partnership, at this time, cannot make any assurances that the tenant will
renew its lease for this space.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Partnership appear on pages F-1 through F-20
of this Form 10-K and are indexed herein under Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partner is a Massachusetts corporation wholly owned by Harold
Brown and Ronald Brown. Harold Brown and Ronald Brown were individual general
partners of the Partnership until May 1984 when NewReal, Inc. replaced them as
the sole general partner of the Partnership. The General Partner is responsible
for making all decisions and taking all action deemed by it necessary or
appropriate to conduct the business of the Partnership.
Since October 1992, the General Partner employed the Hamilton Partnership as
the management company to manage the Partnership's and its Subsidiary
Partnership's properties. During 1996, The Hamilton Partnership was dissolved
and its successor and general partner assumed the management functions of the
Hamilton Partnership. The Hamilton Company, a Massachusetts corporation, was the
99% general partner of Hamilton Partnership. The Hamilton Company was purchased
by Harold Brown in August 1993. Harold Brown also owned the corporation that was
the 1% limited partner of the Hamilton Partnership. See "ITEM 11. EXECUTIVE
COMPENSATION" for information concerning fees paid by the Partnership to the
Hamilton Company during 1997.
Because the General Partner has employed the Hamilton Company as the manager
for the Properties, the General Partner has no employees.
The directors and executive officers of the General Partner are Ronald Brown
and Harold Brown. Harold Brown and Ronald Brown are brothers. The directors of
the General Partner hold office until their successors are duly elected and
qualified. The executive officers of the General Partner serve at the pleasure
of the Board of Directors.
The following table sets forth the name and age of each director and officer
of the General Partner and each such person's principal occupation and
affiliation during the preceding five years.
<TABLE>
<CAPTION>
NAME AND POSITION AGE OTHER POSITIONS
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Ronald Brown........................ 62 Associate, Hamilton Realty Company (since 1967); Treasurer, R. Brown
President, Clerk and Director Partners Inc. (since 1985), President, Secretary and sole proprietor
(since 1984) (since April 1989); Member, Greater Boston Real Estate Board (since
1981); Director, Brookline Chamber of Commerce (since 1978); Trustee
of Trustee of Reservations (since 1988); Director, Brookline Music
School (since 1993); President, Brookline Chamber of Commerce
(1990-1992); Director, Coolidge Corner Theater Foundation
(1990-1993); President, Brookline Property Owner's Association
(1981-1990); Trustee, Brookline Hospital (1982-1989), Director,
Brookline Symphony Orchestra (since 1996), Treasurer, Brookline
Greenspace Alliance.
Harold Brown........................ 73 Sole proprietor, Hamilton Realty Company (since 1955); Trustee of
Treasurer and Director Wedgestone Realty Investors Trust (1982-1985); (since 1984) Chairman
of the Board and principal stockholder of the Wedgestone Advisory
Corporation (1980-1985); Director of AFC Financial Corp. (1983-1985);
Member, Greater Boston Real Estate Board; Director, Coolidge Bank and
Trust (1980-1983).
</TABLE>
14
<PAGE>
As discussed under "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS," in 1997 and 1996 the Partnership repurchased
certain Partnership Units from each of Harold Brown, Ronald Brown and the
General Partner, and the repurchase of these units were reported by each of
Harold Brown and Ronald Brown on Forms 4 and Forms 5 in 1997.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Partnership's directors and executive officers, and persons who own more than
10% of a registered class of the Partnership's equity securities, to file with
the Securities and Exchange Commission reports of ownership changes and changes
in ownership of the Partnership, officers, directors and greater than 10% of the
shareholders are required by SEC regulations to furnish the Partnership with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Partnership or written or oral representations that no reports were required the
Partnership believes that during 1997 fiscal year, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except that Harold Brown and Ronald Brown were late in
filing two sets of Forms 4 covering eight transactions involving the sale of the
Partnership's Class B Partnership Units and General Partnership Units
repurchased by the Partnership to maintain the required ownership percentages.
Harold Brown is filing a Form 4 Statement of Changes in Beneficial Ownership
contemporaneously with the filing of this Annual Report in connection with his
recent purchase of 1,500 Depositary Receipts on February 8, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to the Partnership Agreement, the General Partner, or any
management entity employed by the General Partner, is entitled to a management
fee equal to 4% of the rental and other operating income from the Properties and
a mortgage servicing fee equal to 0.5% of the unpaid principal balance of any
debt instruments received, held and serviced by the Partnership (the "Management
Fee"). The Partnership Agreement also authorizes the General Partner to charge
to the Partnership its cost for employing professionals to assist with the
administration of the Partnership Properties (the "Administrative Fee"). The
Administrative Fee is not charged against the Management Fee. In addition, upon
the sale or disposition of any Partnership Properties, the General Partner, or
any management entity which is the effective cause of such sale, is entitled to
a commission equal to 3% of the gross sale price (the "Commission"), provided
that should any other broker be entitled to a commission in connection with the
sale, the commission shall be the difference between 3% of the gross sale price
and the amount to be paid to such broker.
In accordance with the Partnership Agreement, the Management Fee, the
Administrative Fee and the Commission are paid to the Hamilton Company. See
"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." The total
Management Fee charged by Hamilton Company during 1997 was approximately
$715,000. In 1997, the Partnership and its Subsidiary Limited Partnerships also
paid to the Hamilton Company Administrative Fees of approximately $731,000
inclusive of construction supervision and architectural fees of $295,000,
repairs and maintenance service charges of $235,000, legal fees of $154,000 and
rental fees of $47,000. No sales commissions were paid to the management
companies in 1997. In addition, during 1997 the Partnership paid the Hamilton
Company $50,000 for certain accounting services, which were provided by an
outside company prior to 1993.
The management services provided by the Hamilton Company include, but are
not limited to, collecting rents and other income, approving, ordering and
supervising all repairs and other decorations, terminating leases, evicting
tenants, purchasing supplies and equipment, financing and refinancing
properties, settling insurance claims, maintaining administrative offices and
employing personnel. In addition, the Partnership employs the president of the
Hamilton Company to provide asset management services to the Partnership for
which the Partnership paid approximately $31,000 in 1997.
15
<PAGE>
Members of the Partnership's Advisory Committee and Ronald Brown and Harold
Brown receive $200 for each committee meeting attended. The Advisory Committee
held six meetings during 1997. Included in the construction supervision fees
mentioned above is $24,000 and $16,800 in 1997 and 1996, respectively which were
paid by Hamilton Company to Ronald Brown.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 4, 1998, except as listed below, the General Partner was not
aware of any beneficial owner of more than 5% of the outstanding Class A Units
or the Depositary Receipts, other than Boston EquiServe Limited Partnership
("Boston EquiServe"), which under the Deposit Agreement, as Depositary, is the
record holder of the Class A Units exchanged for Depositary Receipts. As of
March 4, 1998, pursuant to the Deposit Agreement, Boston EquiServe was serving
as the record holder of the Class A Units with respect to which 1,065,236
Depositary Receipts had been issued to 1,598 holders. As of March 4, 1998, there
were issued and outstanding 31,854 Class A Units held by 1,466 limited partners
and $33,015 Class B Units and 1,738 General Partnership Units held by the
persons listed below.
