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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, 1998 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)
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Registrant's telephone number, including area code (617) 783-0039
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 February 26, 1999, the aggregate market value of traded securities
held by non-affiliates of the registrant was $13,062,587, 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 Partnership terminates on December 31, 2017, except
the General Partner may extend the termination date for an additional forty
years.
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 refinancing 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. 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. In
connection with a refinancing in March 1999, the Partnership restructured the
ownership of another apartment complex located in Woburn, Massachusetts. In
addition, on December 21, 1998, the Partnership entered into a purchase and sale
agreement for the sale of an apartment complex located in Quincy, Massachusetts
which had previously been held by a Subsidiary Partnership. SEE "ITEM 1. RECENT
DEVELOPMENTS."
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
ratios. 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 Management Corporation, 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 60 individuals who
are primarily involved in the supervision and maintenance of specific
properties. The General Partner has no employees.
1
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As of February 26, 1999, 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 condominium unit in a separate condominium
complex and one co-operative apartment (the condominium units 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 February 26, 1999, 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 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 Joint
Venture 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 Joint Venture 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 Receipts from existing holders of securities. The
purchase of Receipts took place over a period of approximately eighteen months.
The purchase prices paid for 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. During 1997 and 1996, the Partnership purchased 15,288 and 15,915
Receipts for a total cost of $139,268 and $110,060, respectively. The plan to
purchase Receipts was terminated on December 10, 1997. See Note 8 to Notes to
Financial Statements included as part of this Form 10-K.
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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 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 31% vacant and the
Partnership cannot determine the effect the vacancy rate Timpany Plaza will have
on the Partnership's 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 1998, 1997 or 1996. However, the
Partnership executed a purchase and sale agreement on December 21, 1998 for the
sale of the Willard Street apartments, a 16-unit apartment building in Quincy,
Massachusetts. The building is to be sold at a purchase price of approximately
$850,000. The Partnership currently plans to assign to the purchaser the
existing mortgage which has a current balance of approximately $285,000. In
consideration of the sale, the purchaser proposes to pay the purchase price by
making a cash down-payment of $85,000. The balance of the purchase price will be
evidenced by a promissory note which will be secured by a mortgage on other real
property owned by the purchaser or a relative of the purchaser who will also
execute a guarantee in favor of the Partnership.
3
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On March 24, 1999, the Partnership refinanced an existing mortgage on the
Westgate Woburn Apartments, a 221-unit apartment complex in Woburn,
Massachusetts. In connection with the refinancing, the refinancing bank required
the Partnership to transfer the ownership of the Westgate Woburn property to a
single purpose entity. Ownership of the Westgate Woburn property was transferred
to a Massachusetts limited liability company in which the Partnership owns a
99.67% interest and the remaining .33% interest is held by an unaffiliated third
party. The unaffiliated third party has entered into a lease agreement with the
Partnership pursuant to which any benefit derived from its ownership interest in
the Westgate Woburn property will be returned to the Partnership. As a result of
the refinancing, the Partnership paid the existing debt of approximately
$6,700,000 and lowered the interest rate on the new mortgage of $12,000,000 from
10.99% to 7.07%. The new mortgage for Westgate Woburn has a term of fifteen (15)
years with a 25 year amortization. The Partnership plans to use the approximate
$5,000,000 in net proceeds obtained from the refinancing to develop additional
apartment units on the Westgate Woburn property and to acquire other as yet
unidentified properties.
In March 1999, the Partnership entered into an agreement to purchase a
39,600 square foot commercial property known as Staples Plaza, located in
Framingham, Massachusetts. The purchase price is $8,200,000. The Partnership
will assume an 8% mortgage on the property of approximately $5,200,000 maturing
in 2016 and the balance of $3,000,000 will be funded from the Partnership's cash
reserves. The Partnership plans to close on the property in June 1999. This
purchase is conditional on the assignment of the existing mortgage which has not
been obtained as of March 24, 1999.
Other than such purchases described above, the Partnership has not acquired
new properties since February 1989. See "ITEM 2. PROPERTIES--Commercial
Properties." During 1998 the Partnership made certain improvements to its
properties at a total cost of approximately $2,300,000. 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 Advisory Committee has no
binding power except with respect to investments and acquisitions involving
affiliates of the Partnership.
ITEM 2. PROPERTIES
As of February 26, 1999, the Partnership and its Subsidiary Partnerships own
the Apartment Complexes, the Condominium Units and the Commercial Properties.
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.
4
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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
February 26, 1999, the principal amount outstanding under any mortgages as of
December 31, 1998, and the maturity dates of such mortgages.
<TABLE>
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MORTGAGE
BALANCE
AND INTEREST MATURITY
NUMBER AND RATE AS OF DATE
APARTMENT TYPE OF RENT DECEMBER OF
COMPLEX UNITS RANGE VACANCIES 31, 1998 MORTGAGE
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<S> <C> <C> <C> <C> <C>
Coach LP........................... 48 units 1 $ 1,158,237 2005
53-55 Brook St. 0 three-bedrooms 8.25%
Acton, MA 24 two-bedrooms $ 815-920
20 one-bedrooms $ 725-820
4 studios $ 635-650
Westgate Woburn.................... 221 units 6 $ 6,716,975 2000
2-20 Westgate Dr. 1 three-bedroom $ 1495 10.99%
Woburn, MA 110 two-bedrooms $ 810-1085
110 one-bedrooms $ 705-940
0 studios N/A
Avon Street Apts. LP............... 66 units 1 $ 1,734,243 2005
130 Avon Street 0 three-bedrooms N/A 8.775%
Malden, MA 30 two-bedrooms $ 790-870
33 one-bedrooms $ 660-780
3 studios $ 595-605
Middlesex Apts. LP................. 18 units 0 $ 1,070,500 2005
132-144 Middlesex Rd. 18 three-bedrooms $ 1415-1650 8.625%
Newton, MA 0 two-bedrooms N/A
0 one-bedrooms N/A
0 studios N/A
Clovelly Apts. LP.................. 103 units 3 $ 2,026,690 2005
160-170 Concord St. 0 three-bedrooms N/A 8.375%
Nashua, NH 53 two-bedrooms $ 635-795
50 one-bedrooms 545-625
0 studios N/A
Nashoba Apts. LP................... 32 units 3 $ 1,058,792 2005
284 Great Road 0 three-bedrooms N/A 8.625%
Acton, MA 32 two-bedrooms $ 880-1195
0 one-bedrooms N/A
0 studios N/A
River Drive LP..................... 72 units 3 $ 1,502,046 2005
3-17 River Drive 0 three-bedrooms N/A 8.775%
Danvers, MA 60 two-bedrooms $ 705-800
5 one-bedrooms $ 650-665
7 studios $ 550-565
Executive Apts. LP................. 72 units 3 $ 1,740,023 2005
545-561 Worcester Road 0 two-bedrooms N/A 8.775%
Framingham, MA 48 two-bedrooms $ 450-865