The following table sets forth certain information regarding each class of
Partnership Units beneficially owned on March 4, 1998 by (i) each person known
by the Company to beneficially own more than 5% of any class of Partnership
Units, (ii) each director and officer of the General Partner and (iii) all
directors and officers of the General Partner as a group. The inclusion in the
table below of any units deemed beneficially owned does not constitute an
admission that the named persons are direct or indirect beneficial owners of
such units. Unless otherwise indicated, each person listed below has sole voting
and investment power with respect to the units listed.
<TABLE>
<CAPTION>
GENERAL
CLASS A CLASS B PARTNERSHIP
-------------------------- ------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
% OF % OF % OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
5% OWNERS UNITS UNITS UNITS UNITS UNITS UNITS
DIRECTORS AND BENEFICALLY BENEFICIALLY BENEFICALLY BENEFICIALLY BENEFICALLY BENEFICIALLY
OFFICERS OWNED OWNED OWNED OWNED OWNED OWNED
- ----------------------------------- ------------ ----------- --------------- ------------- ------------ -----------
Harold Brown....................... (1) (1)
c/o New England
Realty Associates Limited
Partnership
39 Brighton Ave.
Allston, MA 02110
NERA 1994 Irrevocable Trust........ (1) (1) 24,761(2) 75%(2) (3) 100%(3)
c/o Lane & Altman
101 Federal St.
Boston, MA 02110
Ronald Brown....................... 755(4) 0.5%(4) 8,254 25% (3) 100%(3)
c/o New England
Realty Associates Limited
Partnership
39 Brighton Ave.
Allston, MA 02110
NewReal, Inc....................... 0 0 0 0 1,738 100%(3)
39 Brighton Ave.
Allston, MA 02134
All directors and officers as a 7,214(5) 5.2%(5) 33,015(6) 100%(6) (3) 100%(3)
group
</TABLE>
- ------------------------
(1) 3,500 Depositary Receipts are held of record by Harold Brown and 61,094
Depositary Receipts are held of record by the NERA 1994 Irrevocable Trust
(the "Trust"), a grantor trust established by Harold Brown. The
beneficiaries of the Trust are trusts for the benefit of children of Mr.
Brown. During his lifetime, Mr. Brown is entitled to receive the income from
the Trust and has the right to reacquire the Depositary Receipts held by the
Trust provided that substitute assets are transferred to the Trust.
16
<PAGE>
Accordingly, Mr. Brown may be deemed to beneficially own the Depositary
Receipts held by the Trust. Because a Depositary Receipt represents
beneficial ownership of one-tenth of a Class A Unit, Harold Brown may be
deemed to beneficially own approximately 6,459 Class A Units and the Trust
may be deemed to beneficially own approximately 6,109 Class A Units. Mr.
Brown currently has no voting or investment power over the Depositary
Receipts held by the Trust and disclaims beneficial ownership of such
Depositary Receipts. Luci Daley Vincent and Robert Somma, as trustees of the
Trust (the "Trustees"), share voting and investment power over the
Depositary Receipts held by the Trust, subject to the provisions of the
Trust, and thus may each be deemed to beneficially own the 64,594 Depositary
Receipts held by the Trust. The Trustees have no pecuniary interest in the
Depositary Receipts held by the Trust and disclaim beneficial ownership of
such Depositary Receipts.
(2) Consists of Class B Units held by the Trust. See Note (1) above. Harold
Brown currently has no voting or investment power over the Class B Units
held by the Trust and disclaims beneficial ownership of such Class B Units.
The Trustees share voting and investment power over the Class B Units held
by the Trust, subject to the provisions of the Trust, and thus may each be
deemed to beneficially own the 24,761 Class B Units held by the Trust. The
Trustees have no pecuniary interest in the Class B Units held by the Trust
and disclaim beneficial ownership of such Class B Units.
(3) Since Harold Brown and Ronald Brown are the controlling stockholders,
executive officers and directors of NewReal, Inc., they may be deemed to
beneficially own all 1,738 of the General Partnership Units held of record
by NewReal, Inc.
(4) Consists of 7,548 Depositary Receipts held of record jointly by Ronald Brown
and his wife. Because a Depositary Receipt represents beneficial ownership
of one-tenth of a Class A Unit, Ronald Brown may be deemed to beneficially
own approximately 755 Class A Units.
(5) Consists of the Class A Units described in Notes (1) and (4) above.
(6) Includes the Class B Units described in Note (2) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of the Riverside Apartments, which was owned by the
Partnership prior to the conversion of that complex into condominiums, all of
the buildings in which the Condominium Units are located were developed or
partially owned by Harold Brown, together, in certain instances, with Ronald
Brown. In addition, certain Subsidiary Partnerships purchased certain properties
in 1995 from entities in which Harold Brown had substantial equity interest. In
each case, the General Partner believes that the Partnership and its Subsidiary
Partnerships acquired the Condominium Units and the other properties purchased
in 1995 at prices not in excess of fair market value.
In 1995, Harold Brown, through an entity in which he is the majority
shareholder, loaned the Partnership $1,175,000 to purchase certain property. The
loan was repaid in May, 1995 with interest at the rates from 8.5% to 9%. Total
interest paid on the loan was $38,073.
In addition, Harold Brown is a limited partner as well as a general partner
in West Peabody L.P. which owns the Investment Property. Harold Brown's interest
in the Investment Property referred to herein as the West Peabody Limited
Partnership is 79.0%.
See also "ITEM 2. PROPERTIES," "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT" and "ITEM 11. EXECUTIVE COMPENSATION" for information regarding
the fees paid to Hamilton Company, an affiliate of the General Partner and "ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS" for
information regarding Units repurchased by the Partnership from Harold Brown,
Ronald Brown and the General Partner.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Financial Statements are included in this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and 1996
17
<PAGE>
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Partners' Capital for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Financial Statements
(a) 2. Financial Statement Schedules:
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included
in the financial statements or notes thereto.
(a) 3. Exhibits:
The exhibits filed as part of this Annual Report on Form 10-K are listed
in the Exhibit Index included herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
INCOME STATEMENT INFORMATION
Revenues................................... $ 17,506,971 $ 16,634,883 $ 12,459,478 $ 8,506,195 $ 8,414,801
Expenses................................... 16,383,317 15,909,234 15,575,565 7,658,215 7,388,323
Income (Loss) from Operations.............. 1,123,654 725,649 (3,116,087) 847,980 1,026,478
Other Income............................... 144,977 186,781 241,276 224,571 113,537
Net Income (Loss).......................... 1,268,631 912,430 (2,874,811) 1,072,551 1,140,015
Net Income (Loss) per Unit................. 7.30 5.17 (16.23) 6.05 6.36
Distributions to Partners per Unit......... 8.80 6.80 6.80 6.80 6.80
Net Income (Loss) per Depositary Receipt... .73 .52 (1.62) .61 .64
Distributions to Partners per Depositary
Receipt.................................. .88 .68 .68 .68 .68
BALANCE SHEET INFORMATION
Total Assets............................... 58,147,503 $ 58,788,939 $ 59,750,970 28,321,816 $ 27,693,357
Net Real Estate Investments................ 51,575,342 52,239,981 51,688,269 23,782,167 23,665,365
Total Debt Outstanding..................... 51,956,821 52,538,499 53,072,037 18,742,909 17,884,116
Partners' Capital.......................... 3,465,230 3,898,498 4,323,402 8,400,979 8,556,758
</TABLE>
18
<PAGE>
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.
<TABLE>
<S> <C> <C>
NEW ENGLAND REALTY ASSOCIATES LIMITED
PARTNERSHIP
By: NewReal, Inc.,
ITS GENERAL PARTNER
By: /s/ RONALD BROWN
-----------------------------------------
Ronald Brown, PRESIDENT
Dated: March 31, 1998
</TABLE>
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
- ------------------------------ --------------------------- -------------------
President and Director of
/s/ RONALD BROWN the General Partner
- ------------------------------ (Principal Executive March 31, 1998
Ronald Brown Officer)
Treasurer and Director of
/s/ HAROLD BROWN the General Partner
- ------------------------------ (Principal Financial March 31, 1998
Harold Brown Officer and Principal
Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ------------------------------------------------------------------------------------------- -----
<S> <C> <C>
(3) --Second Amended and Restated Contract of Limited Partnership(1) --
(4)(a) --Specimen certificate representing Depositary Receipts(2) --
(b) --Description of rights of holders of Partnership securities* --
--Deposit Agreement, dated August 12, 1987, between the General Partner and the First
(c) National Bank of Boston(3) --
--Purchase and Sale Agreement by and between Sally A. Starr and Lisa Brown, Trustees of
(10) Omnibus Realty Trust, a nominee trust.(4)
(21) --Subsidiaries of the Partnership.(5)
(27) --Financial Data Schedule of Partnership
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit A to the Partnership's Statement
Furnished in Connection with the Solicitation of Consents filed under the
Securities Exchange Act of 1934 on October 14, 1986.
(2) Incorporated herein by reference to Exhibit A to Exhibit 2(b) to the
Partnership's Registration Statement on Form 8-A, filed under the Securities
Exchange Act of 1934 on August 17, 1987.
(3) Incorporated herein by reference to Exhibit 2(b) to the Partnership's
Registration Statement on Form 8-A, filed under the Securities Exchange Act
of 1934 on August 17, 1987.
(4) Incorporated by reference to Exhibit 2.1 to the Partnership(1)s Current
Report on Form 8-K dated June 30, 1995.
(5) Incorporated by reference to Note 2 to Financial Statements included as part
of this Form 10-K.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
New England Realty Associates Limited Partnership
We have audited the accompanying consolidated balance sheets of New England
Realty Associates Limited Partnership and Subsidiary Partnerships as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New England
Realty Associates Limited Partnership and its Subsidiary Partnerships at
December 31, 1997 and 1996 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
MILLER WACHMAN LLP
Certified Public Accountants
Boston, Massachusetts
March 4, 1998
21
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
ASSETS
Rental Properties.................................................................. $ 51,575,342 $ 52,293,981
Cash and Cash Equivalents.......................................................... 456,277 1,830,605
Short-term Investments............................................................. 2,055,429 51,528
Rents Receivable................................................................... 604,350 688,245
Real Estate Tax Escrows............................................................ 570,713 503,234
Prepaid Expenses and Other Assets.................................................. 1,514,370 1,696,237
Investment in Joint Venture........................................................ 75,467 93,734
Financing and Leasing Fees......................................................... 1,295,555 1,631,375
------------- -------------
TOTAL ASSETS..................................................................... $ 58,147,503 $ 58,788,939
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable.................................................................. $ 51,956,821 $ 52,538,499
Accounts Payable and Accrued Expenses.............................................. 903,430 684,626
Advance Rental Payments and Security Deposits...................................... 1,822,022 1,667,316
------------- -------------
Total Liabilities................................................................ 54,682,273 54,890,441
Commitments and Contingent Liabilities (Note 9)
Partners' Capital..................................................................
173,252 units outstanding in 1997 and 175,163 in 1996.............................. 3,465,230 3,898,498
------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................................ $ 58,147,503 $ 58,788,939
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Rental income..................................................... $ 17,313,181 $ 16,448,939 $ 12,296,735
Laundry and sundry income......................................... 193,790 185,944 162,743
------------- ------------- -------------
17,506,971 16,634,883 12,459,478
------------- ------------- -------------
Expenses
Administrative.................................................... 991,167 854,337 836,048
Depreciation and amortization..................................... 3,239,186 3,055,786 2,339,883
Interest.......................................................... 4,650,806 4,729,769 3,432,090
Management fees................................................... 737,883 699,806 522,842
Operating......................................................... 1,962,124 1,908,616 1,257,852
Renting........................................................... 318,397 287,485 359,053
Repairs and maintenance........................................... 2,601,470 2,577,952 2,175,014
Taxes and insurance............................................... 1,882,284 1,795,483 1,402,783
Impairment loss................................................... -- -- 3,250,000
------------- ------------- -------------
16,383,317 15,909,234 15,575,565
------------- ------------- -------------
Income (Loss) from Operations..................................... 1,123,654 725,649 (3,116,087)
------------- ------------- -------------
Other Income
Interest income................................................... 133,265 156,127 59,909
Income (loss) from investments in partnerships and joint
venture......................................................... (10,584) 12,294 28,904
Gain on sale of rental properties................................. -- -- 152,463
Other............................................................. 22,296 18,360 --
------------- ------------- -------------
144,977 186,781 241,276
------------- ------------- -------------
Net Income (Loss)................................................. $ 1,268,631 $ 912,430 $ (2,874,811)
------------- ------------- -------------
------------- ------------- -------------
Net Income (Loss) per Unit........................................ $ 7.30 $ 5.17 $ (16.23)
------------- ------------- -------------
------------- ------------- -------------
Weighted Average Number of Units Outstanding...................... 173,855 176,572 177,152
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNERS'
CAPITAL
----------
UNITS LESS
---------------------------------------------------- TREASURY LIMITED
GENERAL UNITS ----------
CLASS A CLASS B PARTNERSHIP SUB-TOTAL AT COST TOTAL CLASS A
----------- ----------- ------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............... 144,180 34,243 1,802 180,225 3,073 177,152 $6,717,849
Unit Buyback........................... -- -- -- -- -- -- --
Distributions to Partners.............. -- -- -- -- -- -- (962,213)
Net (Loss)............................. -- -- -- -- -- -- (2,299,849)
----------- ----------- ----- ----------- ----- --------- ----------
Balance, December 31, 1995............. 144,180 34,243 1,802 180,225 3,073 177,152 $3,455,787
Unit Buyback........................... -- -- -- -- 1,989 (1,989) (110,060)
Distributions to Partners.............. -- -- -- -- -- -- (959,806)
Net Income............................. -- -- -- -- -- -- 729,944
----------- ----------- ----- ----------- ----- --------- ----------
Balance, December 31, 1996............. 144,180 34,243 1,802 180,225 5,062 175,163 3,115,865
Unit Buyback........................... -- -- -- -- 1,911 (1,911) (139,268)
Distribution to Partners............... -- -- -- -- -- -- (1,222,251)
Net Income............................. -- -- -- -- -- -- 1,014,905
----------- ----------- ----- ----------- ----- --------- ----------
Balance, December 31, 1997............. 144,180 34,243 1,802 180,225 6,973 173,252 $2,769,251