24 one-bedrooms $ 685-770
0 studios N/A
Willard Apts. LP................... 16 units 3 $ 285,058 2005
580 Willard St. 0 three-bedrooms N/A 8.375%
Quincy, MA 8 two-bedrooms $ 715-825
8 one-bedrooms $ 660-725
0 studios N/A
</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, 1998 MORTGAGE
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Olde English Apts. LP.............. 84 units 5 $ 1,365,217 2005
703-718 Chelmsford St. 0 three-bedrooms 8.5%
Lowell, MA 47 two-bedrooms $ 640-745
30 one-bedrooms $ 600-680
7 studios $ 550-590
Oak Ridge Apts. LP................. 61 units 3 $ 2,043,011 2005
Chestnut St. 42 three-bedrooms $ 830-945 8.5%
Foxboro, MA 19 two-bedrooms $ 710-805
0 one-bedrooms N/A
0 studios N/A
Linhart LP......................... 9 units 0 $ 1,271,296 2005
4-34 Lincoln St. 0 three-bedrooms N/A 9.25%
Newton, MA 0 two-bedrooms N/A
6 one-bedrooms $ 640-795
3 studios $ 585-605
Commonwealth 1137 LP............... 35 units 28 three- 0 $ 1,231,350 2005
1131-1137 Comm. Ave. bedrooms $ 1175-1495 8.375%
5 two-bedrooms $ 825-1150
1 one-bedrooms $ 445
1 studio $ 625
Redwood Hills LP................... 180 units 3 $ 4,451,138 2005
376-384 Sunderland Rd. 0 three-bedrooms N/A 8.375%
Worcester, MA 89 two-bedrooms $ 695-850
91 one-bedrooms $ 620-830
0 studios N/A
Commonwealth 1144 LP............... 261 units 0 $ 5,144,734 2005
1144-1160 Comm. Ave. 0 three-bedrooms N/A 8.375%
Allston, MA 11 two-bedrooms $ 600-955
108 one-bedrooms $ 640-895
142 studios $ 530-750
Boylston Downtown LP............... 269 units 0 $ 7,561,258 2005
62 Boylston St. 0 three-bedrooms N/A 8.375%
Boston, MA 0 two-bedrooms N/A
53 one-bedrooms $ 645-1,400
216 studios $ 530-985
North Beacon 140 LP................ 64 units 2 $ 3,378,516 2005
140-154 North Beacon St. 10 three-bedrooms $ 1785-1950 8.375%
Brighton, MA 54 two-bedrooms $ 1230-1595
0 one-bedrooms N/A
0 studios N/A
Highland Street Apartments......... 36 Units 1 0 0
38-40 Highland Street 0 three-bedrooms N/A
Lowell, MA 24 two-bedrooms $ 542-$655
10 one-bedrooms $ 500-$610
2 Studios $ 495-$530
</TABLE>
See Note 5 to Notes to Financial Statements included as part of this Form
10-K for information relating to the Partnership's and its Subsidiary
Partnership 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
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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 Partnership for such units, and
the number of vacancies as of February 26, 1999. 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
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Riverside Apartments.................................. 19 0 three-bedrooms N/A 0
8-20 Riverside Street 12 two-bedrooms $ 890-1100
Watertown, MA 5 one-bedrooms $ 770-855
2 studios $ 750-795
The Kenmore Tower(1).................................. 1 0 three-bedrooms N/A 0
566 Commonwealth Avenue 1 one-bedroom $ 1,345
Boston, MA 0 studios N/A
Chateaux Westgate..................................... 1 0 three-bedrooms N/A 0
Oak Lane 1 two-bedrooms $ 780
Brockton, MA 0 studios N/A
</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 $5,500
was allocated to the Partnership as of December 31, 1998.
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, 1998, the mortgage had an outstanding balance of
$1,371,635. As of February 26, 1999, the shopping center had a vacancy rate of
5%, and the average rent per square foot was $5.03.
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, 1998, the mortgage had an
outstanding balance of $3,408,345. As of February 26, 1999, the shopping center
had a vacancy rate of 31%, and the average rent per square foot was $3.52.
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.
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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
being split evenly between this Subsidiary Partnership and the tenant. This
Subsidiary Partnership's share of the joint venture's net income in 1998 was
$16,714.
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, 1998, the mortgage had an outstanding balance of
$2,803,488. As of February 26, 1999, the Shopping Center had a 5% vacancy rate,
and the average rent per square foot was $4.01.
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 February 26, 1999, the commercial space had a 1%
vacancy rate, and the average rent per square foot was $18.98.
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 February 26, 1999, the
commercial space had a 67% vacancy rate, and the average rent per square foot
was $13.75. The Partnership is currently negotiating with potential tenants 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 February 26, 1999, the
commercial space was fully rented, and the average rent per square foot was
$12.73.
See Item 13 "Certain Relationships and Related Transactions" concerning
ownership interest in the above properties.
INVESTMENT PROPERTY
As of December 31, 1998, the Partnership's investment and its interest in
the joint venture with a Timpany Plaza tenant comprised less than 1% of the
Partnership's total assets.
WEST PEABODY LIMITED PARTNERSHIP Prior to September 9, 1998, the
Partnership owned a 10% limited partnership interest in the West Peabody Limited
Partnership ("West Peabody L.P."). West Peabody L.P. owned a 125,000 square foot
office and warehouse building in West Peabody, Massachusetts. On September 9,
1998, West Peabody L.P. was sold. As of the date of the sale and disposition of
West Peabody L.P., the Partnership's share of losses generated by the West
Peabody L.P. through the said date exceeded the Partnership's investment by
approximately $664,000. As a result of the disposition of West Peabody L.P.,
each of the limited partners will recognize income in an amount equal to their
proportionate share of the Partnership's losses in excess of such limited
partner's tax basis.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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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 1998, the high and low bid quotations for the Receipts were $13.00 and
$9.19, respectively. The table below sets forth the high and low bids for each
quarter of 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
HIGH HIGH
LOW BID BID LOW BID BID
------- ------- ------- -------
First Quarter................................................................. 9 3/16 11 1/2 $ 7 $ 9
Second Quarter................................................................ 9 1/2 11 $ 8 1/8 $ 9 1/4
Third Quarter................................................................. 9 3/8 13 $ 8 1/4 $11 1/2
Fourth Quarter................................................................ 10 11 1/4 $ 8 3/4 $11 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 1998 and 1997,
the Partnership made total distributions of $8.20 and $8.80 per Partnership
Unit, respectively ($.82 and $.88 per Receipt, respectively). The total value of
the distribution in 1998 was $1,418,369, an amount determined by the General
Partner and the Partnership's Advisory Committee. In February 1999, the
Partnership declared a regular semi-annual distribution of $4.60 per Partnership
Unit ($.46 per Receipt) and a special dividend of $3.50 per Partnership Unit
(.35 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 1998 and 1997, the taxable income exceeded
statement income by approximately $790,000 and $71,000, respectively. The
Partnership declared a special distribution in February 1999 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 Receipts from existing holders of securities. The
purchase of Receipts took place over a period of eighteen months. The purchase
prices paid for 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.
During 1997 and 1996, the Partnership purchased 15,288 and 15,915 Receipts for a
total cost of $139,268 and $110,060, respectively. 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. The plan to purchase Receipts was terminated on December 10,
1997.
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 21 of this Form
10-K.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
New England Realty Associates Limited Partnership and its Subsidiary
Partnerships earned income from operations of $1,985,727 during the year ended
December 31, 1998, compared to $1,123,654 during the year ended December 31,
1997, an increase of $862,073.