----------- ----------- ----- ----------- ----- --------- ----------
----------- ----------- ----- ----------- ----- --------- ----------
<CAPTION>
GENERAL
CLASS B PARTNERSHIP TOTAL
--------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1995............... $1,598,946 $ 84,184 $8,400,979
Unit Buyback........................... -- -- --
Distributions to Partners.............. (228,526) (12,027) (1,202,766)
Net (Loss)............................. (546,214) (28,748) (2,874,811)
--------- ----------- ----------
Balance, December 31, 1995............. $ 824,206 $ 43,409 $4,323,402
Unit Buyback........................... (26,141) (1,376) (137,577)
Distributions to Partners.............. (227,954) (11,997) (1,199,757)
Net Income............................. 173,362 9,124 912,430
--------- ----------- ----------
Balance, December 31, 1996............. 743,473 39,160 3,898,498
Unit Buyback........................... (33,077) (1,741) (174,086)
Distribution to Partners............... (290,284) (15,278) (1,527,813)
Net Income............................. 241,040 12,686 1,268,631
--------- ----------- ----------
Balance, December 31, 1997............. $ 661,152 $ 34,827 $3,465,230
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)................................................. $ 1,268,631 $ 912,430 $ (2,874,811)
------------- ------------- --------------
Adjustments to reconcile net income to net cash provided by (used
in) operating activities
Depreciation and amortization................................... 3,239,186 3,055,786 2,339,883
(Income) loss from investments in partnerships and joint
venture....................................................... 10,584 (12,294) (28,904)
Unrealized appreciation on short-term investments............... (37,296) -- --
Impairment loss................................................. -- -- 3,250,000
(Gain) on sale of rental properties............................. -- -- (152,463)
(Increase) Decrease in rents receivable......................... 83,895 (3,836) (41,305)
(Increase) in financing and leasing fees........................ (20,524) (53,449) (1,970,607)
Increase (Decrease) in accounts payable......................... 218,804 (120,239) 183,876
(Increase) Decrease in real estate tax escrows.................. (67,479) 35,711 (515,387)
(Increase) Decrease in prepaid expenses and other assets........ 181,867 237,235 (1,444,689)
Increase in advance rental payments and security deposits....... 154,706 116,650 993,727
------------- ------------- --------------
Total Adjustments............................................... 3,763,743 3,255,564 2,614,131
------------- ------------- --------------
Net cash provided by (used in) operating activities............. 5,032,374 4,167,994 (260,680)
------------- ------------- --------------
Cash Flows from Investing Activities
Distribution from joint venture................................... 7,684 48,549 64,255
Purchase and improvement of rental properties..................... (2,164,204) (3,218,539) (31,436,551)
Maturity of short-term investments................................ 51,528 -- --
Purchase of short-term investments................................ (2,018,133) (2,651) (3,322)
Proceeds from the sale of properties.............................. -- -- 219,706
------------- ------------- --------------
Net cash (used in) investing activities............................. (4,123,125) (3,172,641) (31,155,912)
------------- ------------- --------------
Cash Flows from Financing Activities
Principal payments and early repayment of mortgages payable....... (581,678) (533,538) (10,897,871)
Proceeds from mortgages........................................... -- -- 46,402,000
Distributions to partners......................................... (1,527,813) (1,199,757) (1,202,766)
Purchase of treasury units........................................ (174,086) (137,577) --
Proceeds from (repayment of) note payable......................... -- -- (1,175,000)
------------- ------------- --------------
Net cash provided by (used in) financing activities............. (2,283,577) (1,870,872) 33,126,363
------------- ------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents................ (1,374,328) (875,519) 1,709,771
Cash and Cash Equivalents, Beginning................................ 1,830,605 2,706,124 996,353
------------- ------------- --------------
Cash and Cash Equivalents, Ending................................... $ 456,277 $ 1,830,605 $ 2,706,124
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
LINE OF BUSINESS: New England Realty Associates Limited Partnership ("NERA"
or the "Partnership") was organized in Massachusetts during 1977. NERA and its
subsidiaries own and operate various residential apartment buildings,
condominium units, and commercial properties located in Massachusetts,
Connecticut, New Hampshire, and Maine. NERA has also made investments in other
real estate partnerships and has participated in other real estate-related
activities, primarily located in Massachusetts. In connection with the mortgages
referred to in Note 5, a substantial number of NERA's properties were
restructured into separate subsidiary limited partnerships without any change in
the historical cost basis.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of NERA and its subsidiary limited partnerships. NERA has a 99.67%
ownership interest in each of such subsidiary limited partnerships. The
consolidated group is referred to as the "Partnerships." Minority interests are
not recorded since they are insignificant. All significant intercompany accounts
and transactions are eliminated in consolidation. The Partnership accounts for
its investment in the joint venture on the equity method.
ACCOUNTING ESTIMATES: The preparation of the financial statements is in
accordance with generally accepted accounting principles (GAAP) requiring
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Accordingly, actual results could differ
from those estimates.
REVENUE RECOGNITION: Rental income from residential and commercial
properties is recognized over the term of the related lease. Amounts sixty days
in arrears are charged against income. Certain leases of the commercial
properties provide for increasing stepped minimum rents, which are accounted for
on a straight-line basis over the term of the lease.
RENTAL PROPERTIES: Rental properties are stated at cost less accumulated
depreciation. Maintenance and repairs are charged to expense as incurred;
improvements and additions are capitalized. When assets are retired or otherwise
disposed of, the cost of the asset and related accumulated depreciation is
eliminated from the accounts, and any gain or loss on such disposition is
included in income. Rental properties are depreciated on the straight-line
method over their estimated useful lives. In the event that facts and
circumstances indicate that the carrying value of rental properties may be
impaired, an analysis of recoverability is performed. The estimated future
undiscounted cash flows are compared to the asset's carrying value to determine
if a write-down to fair value or discounted cash flow value is required. This
policy was adopted in 1995. Previously, impairment was considered on a
case-by-case basis. See Note 2 for the effect of this accounting change.
FINANCING AND LEASING FEES: Financing fees are capitalized and amortized,
using the interest method, over the life of the related mortgages. Leasing fees
are capitalized and amortized on a straight-line basis over the life of the
related lease.
INCOME TAXES: The financial statements have been prepared under the basis
that NERA and its subsidiaries are entitled to tax treatment as partnerships.
Accordingly, no provision for income taxes on income has been recorded.
CASH EQUIVALENTS: The Partnership and its Subsidiary Partnerships consider
cash equivalents to be all highly liquid instruments purchased with a maturity
of three months or less.
26
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS: The Partnership accounts for short-term investments
in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities". The
Partnerships consider short-term investments to be mutual funds, and bank
certificates of deposit, Treasury obligations, or commercial paper with initial
maturities between three and twelve months. These investments are considered to
be trading account securities and are carried at fair value with unrealized
holding gains or losses reflected in earnings.
CONCENTRATION OF CREDIT RISKS AND FINANCIAL INSTRUMENTS: The Partnerships'
tenants are located in New England, and the Partnerships are subject to the
general economic risks related thereto. No single tenant accounted for more than
5% of the Partnerships' revenues in 1997, 1996, or 1995. The Partnerships make
their temporary cash investments with high credit quality financial institutions
or purchase money market accounts invested in U.S. Government securities or
mutual funds invested in state and municipal securities. At December 31, 1997,
approximately $30,613 of cash and cash equivalents exceeded federally insured
amounts. The mutual fund investment is subject to price volatility associated
with any interest bearing investment. Fluctuations in actual interest rates
affect the value of these investments.
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- USEFUL
1997 1996 LIFE
------------- ------------- -------------
<S> <C> <C> <C>
Land................................................................ $ 9,710,733 $ 9,710,733 --
Buildings........................................................... 43,627,173 43,622,868 25-31 years
Building improvements............................................... 11,351,613 10,648,403 15-31 years
Kitchen cabinets.................................................... 1,029,671 940,870 5-10 years
Carpets............................................................. 1,028,065 977,574 5-10 years
Air conditioning.................................................... 251,950 233,995 7-10 years
Land improvements................................................... 623,453 599,909 10-31 years
Laundry equipment................................................... 62,899 45,248 5-7 years
Elevators........................................................... 45,592 16,842 20 years
Swimming pools...................................................... 42,450 42,450 10 years
Equipment........................................................... 471,263 311,809 5-7 years
Motor vehicles...................................................... 65,926 49,852 5 years
Fences.............................................................. 20,785 20,785 5-10 years
Furniture and fixtures.............................................. 255,033 201,638 5-7 years
Smoke alarms........................................................ 10,706 6,224 5-7 years
------------- -------------
68,597,312 67,429,200
Less accumulated depreciation....................................... 17,021,970 15,135,219
------------- -------------
$ 51,575,342 $ 52,293,981
------------- -------------
------------- -------------
</TABLE>
On December 11, 1996, the Partnership acquired a residential complex
containing 36 apartment units in Lowell, Massachusetts for a purchase price of
approximately $790,000. The purchase was paid from the Partnership's cash
reserves and is unencumbered.
27
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
On June 30, 1995, the Partnerships purchased for $30,198,000 five properties
containing an aggregate of 809 residential apartments and 18,400 square feet of
commercial space. The purchase was paid for in part with the proceeds from the
refinancing of thirteen of the Partnerships' properties and the issuance of new
mortgage notes payable aggregating $22,627,000 and maturing in 2005. The
properties were acquired from a trust owned nominally by the majority
shareholder of NERA's General Partner. In substance, the properties were owned
by the trust's secured lender under a previous restructuring agreement whereby
the lender received all of the operating income from the properties as well as
the proceeds from the sale to NERA. The Partnerships have recorded the purchase
at the amount paid for the properties and have allocated the amounts to the
individual properties acquired. An entity owned by the majority shareholder of
the Partnership's General Partner received a fee of $300,000 from the trust's
secured lender.
Included in rental properties is a building in Newton, Massachusetts
acquired by the Partnership on January 25, 1995. The building consists of 21,223
square feet of commercial space, 9 residential units, and 29 parking spaces for
a total purchase price of $1,925,000. This building was acquired from an entity
in which the majority shareholder of NERA's General Partner had a substantial
ownership interest. The Partnership's management company received a fee of
approximately $11,000 from the seller in this transaction. To facilitate this
acquisition, the Partnership's management company, an entity owned by the
majority shareholder of NERA's General Partner, loaned the Partnership
$1,175,000 in December 1994. In May 1995, the Partnership refinanced this
property and obtained a $1,329,000 mortgage payable in 10 years with interest at
9.25%, and paid off the existing loan of $1,175,000 to the management company.
Total interest paid on this refinanced loan was $38,073.
The operating results of these acquired properties have been included in the
consolidated statements of operations since the date of acquisition. The
following unaudited proforma results assume the acquisitions in 1995 occurred at
the beginning of that year and are based on historical amounts adjusted for
changes in interest expense and depreciation and amortization (stated in
thousands except for per unit amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Rental income.............................................................. $ 15,789
Operating (loss)........................................................... (3,320)
Net (loss)................................................................. (3,078)
(Loss) per unit............................................................ (17.38)
</TABLE>
The proforma amounts do not include the immaterial impact of the December
1996 acquisition of the Highland Avenue property in Lowell, Massachusetts,
referred to above.
The proforma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition in 1995 been
consummated at January 1, 1995, nor are these results necessarily indicative of
future operating results.
In 1995, the Partnership sold two condominiums located in Stoneham and
Boston, Massachusetts. The sales price, net of closing costs, was $219,706, and
the gain of $152,463 is included in other income.
In the fourth quarter of 1995, the Partnerships recorded a special charge of
$3,250,000 relating to the early adoption of Statement of Financial Accounting
Standards No. 121 (FAS 121) on accounting for the impairment of long-lived
assets, effective for fiscal years beginning after December 15, 1995. This
28
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
statement requires that long-lived assets held and used by the entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. During 1995, the
Lewiston Mall, with a carrying value of approximately $8,200,000, was
remortgaged for $2,933,000. As part of this refinancing, the lender obtained an
appraisal of $5,000,000. A further analysis of estimated future cash flows, as
required by FAS 121, indicated an impairment. The carrying value of the Lewiston
Mall has been reduced to the net present value of expected future cash flows,
which approximates the aforementioned appraisal.