The rental activity is summarized as follows:
<TABLE>
<CAPTION>
OCCUPANCY DATE
-------------------------------
FEBRUARY 26,
1999 MARCH 4, 1998
---------------- -------------
<S> <C> <C>
Residential
Units..................................................... 1,668 1,668
Vacancies................................................. 37 48
Vacancy rate.............................................. 2.2% 2.9%
Commercial
Total square feet......................................... 457,700 457,700
Vacancy................................................... 80,852 107,850
Vacancy rate.............................................. 18% 24%
</TABLE>
<TABLE>
<CAPTION>
RENTAL INCOME
-------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Total rents................................................. $ 18,271 $ 17,313
Residential percentage...................................... 86% 84%
Commercial percentage....................................... 14% 16%
Contingent rentals.......................................... $ 731 $ 847
</TABLE>
Rental income for the year ended December 31, 1998 was approximately
$18,271,000 compared to approximately $17,313,000 for the year ended December
31, 1997, an increase of approximately $958,000 (5.5%). Rental income increased
at the residential properties approximately $1,067,000 (7%), while rental income
at the commercial properties decreased approximately $109,000 (4%). Due to the
demand for residential rental property in the greater Boston area, the
Partnership has seen an average increase in rental rates of approximately 5% as
well as a decrease in vacancies. Vacancies at the residential properties have
decreased 23% to 37 vacancies at February 1999 compared to 48 at March 1998. The
decrease in rental income at the commercial properties is due primarily to the
vacancy rate at the Timpany Plaza Shopping Center. The rental rates have
remained relatively stable at the commercial properties.
Expenses for the year ended December 31, 1998 were approximately $16,462,000
compared to approximately $16,383,000 for the year ended December 31, 1997, an
increase of approximately $79,000. Administrative expenses increased to
approximately $1,053,000 for the year ended December 31, 1998 from approximately
$991,000 for the year ended December 31, 1997, an increase of approximately
$62,000. This represents an increase in professional fees due in part to special
projects for which the Partnership contracted during the early part of 1998.
Depreciation and amortization expense increased to approximately $3,339,000 for
the year ended December 31, 1998 from approximately $3,239,000 for the year
ended December 31, 1997, an increase of approximately $100,000. This increase is
due to ongoing capital improvements to the Partnership properties. Management
fees increased to approximately $773,000 for the year ended December 31, 1998
from approximately $738,000 for the year ended December 31, 1997, an increase of
approximately $35,000. The increase is due to the increase in rental income.
10
<PAGE>
These increases are offset by a decrease in interest expense to
approximately $4,608,000 for the year ended December 31, 1998 from approximately
$4,651,000 for the year ended December 31, 1997, a decrease of approximately
$43,000. This is due to a lower level of mortgage debt. Operating expenses
decreased to approximately $1,900,000 for the year ended December 31, 1998 from
approximately $1,962,000 for the year ended December 31, 1997, a decrease of
approximately $62,000. This decrease is due to lower utility and heating costs
in 1998 as a result of a milder winter as well as the payment of a utility bill
in 1997 which related to prior years and did not recur in 1998. Renting expenses
decreased to approximately $298,000 for the year ended December 31, 1998 from
approximately $318,000 for the year ended December 31, 1997, a decrease of
approximately $20,000. This decrease is due to a decrease in rental commissions
resulting from lower tenant turnover.
Repairs and maintenance remained relatively unchanged at approximately
$2,607,000 and $2,601,000 for 1998 and 1997 respectively. Taxes and insurance
also remained relatively stable at approximately $1,883,000 and $1,882,000 for
1998 and 1997 respectively.
Interest income was approximately $171,000 for the year ended December 31,
1998 compared to approximately $133,000 for the year ended December 31, 1997, an
increase of approximately $38,000. This increase is due to an increase in the
average cash balance available for investment in 1998.
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 income for 1998 in the joint venture at the
Timpany Plaza Shopping Center was approximately $17,000 compared to a loss of
approximately $11,000 in 1997, an increase of approximately $28,000. This
increase in income at the joint venture is due to leasing 10,000 square feet of
space for the full year of 1998 which was vacant in 1997.
Included in other income in 1998 and 1997 is approximately $56,000 and
$37,000 respectively, in unrealized appreciation in the Partnership's short-term
investment.
As a result of the changes discussed above, net income for the year ended
December 31, 1998 was approximately $2,225,000 compared to approximately
$1,269,000 for the year ended December 31, 1997, an increase of approximately
$956,000.
11
<PAGE>
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.
<TABLE>
<CAPTION>
OCCUPANCY DATE
-----------------------------
MARCH 4, 1998 MARCH 14, 1997
------------- --------------
<S> <C> <C>
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
-----------------------------
1997 1996
------------- --------------
<S> <C> <C>
Total rents................................................... $ 17,313 $ 16,449
Residential percentage........................................ 84% 86%
Commercial percentage......................................... 16% 14%
Contingent rentals............................................ $ 847 $ 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 69,000 square feet of space and paid to the
Partnership approximately $188,000 in 1996 and $118,000 in 1997, vacated the
premises and at March 4, 1998 the space remained 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 is due to 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 is due to an increase in rental commissions paid
in 1997. 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 reflects 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.
12
<PAGE>
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, an increase of approximately $23,000. This was
the result of rental income from the joint venture decreasing significantly due
to an increase in vacancies in the relet space.
Included in other income in 1997 is approximately $37,000 in unrealized
appreciation in the Partnership's short-term investments and, in 1996,
approximately $18,000 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.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash during 1998 and 1997 was the
collection of rents. The majority of cash and cash equivalents of approximately
$623,000 at December 31, 1998 and approximately $456,000 was held in an interest
bearing account. The Partnership's short-term investments are approximately
$3,060,000 at December 31, 1998 of which approximately $1,921,000 is invested in
a Massachusetts Municipal Bond Fund and approximately $1,139,000 is invested in
a U.S. Treasury Fund. At December 31, 1997, the short-term investment of
approximately $2,055,000 is invested in a Massachusetts Municipal Bond Fund.
In December 1998, the Partnership entered into an agreement to sell the
Willard Street Apartments located in Quincy, Massachusetts. The sale price is
$850,000. The buyer will assume the first mortgage of approximately $285,000,
and the Partnership will take back a mortgage of approximately $480,000 at a
rate of 7.5%. The net cash from the sale of this property will be approximately
$85,000. The mortgage matures at the earlier of the refinancing of the property
or July 31, 2005.
On March 24, 1999, the Partnership refinanced the Westgate Apartments
located in Woburn, Massachusetts. The new loan will be $12,000,000, with an
interest rate of 7.07%, and a term of 15 years, amortized over 25 years. The net
cash of approximately $5,000,000 from this refinancing will be used for future
acquisitions and redevelopment of the Westgate Apartments.
In March 1999, the Partnership entered into an agreement to purchase a
39,600 square-foot commercial property known as Staples Plaza, located in
Framingham, Massachusetts. The purchase price is $8,200,000. The Partnership
will assume an 8% mortgage on the property of approximately $5,200,000, maturing
in 2016; and the balance of $3,000,000 will be funded from the Partnership's
cash reserves. The Partnership plans to close on the property in June 1999. This
purchase is conditional on the assignment of the existing mortgage which has not
been obtained as of March 24, 1999.