Real estate and accumulated depreciation as of December 31, 1997 is:
<TABLE>
<CAPTION>
GROSS AMOUNT
COST AT WHICH
CAPITALIZED CARRIED AT
INITIAL COST TO SUBSEQUENT TO CLOSE OF
PARTNERSHIPS(1) ACQUISITION PERIOD
ENCUMBRANCES ---------------------------- (2) ------------
(FIRST BUILDINGS AND --------------
MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND
---------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Condominium Units....................... $ 0 $ 33,746 $ 311,527 $ 37,371 $ 33,746
Residential Units
Massachusetts
Westgate Woburn......................... 6,774,608 461,300 2,424,636 4,176,201 461,300
Residential Apartments
Woburn, Massachusetts
Coach L.P............................... 1,172,999 140,600 445,791 461,904 140,600
Residential Apartments
Acton, Massachusetts
Avon Street Apartments L.P.............. 1,754,711 62,700 837,318 281,721 62,700
Residential Apartments
Malden, Massachusetts
Middlesex Apartments L.P................ 1,083,340 37,700 161,012 206,339 37,700
Residential Apartments
Newton, Massachusetts
Clovelly Apartments L.P................. 2,051,399 177,610 1,478,359 439,740 177,610
Residential Apartments
Nashua, New Hampshire
Nashoba Apartments L.P.................. 1,071,595 79,650 284,548 623,648 79,650
Residential Apartments
Acton, Massachusetts
River Drive L.P......................... 1,519,773 72,525 587,777 984,533 72,525
Residential Apartments
Danvers, Massachusetts
Executive Apartments L.P................ 1,760,559 91,400 740,360 777,925 91,400
Residential Apartments
Framingham, Massachusetts
Willard Apartments L.P.................. 288,589 15,825 63,477 133,384 15,825
Residential Apartments
Quincy, Massachusetts
Olde English Apartments L.P............. 1,381,926 46,181 878,323 305,812 46,181
Residential Apartments
Lowell, Massachusetts
Oak Ridge Apartments L.P................ 2,068,016 135,300 406,544 959,582 135,300
Residential Apartments
Foxboro, Massachusetts
Commonwealth 1137 L.P................... 1,246,728 342,000 1,367,669 208,545 342,000
Residential Apartments
Boston, Massachusetts
<CAPTION>
ACCUMULATED
BUILDINGS AND DEPRECIATION DATE
IMPROVEMENTS TOTALS (3) ACQUIRED
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Condominium Units....................... $ 348,898 $ 382,644 $ 243,613 Various
Residential Units
Massachusetts
Westgate Woburn......................... 6,600,837 7,062,137 3,443,636 Sept. 1977
Residential Apartments
Woburn, Massachusetts
Coach L.P............................... 907,695 1,048,295 573,802 Sept. 1977
Residential Apartments
Acton, Massachusetts
Avon Street Apartments L.P.............. 1,119,039 1,181,739 773,163 Sept. 1977
Residential Apartments
Malden, Massachusetts
Middlesex Apartments L.P................ 367,351 405,051 163,570 Sept. 1977
Residential Apartments
Newton, Massachusetts
Clovelly Apartments L.P................. 1,918,099 2,095,709 1,320,142 Sept. 1977
Residential Apartments
Nashua, New Hampshire
Nashoba Apartments L.P.................. 908,196 987,846 453,131 Sept. 1977
Residential Apartments
Acton, Massachusetts
River Drive L.P......................... 1,572,310 1,644,835 810,738 Sept. 1977
Residential Apartments
Danvers, Massachusetts
Executive Apartments L.P................ 1,518,285 1,609,685 995,674 Sept. 1977
Residential Apartments
Framingham, Massachusetts
Willard Apartments L.P.................. 196,861 212,686 82,627 Sept. 1977
Residential Apartments
Quincy, Massachusetts
Olde English Apartments L.P............. 1,184,135 1,230,316 792,158 Sept. 1977
Residential Apartments
Lowell, Massachusetts
Oak Ridge Apartments L.P................ 1,366,126 1,501,426 663,125 Sept. 1977
Residential Apartments
Foxboro, Massachusetts
Commonwealth 1137 L.P................... 1,576,214 1,918,214 157,162 July 1995
Residential Apartments
Boston, Massachusetts
</TABLE>
29
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS AMOUNT
COST AT WHICH
CAPITALIZED CARRIED AT
INITIAL COST TO SUBSEQUENT TO CLOSE OF
PARTNERSHIPS(1) ACQUISITION PERIOD
ENCUMBRANCES ---------------------------- (2) ------------
(FIRST BUILDINGS AND --------------
MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND
---------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Commonwealth 1144 L.P................... 5,208,986 1,410,000 5,664,816 437,812 1,410,000
Residential Apartments
Boston, Massachusetts
Boylston Downtown L.P................... 7,655,690 2,112,000 8,593,111 473,020 2,112,000
Residential Apartments
Boston, Massachusetts
North Beacon 140 L.P.................... 3,420,710 936,000 3,762,013 443,946 936,000
Residential Units
Boston, Massachusetts
Redwood Hills L.P....................... 4,506,727 1,200,000 4,810,604 630,684 1,200,000
Residential Units
Worcester, Massachusetts
East Hampton L.P........................ 1,392,992 394,011 1,182,031 1,240,760 394,011
Strip Shopping Mall
East Hampton, Connecticut
Timpany Plaza L.P....................... 3,460,975 378,125 4,729,978 352,233 378,125
Shopping Mall
Gardner, Massachusetts
Lewiston Mall L.P. (4).................. 2,847,139 1,043,059 3,694,731 428,916 1,043,059
Shopping Mall
Lewiston, Maine
Linhart L.P............................. 1,289,359 385,000 1,540,000 545,214 385,000
Residential/Commercial
Newton, Massachusetts
Highland Street Apartments, L.P......... 0 156,000 634,085 138,580 156,000
Residential Apartments
Lowell, Massachusetts
---------------- ------------ -------------- -------------- ------------
$ 51,956,821 $ 9,710,732 $ 44,598,710 $ 14,287,870 $ 9,710,732
---------------- ------------ -------------- -------------- ------------
---------------- ------------ -------------- -------------- ------------
<CAPTION>
ACCUMULATED
BUILDINGS AND DEPRECIATION DATE
IMPROVEMENTS TOTALS (3) ACQUIRED
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Commonwealth 1144 L.P................... 6,102,628 7,512,628 642,287 July 1995
Residential Apartments
Boston, Massachusetts
Boylston Downtown L.P................... 9,066,131 11,178,131 968,316 July 1995
Residential Apartments
Boston, Massachusetts
North Beacon 140 L.P.................... 4,205,959 5,141,959 442,616 July 1995
Residential Units
Boston, Massachusetts
Redwood Hills L.P....................... 5,441,288 6,641,288 577,017 July 1995
Residential Units
Worcester, Massachusetts
East Hampton L.P........................ 2,422,791 2,816,802 792,903 Sept. 1984
Strip Shopping Mall
East Hampton, Connecticut
Timpany Plaza L.P....................... 5,082,211 5,460,336 2,385,387 Sept. 1985
Shopping Mall
Gardner, Massachusetts
Lewiston Mall L.P. (4).................. 4,123,647 5,166,706 472,641 Feb. 1989
Shopping Mall
Lewiston, Maine
Linhart L.P............................. 2,085,214 2,470,214 222,309 Jan. 1995
Residential/Commercial
Newton, Massachusetts
Highland Street Apartments, L.P......... 772,665 928,665 45,953 Dec. 1996
Residential Apartments
Lowell, Massachusetts
-------------- -------------- ---------------
$ 58,886,580 $ 68,597,312 $ 17,021,970
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
- ------------------------
(1) The initial cost to the Partnerships represents both the balance of
mortgages assumed in September 1977, including subsequent adjustments to
such amounts, and subsequent acquisitions at cost.
(2) Net of retirements, which are not significant.
(3) In 1997, rental properties were depreciated over the following estimated
useful lives:
<TABLE>
<S> <C>
Assets Life
Buildings and Improvements 10-31
years
Other Categories of Assets 5-10 years
</TABLE>
(4) Initial costs and carrying values are net of $3,250,000 impairment loss.
30
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
A reconciliation of rental properties and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -------------
Rental Properties
Balance, Beginning................................................ $ 67,429,200 $ 65,052,299 $ 37,753,503
Additions
Buildings, improvements, and other assets....................... 2,164,204 3,218,539 33,334,751
------------- ------------- -------------
69,593,404 68,270,838 71,088,254
------------- ------------- -------------
Deduct:
Write-off of retired or disposed assets......................... 996,092 841,638 1,101,345
Loss on impairment of rental properties......................... -- -- 4,934,610
------------- ------------- -------------
996,092 841,638 6,035,955
------------- ------------- -------------
Balance, Ending................................................... $ 68,597,312 $ 67,429,200 $ 65,052,299
------------- ------------- -------------
------------- ------------- -------------
Accumulated Depreciation
Balance, Beginning................................................ $ 15,135,219 $ 13,364,030 $ 13,971,336
Add:
Depreciation for the year....................................... 2,882,843 2,612,827 2,111,405
------------- ------------- -------------
18,018,062 15,976,857 16,082,741
------------- ------------- -------------
Deduct:
Accumulated depreciation of retired or disposed assets.......... 996,092 841,638 1,034,101
Loss on impairment of rental properties......................... -- -- 1,684,610
------------- ------------- -------------
996,092 841,638 2,718,711
------------- ------------- -------------
Balance, Ending..................................................... $ 17,021,970 $ 15,135,219 $ 13,364,030
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
31
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS
The Partnerships' properties are managed by an entity which is owned by the
majority shareholder of the General Partner. The management fee is equal to 4%
of rental revenue and laundry income. Total fees paid were $715,086, $677,066,
and $504,842 in 1997, 1996, and 1995 respectively. Advance rental payments and
security deposits are held in escrow by the management company (see Note 6). The
management company also receives a mortgage servicing fee equal to an annual
rate of 1/2% of the monthly outstanding balance of mortgages receivable
resulting from the sale of property. There were no mortgage servicing fees paid
in 1997, 1996, and 1995.
The Partnership Agreement also permits the General Partner or management
company to charge the costs of professional services (such as counsel,
accountants, and contractors) to NERA. In 1997, 1996, and 1995 approximately
$731,000, $511,000, and $231,000 was charged to NERA for legal, construction,
maintenance, rental and architectural services, and supervision of capital
improvements. Approximately $295,000, $232,000, and $50,000 was capitalized in
1997, 1996 and 1995 in rental properties. Included in the 1997 expenses referred
to above, approximately $235,000 is recorded in repairs and maintenance,
$154,000 in administrative expense, and $47,000 in renting expense. Included in
the 1996 expenses referred to above, approximately $115,000 is recorded in
repairs and maintenance expenses, approximately $147,000 in administrative
expenses, and approximately $17,000 in renting expenses. In 1995 the balance of
$181,000 was included in administrative expense. Additionally in 1997, 1996 and
1995, the Partnership paid to the management company $50,000, $50,000, and
$30,000 respectively for accounting services previously provided by an outside
company.
The Partnership Agreement entitles the General Partner or a management
company to receive certain commissions upon the sale of Partnership property
only to the extent that total commissions do not exceed 3%. No such commissions
were paid in 1997, 1996, or 1995.
In 1996, an unrelated individual that performed asset management consulting
services to NERA and the management company was appointed President of the
management company. This individual continues to receive asset management fees
from NERA, receiving $30,600 and $28,800 in 1997 and 1996 respectively.
Included in prepaid expenses and other assets were amounts due from related
parties of $487,321 and $416,317 at December 31, 1997 and 1996 respectively,
representing Massachusetts tenant security and prepaid rent deposits, which are
held for the Partnerships by another entity also owned by one of the
shareholders of the General Partner (see Note 6).
Also included in prepaid expenses and other assets is an insurance reserve
account funded by the Partnerships and held by the management company. The
insurance reserve includes funds from other properties which are also owned by
the related parties. The balance in the reserve was $155,072 and $82,856 at
December 31, 1997 and December 31, 1996 respectively.
See Note 10 for rental arrangements with the Timpany Plaza joint venture.
As described in Note 4, the Partnership has interests in certain entities in
which the majority shareholder of the General Partner is also involved.
See Note 2 for fees paid to related parties by the sellers of the
Partnerships' 1995 acquisitions.
32
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--OTHER ASSETS
Short-term investments are considered to be trading securities per FAS 115
and are carried on the balance sheet at their market value. At December 31,
1997, a mutual fund with a cost of $2,018,134 was recorded at its market value
of $2,055,429. The unrealized gain of $37,296 is included in other income. At
December 31, 1996, a 5.07% certificate of deposit maturing in February 1997 is
carried at its cost of $51,528, which approximates market.
Included in prepaid expenses and other assets at December 31, 1997 and 1996,
is approximately $389,000 and $669,000 respectively held in escrow to pay future
capital improvements (See Note 5).
The carrying value of the Partnership's 50% interest in the Timpany Plaza
joint venture, at equity, is $75,467 and $93,734 at December 31, 1997 and
December 31, 1996 respectively.
The Partnership owns a 10% ownership interest in a real estate partnership
accounted for by the equity method and reduced to a carrying value of zero.
Losses in excess of cost in limited partnerships have not been recorded as the
Partnership is not liable for such amounts. The majority shareholder of the
General Partner is also the majority owner of this partnership. There can be no
assurance that any of NERA's partnership investments will be realizable in the
future in excess of their carrying value. In 1996, $18,360 is recorded in other
income for the amount received from the disposition of investment partnerships
that had previously been reduced to a carrying value of zero.
NOTE 5--MORTGAGES PAYABLE
At December 31, 1997 and December 31, 1996, the mortgages payable consisted
of various loans, substantially all of which were secured by first mortgages on
properties referred to in Note 2, with interest ranging from 8.25% to 10.99%,
payable in monthly installments currently aggregating approximately $431,000
including interest, to various dates through 2005. Although the loans mature
within ten years, they are being amortized on a basis between 25 and 27.5 years.
The carrying amounts of the Partnerships' mortgages payable approximate their
fair value.
The Partnerships have pledged tenant leases as additional collateral for
certain of these mortgages.
Approximate annual maturities are as follows:
<TABLE>
<S> <C>
1998--current maturities....................................... $ 634,000
1999........................................................... 692,000
2000........................................................... 7,335,000
2001........................................................... 743,000
2002........................................................... 808,000
Thereafter..................................................... 41,745,000
----------
$51,957,000
----------
----------
</TABLE>
NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS
The lease agreements for certain properties require tenants to maintain a
one-month advance rental payment plus security deposits. The funds are held in
escrow by another entity owned by the majority shareholder of the General
Partner (see Note 3).
33
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PARTNERS' CAPITAL
The Partnership has two categories of limited partners (Class A and B) and
one category of General Partner (General Partner). Under the terms of the
Partnership Agreement, Class B units and General Partnership units must
represent 19% and 1% respectively of the total units outstanding. All classes
have equal profit-sharing and distribution rights in proportion to their
ownership interests.
The Partnership declared distributions of $8.80 per unit in 1997 and $6.80
per unit in 1996, and 1995. The 1997 distribution includes a special dividend of
$ 1.00 per unit paid in March 1997 (see note 13).
In March 1998, the Partnership declared a regular semi-annual dividend of
$4.10 per unit.
The Partnership has entered into a deposit agreement with an agent to
facilitate public trading of limited partners' interests in Class A units.