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 18 months. The purchase prices paid for
such Depositary Receipts were equal to the price at which such securities were
traded on the NASDAQ Stock Market at the time of the purchase. During 1997 and
1996, the Partnership
13
<PAGE>
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 $34,819 in 1997 and 378 Class B and 20
General Partnership units for a total cost of $27,517 in 1996 to maintain the
ownership percentages required by the current form of partnership agreement. The
plan to purchase Depositary Receipts was terminated on December 10, 1997.
During 1998, the Partnership and its Subsidiary Partnerships completed
certain improvements to their properties at a total cost of approximately
$2,324,000. The most significant improvements were made at 62 Boylston Street,
located in Boston, Massachusetts for a total cost of approximately $502,000 and
at 2-20 Westgate Dr., located in Woburn, Massachusetts for a total cost of
approximately $441,000. Additional capital improvements of approximately
$223,000, $210,000, $142,000, $121,000 and $105,000 were made to the Lincoln
Street Apartments, Redwood Apartments, 1144 - 1160 Commonwealth Avenue, Oakridge
Apartments, and North Beacon Street Apartments, respectively.
In 1999, the Partnership and its Subsidiary Partnerships plan to invest
approximately $2,500,000 in capital improvements, of which approximately
$2,181,000 is designated for residential properties and approximately $319,000
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 and mortgage refinancings 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.
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 LP in Lewiston, Maine, which paid
approximately $329,000 in rent in 1998, can terminate its lease with nine months
notice, effective January 1, 1997. 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.
READINESS FOR YEAR 2000
The Year 2000 problem arises because older or noncompliant computer systems
are unable either to process data with accuracy, or to operate building systems
correctly, by reason of the inability of either software or elements of hardware
contained within such systems correctly to process dates after December 31,
1999. The Partnership has considered the Year 2000 problem as its relates to the
business of the Partnership in three areas: Partnership operations, problems
with vendors, and problems with tenants.
OPERATIONS
Partnership operations have been considered in two areas: Financial
operations and building operations. With respect to financial operations, all of
the accounting and management functions of the Partnership are discharged for
the Partnership by its contracted property manager, The Hamilton Company. The
Partnership has been advised by The Hamilton Company that, as part of routine
computer
14
<PAGE>
software and hardware updates which are presently in process, The Hamilton
Company will be able to continue to perform the financial operations of the
Partnership in the ordinary course. The costs of such compliance will be borne
as operating costs by The Hamilton Company and will not be a charge to the
earnings of the Partnership. The Partnership believes that the management fee
paid by the Partnership to The Hamilton Company will be adequate to support The
Hamilton Company's effort in this regard, which understanding has been confirmed
to the Partnership by The Hamilton Company.
Specifically, The Hamilton Company has advised the Partnership as follows:
that it has retained professional Year 2000 consulting services to provide
advice concerning the installation of new hardware and software; that the new
systems to be installed are used as standard systems by many real estate
management companies, and such systems are Year 2000 compliant; that of a total
estimated cost of $150,000 associated with the replacement of hardware and
software by The Hamilton Company, which replacement will address all Year 2000
compliance issues, approximately $100,000 have already been incurred; that such
expenses include and will include the cost of training of employees and staff
and all fees and expenses of consultants; that The Hamilton Company during the
last quarter of 1998 began validating the processes of its newly installed
computer hardware and software systems to assure reliability and provide testing
and verification; that the new computer systems are expected to be fully Year
2000 compliant and operational on or before June 30, 1999, and that the
Partnership will obtain appropriate assurances in such regard from The Hamilton
Company.
The Partnership and its manager believe that its Year 2000 initiative will
adequately prepare the Partnership with respect to Year 2000 issues; the
Partnership has not developed any contingency plan for financial operations
should the current initiative prove to be unsuccessful, and believes that there
would be adequate time to effect a different and compliant systems installation
if the June 30, 1999 testing date is not met.
With respect to building operations, the Partnership expects to have
completed its review of all computerized systems which are operant in the
Partnership's real estate holdings on or before June 30, 1999. The Partnership
does not believe that its real estate holdings are particularly subject to Year
2000 problems, but will institute appropriate remedial procedures forthwith upon
the conclusion of its review of its real estate holdings. The Partnership has
yet to determine the cost of any such remediation, nor has it established any
contingency plan to date.
VENDORS
The Partnership further has reviewed its relationship with principal
vendors. The Partnership is soliciting written assurance that its third-party
vendors which process the rents and deposits received from tenants, and its bank
of deposit and account, are Year 2000 compliant. During 1999, the Partnership
will confirm such compliance, and believes that alternate servicing arrangements
of a compliant nature would be available to the Partnership in the event any
noncompliance is experienced.
TENANTS
Finally, the Partnership's entire income is derived from the payment of
rents, and the impact of Year 2000 problems on the viability and credit
worthiness of tenants could pose a significant economic threat to the income and
profitability of the Partnership. However, approximately 86% of the
Partnership's tenants are residential and are not subject to the same magnitude
of risk that might be incurred in a tenant mix which was more commercially
oriented. Further, no commercial tenant accounts for more than 2% of the gross
rental income of the Partnership, and the Partnership therefore does not
consider its gross income or profitability to be materially at risk by reason of
possible impact of the Year 2000 problem on its tenant population. On or before
June 30, 1999, the Partnership intends to seek written assurance of substantial
compliance by its largest commercial tenants with Year 2000 issues, both on the
part of such tenants and their respective essential third-party trading
partners.
15
<PAGE>
RISKS SUMMARIZED
Failure of the Partnership adequately to provide for Year 2000 compliance
with respect to its financial operations could result in an inability to
collect, credit or track rental income. Failure to bring computerized
operational systems within its real estate holdings into compliance might cause
liability on the part of the Partnership for economic or physical loss to its
tenants and the invitees of those tenants in excess of applicable insurance
coverages. The failure of third- party vendors to provide adequate financial
support to rental collection and crediting function could have a significant
negative impact on the gross income and net profit of the Partnership, and the
inability of the Partnership's tenants to sustain financial health would, in
turn, result in a reduction of gross rentals received by the Partnership. At the
time of the filing of this Annual Report on Form 10-K, the Partnership is unable
to quantify the potential liability it may incur as result of any damage or harm
to any property owned by the Partnership and which results from a Year 2000
related failure. The Partnership has been informed by its insurance consultant
that it is not insured against any such damage or harm. The Partnership is
taking steps to confirm that the Partnership's major suppliers of electricity,
gas, oil and water have or are taking adequate precautions to guard against any
Year 2000 failures.
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.
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 The 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 1998.
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.
16
<PAGE>
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........................ 63 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 Company................ 74 Sole proprietor, Hamilton Realty (since 1955); Trustee of Wedgestone
Treasurer and Director 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>
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 1998 fiscal year, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except that Harold Brown failed to file four (4) Forms 4
covering four (4) transactions involving the purchase by Harold Brown of
Depositary Receipts through the open market.
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
17
<PAGE>
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 management company, The
Hamilton Company. See "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT." The total Management Fee charged by The Hamilton Company during
1998 was approximately $749,000. In 1998, the Partnership and its Subsidiary
Limited Partnerships also paid to The Hamilton Company Administrative Fees of
approximately $671,000 inclusive of construction supervision and architectural
fees of $244,000, repairs and maintenance service fees of $219,000, legal fees
of $135,000, rental fees and miscellaneous charges of $73,000. No sales
commissions were paid to the management companies in 1998. In addition, during
1998 the Partnership paid The Hamilton Company $60,000 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 1998.
Members of the Partnership's Advisory Committee and Ronald Brown and Harold
Brown receive $200 for each committee meeting attended. The Advisory Committee
held seven meetings during 1998. Included in the construction supervision fees
mentioned above is $24,000 in 1998 and 1997, respectively which were paid by The
Hamilton Company to Ronald Brown.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 26, 1999, 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 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 Receipts. As of February 26, 1999,
pursuant to the Deposit Agreement, Boston EquiServe was serving as the record
holder of the Class A Units with respect to which 1,079,676 Receipts had been
issued to 1,538 holders. As of February 26, 1999, there were issued and
outstanding 30,410 Class A Units held by 1,404 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 February 26, 1999 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.
18
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B GENERAL PARTNERSHIP
-------------------------- ------------------------------- --------------------------
% OF % OF % OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
5% OWNERS UNITS UNITS UNITS UNITS UNITS UNITS
DIRECTORS AND BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OFFICERS OWNED OWNED OWNED OWNED OWNED OWNED
- ----------------------------------- ------------ ----------- --------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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%
39 Brighton Ave.
Allston, MA 02134
All directors and officers
as a group....................... 9,364(5) 6.8%(5) 33,015(6) 100%(6) (3) 100%(3)
</TABLE>
- ------------------------------
(1) 25,000 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 Receipts held by the Trust provided that
substitute assets are transferred to the Trust. Accordingly, Mr. Brown may
be deemed to beneficially own the Receipts held by the Trust. Because a
Receipt represents beneficial ownership of one-tenth of a Class A Unit,
Harold Brown may be deemed to beneficially own approximately 8,609 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 Receipts held by the Trust and disclaims beneficial ownership of such
Receipts. Luci Daley Vincent and Robert Somma, as trustees of the Trust (the
"Trustees"), share voting and investment power over the Receipts held by the
Trust, subject to the provisions of the Trust, and thus may each be deemed
to beneficially own the 86,094 Receipts held by the Trust. The Trustees have
no pecuniary interest in the Receipts held by the Trust and disclaim
beneficial ownership of such 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 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
19
<PAGE>
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 a the rates from 8.5% to 9%. Total
interest paid on the loan was $38,073.
In addition, Harold Brown was a limited partner as well as a general partner
in West Peabody L.P. which owned the Investment Property. Harold Brown's
interest in the Investment Property referred to herein as the West Peabody
Limited Partnership was 79.0%. This property was disposed of in 1998.
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 Partnership, 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, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Partners' Capital for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
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.
20
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues.............................. $ 18,447,450 $ 17,506,971 $ 16,634,883 $ 12,459.478 $ 8,506,195
Expenses.............................. 16,461,723 16,383,317 15,909,234 15,575,565 7,658,215
Income (Loss) from Operations......... 1,985,727 1,123,654 725,649 (3,116,087) 847,980
Other Income.......................... 239,292 144,977 186,781 241,276 224,571
Net Income (Loss)..................... 2,225,019 1,268,631 912,430 (2,874,811) 1,072,551
Net Income (Loss) per Unit............ 12.84 7.30 5.17 (16.23) 6.05
Distributions to Partners per Unit.... 8.20 8.80 6.80 6.80 6.80
Net Income (Loss) per Depositary
Receipt............................. 1.28 .73 .52 (1.62) .61
Distributions to Partners per
Depositary Receipt.................. .82 .88 .68 .68 .68
BALANCE SHEET INFORMATION
Total Assets.......................... 58,406,104 58,147,503 $ 58,788,939 $ 59,750,970 28,321,816
Net Real Estate Investments........... 50,868,382 51,575,342 52,239,981 51,688,269 23,782,167
Total Debt Outstanding................ 51,322,552 51,956,821 52,538,499 53,072,037 18,742,909
Partners' Capital..................... 4,271,880 3,465,230 3,898,498 4,323,402 8,400,979
</TABLE>
21
<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, 1999
</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, 1999
Ronald Brown Officer)
Treasurer and Director of
/s/ HAROLD BROWN the General Partner
- ------------------------------ (Principal Financial March 31, 1999
Harold Brown Officer and Principal
Accounting Officer)
22
<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.
23
<PAGE>
INDEPENDENT AUDITOR'S 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, 1998, and 1997, 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, 1998. 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, 1998 and 1997 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
MILLER WACHMAN LLP /s/
Certified Public Accountants
Boston, Massachusetts
February 26, 1999
(March 24, 1999 as to Note 14)
24
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
ASSETS
Rental Properties.................................................................. $ 50,868,382 $ 51,575,342
Cash and Cash Equivalents.......................................................... 623,078 456,277
Short-term Investments............................................................. 3,060,373 2,055,429
Rents Receivable................................................................... 509,914 604,350
Real Estate Tax Escrows............................................................ 538,852 570,713
Prepaid Expenses and Other Assets.................................................. 1,710,537 1,514,370
Investment in Joint Venture........................................................ 58,910 75,467
Financing and Leasing Fees......................................................... 1,036,058 1,295,555
------------- -------------
TOTAL ASSETS..................................................................... $ 58,406,104 $ 58,147,503
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable.................................................................. $ 51,322,552 $ 51,956,821
Accounts Payable and Accrued Expenses.............................................. 868,425 903,430
Advance Rental Payments and Security Deposits...................................... 1,943,247 1,822,022
------------- -------------
Total Liabilities.............................................................. 54,134,224 54,682,273
Commitments and Contingent Liabilities (Note 9)
Partners' Capital..................................................................