Under the terms of this agreement, the holders of Class A units have the
right to exchange each Class A unit for ten Depositary Receipts. The following
is information on the net income (loss) per Depositary Receipt:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net Income (Loss) per Depositary Receipt................................................. $ .73 $ .52 $ (1.62)
--- --- ---------
--- --- ---------
</TABLE>
NOTE 8--CAPITAL UNIT REPURCHASE PLAN
During the second quarter of 1996, the Partnership announced a plan to
purchase up to $500,000 of its Depositary Receipts from existing holders of
securities. The repurchase of Depositary Receipts took place over a period of
approximately eighteen months. The purchase prices paid for Depositary Receipts
varied and were equal to the price at which such securities were traded on the
Nasdaq Stock Market at the time of purchase. During 1997 and 1996, the
Partnership purchased 15,288 and 15,915 Depositary Receipts for a total cost of
$139,268 and $110,060, respectively.
In addition, 363 Class B and 19 General Partnership units were purchased in
1997 for a total cost of $34,819 and 378 Class B and 20 General Partnership
units were purchased in 1996 for a total cost of $27,517 to maintain the
ownership percentages required by the current form of partnership agreement (See
Note 7).
Treasury units at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Class A.............................................................. 5,681
Class B.............................................................. 1,228
General Partner...................................................... 64
---------
6,973
---------
---------
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
From time to time, the Partnerships are involved in various ordinary routine
litigation incidental to their business. The Partnerships are not involved in
any material pending legal proceedings.
34
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RENTAL INCOME
In 1997, approximately 88% of rental income is related to residential
apartments and condominium units with leases of one year or less. The remaining
12% is related to commercial properties which have minimum future rental income
on noncancellable operating leases as follows:
<TABLE>
<CAPTION>
COMMERCIAL
PROPERTY
LEASES LAND LEASES TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
1998.................................................................... $ 1,554,000 $ 130,000 $ 1,684,000
1999.................................................................... 1,128,000 132,000 1,260,000
2000.................................................................... 901,000 150,000 1,051,000
2001.................................................................... 665,000 150,000 815,000
2002.................................................................... 517,000 150,000 667,000
Thereafter.............................................................. 1,359,000 1,087,000 2,446,000
------------ ------------ ------------
$ 6,124,000 $ 1,799,000 $ 7,923,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In August 1988, the Partnership entered into a land lease agreement with an
existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts.
The minimum annual rents are $110,000 per year for the first five years,
increasing each subsequent five-year period, with the average being $137,500 per
year for the minimum twenty-year term. Included in rents receivable at December
31, 1997 and 1996 is $171,000 and $163,000 respectively, representing the
deferred rental income from this lease. There are also contingent rents based
upon sales volume, common area maintenance, and other charges. This lease also
provides for six extension periods of five years each at increased rents. The
minimum rents pertaining to this agreement are reflected in the foregoing table.
Concurrently, the Partnership entered into a joint venture with this same
tenant relating to the space formerly leased by the tenant. Under this
arrangement, the two parties have agreed to relet the space and divide the net
income or loss after paying to the Partnership an annual minimum rent of
$84,546. The Partnership's share of losses for the year ended 1997 was $10,584,
compared to income of $12,294 and $28,904 for the years ended 1996, and 1995
respectively.
The aggregate minimum future rental income does not include contingent
rentals which may be received under various leases in connection with percentage
rents, common area charges, and real estate taxes. Aggregate contingent rentals
were $906,731, $927,294, and $730,613 for the years ended December 31, 1997,
1996, and 1995 respectively.
NOTE 11--CASH FLOW INFORMATION
During the years ended December 31, 1997, 1996, and 1995, cash paid for
interest was $4,595,922, $4,644,058, and $3,461,577 respectively.
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership considers the fair value of its financial instruments to
approximate their carrying values because conditions pertaining to the historic
carrying values approximate those in the current market.
35
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--TAXABLE INCOME AND TAX BASIS
Taxable income reportable by the Partners is different than statement income
because of accelerated depreciation, different tax lives for some properties,
impairment losses, and the inclusion for tax purposes of profits and losses
realized on equity investments. Taxable income for 1997 is approximately $71,000
greater than statement income. In March 1997, the Partnership declared a special
$.10 dividend per depository receipt payable March 31, 1997 to assist partners
with any negative tax consequences of these
transactions arising from the reportability for tax purposes of gains of
approximately $1,050,000 from the disposition of two equity investments.
Cumulative tax basis at December 31, 1997 is approximately $2,200,000
greater than the statement basis.
NOTE 14--QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 TOTAL
------------ ------------ ------------- ------------ -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 4,272,830 $ 4,259,107 $ 4,469,504 $4,505,530 $ 17,506,971
Expenses................................ 4,104,523 3,965,526 4,176,141 4,137,127 16,383,317
------------ ------------ ------------- ------------ -------------
Income from Operations.................. 168,307 293,581 293,363 368,403 1,123,654
Other Income............................ 29,297 25,738 30,573 59,369 144,977
------------ ------------ ------------- ------------ -------------
Net Income.............................. $ 197,604 $ 319,319 $ 323,936 $ 427,772 $ 1,268,631
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Net Income per Unit..................... $ 1.13 $ 1.83 $ 1.87 $ 2.47 $ 7.30
Net Income per Depository Receipt....... $ .11 $ .18 $ .19 $ .25 $ .73
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 TOTAL
------------ ------------ ------------- ------------ -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 4,235,464 $ 4,187,671 $ 4,101,730 $4,110,018 $ 16,634,883
Expenses................................ 3,881,730 3,904,970 3,853,986 4,268,548 15,909,234
------------ ------------ ------------- ------------ -------------
Income (Loss) from Operations........... 353,734 282,701 247,744 (158,530) 725,649
Other Income............................ 59,268 40,522 42,125 44,866 186,781
------------ ------------ ------------- ------------ -------------
Net Income (Loss)....................... $ 413,002 $ 323,223 $ 289,869 $ (113,664) $ 912,430
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Net Income (Loss) per Unit.............. $ 2.33 $ 1.82 $ 1.67 $ (.65) $ 5.17
Net Income (Loss) per Depositary
Receipt............................... $ .23 $ .18 $ .17 $ (.06) $ .52
</TABLE>
During the fourth quarter of 1996, the Partnership revised its estimates of
depreciation and amortization and recorded approximately $200,000 of expenses
applicable to earlier quarters during the year.
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 456,277
<SECURITIES> 2,055,429
<RECEIVABLES> 604,350
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 68,597,312
<DEPRECIATION> 17,021,970
<TOTAL-ASSETS> 58,147,503
<CURRENT-LIABILITIES> 0
<BONDS> 51,956,821
0
0
<COMMON> 0
<OTHER-SE> 3,465,230
<TOTAL-LIABILITY-AND-EQUITY> 58,147,503
<SALES> 0
<TOTAL-REVENUES> 17,506,971
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,732,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,650,806
<INCOME-PRETAX> 1,123,654
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,268,631
<EPS-PRIMARY> 7.30
<EPS-DILUTED> 7.30
</TABLE>