173,252 units outstanding in 1998 and in 1997...................................... 4,271,880 3,465,230
------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................................ $ 58,406,104 $ 58,147,503
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Rental income..................................................... $ 18,271,479 $ 17,313,181 $ 16,448,939
Laundry and sundry income......................................... 175,971 193,790 185,944
------------- ------------- -------------
18,447,450 17,506,971 16,634,883
------------- ------------- -------------
Expenses
Administrative.................................................... 1,053,426 991,167 854,337
Depreciation and amortization..................................... 3,338,924 3,239,186 3,055,786
Interest.......................................................... 4,607,860 4,650,806 4,729,769
Management fees................................................... 773,204 737,883 699,806
Operating......................................................... 1,900,211 1,962,124 1,908,616
Renting........................................................... 297,875 318,397 287,485
Repairs and maintenance........................................... 2,607,103 2,601,470 2,577,952
Taxes and insurance............................................... 1,883,120 1,882,284 1,795,483
------------- ------------- -------------
16,461,723 16,383,317 15,909,234
------------- ------------- -------------
Income from Operations............................................ 1,985,727 1,123,654 725,649
------------- ------------- -------------
Other Income
Interest income................................................... 171,435 133,265 156,127
Income (loss) from investments in partnerships and joint
venture......................................................... 16,714 (10,584) 12,294
Other............................................................. 51,143 22,296 18,360
------------- ------------- -------------
239,292 144,977 186,781
------------- ------------- -------------
Net Income........................................................ $ 2,225,019 $ 1,268,631 $ 912,430
------------- ------------- -------------
------------- ------------- -------------
Net Income per Unit............................................... $ 12.84 $ 7.30 $ 5.17
------------- ------------- -------------
------------- ------------- -------------
Weighted Average Number of Units Outstanding...................... 173,252 173,855 176,572
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNERS'
CAPITAL
----------
UNITS LESS
LIMITED -------------------------- 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, 1996................ 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)
Distributions 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
Distributions to Partners............... -- -- -- -- -- -- (1,134,695)
Net Income.............................. -- -- -- -- -- -- 1,780,015
----------- ----------- ----- ----------- ----- --------- ----------
Balance, December 31, 1998.............. 144,180 34,243 1,802 180,225 6,973 173,252 $3,414,571
----------- ----------- ----- ----------- ----- --------- ----------
----------- ----------- ----- ----------- ----- --------- ----------
<CAPTION>
GENERAL
CLASS B PARTNERSHIP TOTAL
--------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1996................ $ 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)
Distributions 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
Distributions to Partners............... (269,490) (14,184) (1,418,369)
Net Income.............................. 422,754 22,250 2,225,019
--------- ----------- ----------
Balance, December 31, 1998.............. $ 814,416 $ 42,893 $4,271,880
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income......................................................... $ 2,225,019 $ 1,268,631 $ 912,430
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................... 3,338,924 3,239,186 3,055,786
(Income) loss from investments in partnerships and joint
venture........................................................ (16,714) 10,584 (12,294)
Unrealized appreciation on short-term investments................ (56,143) (37,296) --
Decrease (Increase) in rents receivable.......................... 94,436 83,895 (3,836)
(Increase) in financing and leasing fees......................... (48,757) (20,524) (53,449)
(Decrease) Increase in accounts payable.......................... (35,005) 218,804 (120,239)
Decrease (Increase) in real estate tax escrows................... 31,861 (67,479) 35,711
(Increase) Decrease in prepaid expenses and other assets......... (196,167) 181,867 237,235
Increase in advance rental payments and security deposits........ 121,225 154,706 116,650
------------- ------------- -------------
Total Adjustments................................................ 3,233,660 3,763,743 3,255,564
------------- ------------- -------------
Net cash provided by operating activities...................... 5,458,679 5,032,374 4,167,994
------------- ------------- -------------
Cash Flows from Investing Activities
Distribution from joint venture.................................... 33,271 7,684 48,549
Purchase and improvement of rental properties...................... (2,323,710) (2,164,204) (3,218,539)
Maturity of short-term investments................................. 1,415,171 51,528 --
Purchase of short-term investments................................. (2,363,972) (2,018,133) (2,651)
------------- ------------- -------------
Net cash (used in) investing activities........................ (3,239,240) (4,123,125) (3,172,641)
------------- ------------- -------------
Cash Flows from Financing Activities
Principal payments and early repayment of mortgages payable........ (634,269) (581,678) (533,538)
Distributions to partners.......................................... (1,418,369) (1,527,813) (1,199,757)
Purchase of treasury units......................................... -- (174,086) (137,577)
------------- ------------- -------------
Net cash (used in) financing activities........................ (2,052,638) (2,283,577) (1,870,872)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents................. 166,801 (1,374,328) (875,519)
Cash and Cash Equivalents, Beginning................................. 456,277 1,830,605 2,706,124
------------- ------------- -------------
Cash and Cash Equivalents, Ending.................................... $ 623,078 $ 456,277 $ 1,830,605
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
28
<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.
FINANCING AND LEASING FEES: Financing fees are capitalized and amortized,
using the interest method, over the life of the related mortgages. Leasing fees
are capitalized and amortized on a straight-line basis over the life of the
related lease.
INCOME TAXES: The financial statements have been prepared under the basis
that NERA and its subsidiaries are entitled to tax treatment as partnerships.
Accordingly, no provision for income taxes on income has been recorded.
CASH EQUIVALENTS: The Partnerships consider cash equivalents to be all
highly liquid instruments purchased with a maturity of three months or less.
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
29
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1998, 1997, or 1996. 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, 1998,
approximately $300,000 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.
ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising
expense was $96,224, $123,215, and $125,195 in 1998, 1997 and 1996,
respectively.
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- USEFUL
1998 1997 LIFE
------------- ------------- -------------
<S> <C> <C> <C>
Land............................................ $ 9,710,733 $ 9,710,733 --
Buildings....................................... 43,627,173 43,627,173 25-31 years
Building improvements........................... 12,610,196 11,351,613 15-31 years
Kitchen cabinets................................ 1,138,588 1,029,671 5-10 years
Carpets......................................... 1,176,261 1,028,065 5-10 years
Air conditioning................................ 281,776 251,950 7-10 years
Land improvements............................... 684,850 623,453 10-31 years
Laundry equipment............................... 58,081 62,899 5-7 years
Elevators....................................... 57,952 45,592 20 years
Swimming pools.................................. 42,450 42,450 10 years
Equipment....................................... 649,370 471,263 5-7 years
Motor vehicles.................................. 65,926 65,926 5 years
Fences.......................................... 18,624 20,785 5-10 years
Furniture and fixtures.......................... 390,209 255,033 5-7 years
Smoke alarms.................................... 17,817 10,706 5-7 years
------------- ------------- -------------
70,530,006 68,597,312
Less accumulated depreciation................... 19,661,624 17,021,970
------------- -------------
$ 50,868,382 $ 51,575,342
------------- -------------
------------- -------------
</TABLE>
30
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
Real estate and accumulated depreciation as of December 31, 1998 is:
<TABLE>
<CAPTION>
GROSS
AMOUNT AT
WHICH
COST CARRIED AT
INITIAL COST TO CAPITALIZED CLOSE OF
PARTNERSHIPS(1) SUBSEQUENT TO PERIOD
------------------------- ACQUISITION (2) ----------
ENCUMBRANCES BUILDINGS AND ----------------
(FIRST MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND
----------------- ---------- ------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Condominium Units.................. $ 0 $ 33,746 $ 311,527 $ 37,078 $ 33,746
Residential Units
Massachusetts
Westgate Woburn.................... 6,716,975 461,300 2,424,636 4,433,029 461,300
Residential Apartments
Woburn, Massachusetts
Coach L.P.......................... 1,158,237 140,600 445,791 477,807 140,600
Residential Apartments
Acton, Massachusetts
Avon Street Apartments L.P......... 1,734,243 62,700 837,318 342,189 62,700
Residential Apartments
Malden, Massachusetts
Middlesex Apartments L.P........... 1,070,500 37,700 161,012 216,442 37,700
Residential Apartments
Newton, Massachusetts
Clovelly Apartments L.P............ 2,026,690 177,610 1,478,359 438,487 177,610
Residential Apartments
Nashua, New Hampshire
Nashoba Apartments L.P............. 1,058,792 79,650 284,548 644,889 79,650
Residential Apartments
Acton, Massachusetts
River Drive L.P.................... 1,502,046 72,525 587,777 1,017,042 72,525
Residential Apartments
Danvers, Massachusetts
Executive Apartments L.P........... 1,740,023 91,400 740,360 836,154 91,400
Residential Apartments
Framingham, Massachusetts
Willard Apartments L.P............. 285,058 15,825 63,477 135,129 15,825
Residential Apartments
Quincy, Massachusetts
Olde English Apartments L.P........ 1,365,217 46,181 878,323 345,805 46,181
Residential Apartments
Lowell, Massachusetts
Oak Ridge Apartments L.P........... 2,043,011 135,300 406,544 1,041,322 135,300
Residential Apartments
Foxboro, Massachusetts
Commonwealth 1137 L.P.............. 1,231,350 342,000 1,367,669 257,320 342,000
Residential Apartments
Boston, Massachusetts
Commonwealth 1144 L.P.............. 5,144,734 1,410,000 5,664,816 579,948 1,410,000
Residential Apartments Boston,
Massachusetts
Boylston Downtown L.P.............. 7,561,258 2,112,000 8,593,111 974,528 2,112,000
Residential Apartments
Boston, Massachusetts
North Beacon 140 L.P............... 3,378,516 936,000 3,762,013 549,418 936,000
Residential Units
Boston, Massachusetts
<CAPTION>
BUILDINGS AND ACCUMULATED DATE
IMPROVEMENTS TOTALS DEPRECIATION (3) ACQUIRED
------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C>
Condominium Units.................. $ 348,605 $ 382,351 $ 263,406 Various
Residential Units
Massachusetts
Westgate Woburn.................... 6,857,665 7,318,965 3,641,898 Sept. 1977
Residential Apartments
Woburn, Massachusetts
Coach L.P.......................... 923,598 1,064,198 603,619 Sept. 1977
Residential Apartments
Acton, Massachusetts
Avon Street Apartments L.P......... 1,179,507 1,242,207 827,747 Sept. 1977
Residential Apartments
Malden, Massachusetts
Middlesex Apartments L.P........... 377,454 415,154 173,752 Sept. 1977
Residential Apartments
Newton, Massachusetts
Clovelly Apartments L.P............ 1,916,846 2,094,456 1,381,995 Sept. 1977
Residential Apartments
Nashua, New Hampshire
Nashoba Apartments L.P............. 929,437 1,009,087 481,577 Sept. 1977
Residential Apartments
Acton, Massachusetts
River Drive L.P.................... 1,604,819 1,677,344 871,429 Sept. 1977
Residential Apartments
Danvers, Massachusetts
Executive Apartments L.P........... 1,576,514 1,667,914 1,059,197 Sept. 1977
Residential Apartments
Framingham, Massachusetts
Willard Apartments L.P............. 198,606 214,431 91,822 Sept. 1977
Residential Apartments
Quincy, Massachusetts
Olde English Apartments L.P........ 1,224,128 1,270,309 846,118 Sept. 1977
Residential Apartments
Lowell, Massachusetts
Oak Ridge Apartments L.P........... 1,447,866 1,583,166 711,135 Sept. 1977
Residential Apartments
Foxboro, Massachusetts
Commonwealth 1137 L.P.............. 1,624,989 1,966,989 257,585 July 1995
Residential Apartments
Boston, Massachusetts
Commonwealth 1144 L.P.............. 6,244,764 7,654,764 915,751 July 1995
Residential Apartments Boston,
Massachusetts
Boylston Downtown L.P.............. 9,567,639 11,679,639 1,402,249 July 1995
Residential Apartments
Boston, Massachusetts
North Beacon 140 L.P............... 4,311,431 5,247,431 644,523 July 1995
Residential Units
Boston, Massachusetts
</TABLE>
31
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS
AMOUNT AT
WHICH
COST CARRIED AT
INITIAL COST TO CAPITALIZED CLOSE OF
PARTNERSHIPS(1) SUBSEQUENT TO PERIOD
------------------------- ACQUISITION (2) ----------
ENCUMBRANCES BUILDINGS AND ----------------
(FIRST MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND
----------------- ---------- ------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Redwood Hills L.P.................. 4,451,138 1,200,000 4,810,604 840,578 1,200,000
Residential Units
Worcester, Massachusetts
East Hampton L.P................... 1,371,635 394,011 1,182,031 1,268,729 394,011
Strip Shopping Mall
East Hampton, Connecticut
Timpany Plaza L.P.................. 3,408,345 378,125 4,729,978 367,328 378,125
Shopping Mall
Gardner, Massachusetts
Lewiston Mall L.P. (4)............. 2,803,488 1,043,059 3,694,731 468,455 1,043,059
Shopping Mall
Lewiston, Maine
Linhart L.P........................ 1,271,296 385,000 1,540,000 768,049 385,000
Residential/Commercial
Newton, Massachusetts
Highland Street Apartments, L.P.... 0 156,000 634,085 180,837 156,000
Residential Apartments
Lowell, Massachusetts
----------------- ---------- ------------- ---------------- ----------
$51,322,552 $9,710,732 $ 44,598,710 $ 16,220,564 $9,710,732
----------------- ---------- ------------- ---------------- ----------
----------------- ---------- ------------- ---------------- ----------
<CAPTION>
BUILDINGS AND ACCUMULATED DATE
IMPROVEMENTS TOTALS DEPRECIATION (3) ACQUIRED
------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C>
Redwood Hills L.P.................. 5,651,182 6,851,182 863,344 July 1995
Residential Units
Worcester, Massachusetts
East Hampton L.P................... 2,450,760 2,844,771 858,992 Sept. 1984
Strip Shopping Mall
East Hampton, Connecticut
Timpany Plaza L.P.................. 5,097,306 5,475,431 2,585,848 Sept. 1985
Shopping Mall
Gardner, Massachusetts
Lewiston Mall L.P. (4)............. 4,163,186 5,206,245 730,650 Feb. 1989
Shopping Mall
Lewiston, Maine
Linhart L.P........................ 2,308,049 2,693,049 342,825 Jan. 1995
Residential/Commercial
Newton, Massachusetts
Highland Street Apartments, L.P.... 814,922 970,922 106,162 Dec. 1996
Residential Apartments
Lowell, Massachusetts
------------- ----------- -----------------
$ 60,819,274 $70,530,006 $19,661,624
------------- ----------- -----------------
------------- ----------- -----------------
</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 1998, 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.
32
<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,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Rental Properties
Balance, Beginning................................................ $ 68,597,312 $ 67,429,200 $ 65,052,299
Additions
Buildings, improvements, and other assets....................... 2,323,710 2,164,204 3,218,539
------------- ------------- -------------
70,921,022 69,593,404 68,270,838
Deduct:
Write-off of retired or disposed assets......................... 391,016 996,092 841,638
------------- ------------- -------------
Balance, Ending................................................... $ 70,530,006 $ 68,597,312 $ 67,429,200
------------- ------------- -------------
------------- ------------- -------------
Accumulated Depreciation
Balance, Beginning................................................ $ 17,021,970 $ 15,135,219 $ 13,364,030
Add:
Depreciation for the year....................................... 3,030,670 2,882,843 2,612,827
------------- ------------- -------------
20,052,640 18,018,062 15,976,857
Deduct:
Accumulated depreciation of retired or disposed assets.......... 391,016 996,092 841,638
------------- ------------- -------------
Balance, Ending................................................... $ 19,661,624 $ 17,021,970 $ 15,135,219
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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 $749,302, $715,086,
and $677,066 in 1998, 1997, and 1996, 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 1998, 1997, and 1996.
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 1998, 1997, and 1996 approximately
$671,000, $751,000, and $511,000 was charged to NERA for legal, construction,
maintenance, rental and architectural services, and supervision of capital
improvements. Approximately $244,000, $295,000, and $232,000 was capitalized in
1998, 1997 and 1996 in rental properties. Included in the 1998 expenses referred
to above, approximately $219,000 is recorded in repairs and maintenance,
$173,000 in administrative expense, and $35,000 in renting expense. Included in
the 1997 expenses referred to above, approximately $235,000 is recorded in
repairs and maintenance, $165,000 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 expense.
Additionally in 1998, 1997 and 1996, the Partnership paid to the management
company $60,000, $50,000, and $50,000, respectively for accounting
33
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
services previously provided by an outside company. Included in accounts payable
and accrued expenses at December 31, 1998, 1997, and 1996 is $115,271, $106,980
and $90,793, due to the management 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 1998, 1997, or 1996.
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 $31,200 and $30,600 and $28,800 in 1998, 1997, and 1996,
respectively.
Included in prepaid expenses and other assets were amounts due from related
parties of $534,357 and $487,321 at December 31, 1998 and 1997 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 at December 31, 1997 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 at December 31, 1997. These funds were no longer held by the management
company at December 31, 1998.
See Note 10 for rental arrangements with the Timpany Plaza joint venture. As
described in Note 4, the Partnership had interests in certain entities in which
the majority shareholder of the General Partner is also involved.
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 fair value. At December 31, 1998,
mutual funds with a cost of $3,004,230 were recorded at their fair value of
$3,060,373. At December 31, 1997, a mutual fund with a cost of $2,018,134 was
recorded at its fair value of $2,055,429. The unrealized gains of $56,143 and
$37,296 are included in other income in 1998, and 1997, respectively.
Included in prepaid expenses and other assets at December 31, 1998 and 1997,
is approximately $567,000 and $389,000 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 $58,910 and $75,467 at December 31, 1998 and
December 31, 1997 respectively. In 1998, the Partnership disposed of 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. This sale did not result in any proceeds to the Partnership. The
majority shareholder of the General Partner was also the majority owner of this
partnership. 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.
34
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--MORTGAGES PAYABLE
At December 31, 1998 and 1997, 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>
1999--current maturities....................................... $ 729,000
2000........................................................... 791,000
2001........................................................... 859,000
2002........................................................... 933,000
2003........................................................... 1,013,000
Thereafter..................................................... 46,998,000
----------
$51,323,000
----------
----------
</TABLE>
See Note 14 regarding the subsequent refinancing of the mortgage on the
Westgate apartments, which is reflected in the above maturity 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).
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 $8.20 per unit in 1998, and $8.80
per unit in 1997, and $6.80 per unit in 1996. The 1997 distribution included a
special dividend of $1.00 per unit paid in March 1997 (see note 13). In February
1999, the Partnership declared a regular semi-annual dividend of $4.60 and a
special dividend of $3.50 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
35
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PARTNERS' CAPITAL (CONTINUED)
have the right to exchange each Class A unit for ten Depositary Receipts. The
following is information on the net income per Depositary Receipt:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Net Income per Depositary Receipt.............................. $ 1.28 $ .73 $ .52
----------- --------- ---------
----------- --------- ---------
</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 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 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. The plan to purchase Depositary Receipts
was terminated on December 10, 1997.
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
required ownership percentage (see Note 7).
Treasury units at December 31, 1998 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.
36
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RENTAL INCOME
In 1998, approximately 86% of rental income is related to residential
apartments and condominium units with leases of one year or less. The remaining
14% 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>
1999................................................ $ 1,559,000 $ 130,000 $ 1,689,000
2000................................................ 1,324,000 150,000 1,474,000
2001................................................ 1,085,000 150,000 1,235,000
2002................................................ 938,000 150,000 1,088,000
2003................................................ 766,000 150,000 916,000
Thereafter.......................................... 1,510,000 950,000 2,460,000
------------ ------------ ------------
$ 7,182,000 $ 1,680,000 $ 8,862,000
------------ ------------ ------------
------------ ------------ ------------
</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, 1998 and 1997 is $167,500 and $171,000, 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 income for the year ended 1998 was $16,714,
compared to a loss of $10,584 for the year ended December 31, 1997 and income of
$12,294 for the year ended December 31, 1996. 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 approximately $731,000,
$847,000 and $927,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Rents receivable are net of allowances for doubtful accounts of $135,559 and
$124,887 at December 31, 1998 and 1997, respectively.
NOTE 11--CASH FLOW INFORMATION
During the years ended December 31, 1998, 1997, and 1996, cash paid for
interest was $4,543,330, $4,595,922, and $4,644,058, 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.
37
<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 financial
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 1998 is
approximately $800,000 greater than financial statement income. In February
1999, the Partnership declared a special $3.50 per Partnership Unit ($.35
dividend per Receipt) payable March 31, 1999 to assist partners with any tax
consequences arising from the reportability, for tax purposes, of gains of
approximately $664,000 from the disposition of an equity investment. Cumulative
tax basis at December 31, 1998 is approximately $1,500,000 greater than the
financial statement basis.
NOTE 14--SUBSEQUENT EVENTS
On March 24, 1999, the Partnership refinanced the outstanding mortgage of
approximately $6,700,000 maturing in 2000, on the Westgate apartments. The new
15 year mortgage is for $12,000,000 at a 7.07% interest rate with an
amortization schedule of 25 years. This refinancing is reflected in the mortgage
maturity schedule in Note 5.
In December 1998, the Partnership entered into an agreement to sell the
Willard Street apartments located in Quincy, Massachusetts for $850,000. The
purchaser is to pay $85,000 in cash, assume the existing mortgage of
approximately $285,000, and give to the Partnership a mortgage note for the
remaining $480,000. This 7.5% mortgage note is to be collateralized by other
real estate owned by the purchaser and matures at the earlier of the refinancing
of the purchased property or July 31, 2005, the maturity date of the assumed
mortgage. At March 24, 1999, the holder of the outstanding mortgage has not
approved the assignment to the purchaser.
In March 1999, the Partnership entered into an agreement to purchase a
39,600 square foot commercial property known as Staples Plaza, located in
Framingham, Massachusetts. The purchase price is $8,200,000. The Partnership
will assume an 8% mortgage on the property of approximately $5,200,000, maturing
in 2016, and the balance of $3,000,000 will be funded from the Partnership's
cash reserves. The Partnership plans to close on the property in June 1999. This
purchase is conditional on the assignment of the existing mortgage, which has
not been obtained as of March 24, 1999.
NOTE 15--QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998 TOTAL
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues................................ $ 4,581,114 $ 4,586,024 $ 4,615,993 $4,664,319 $ 18,447,450
Expenses................................ 4,166,214 4,084,532 4,105,522 4,105,455 16,461,723
------------ ------------ ------------- ------------ -------------
Income from Operations.................. 414,900 501,492 510,471 558,864 1,985,727
Other Income............................ 28,808 48,624 141,037 20,823 239,292
------------ ------------ ------------- ------------ -------------
Net Income.............................. $ 443,708 $ 550,116 $ 651,508 $ 579,687 $ 2,225,019
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Net Income per Unit..................... $ 2.56 $ 3.18 $ 3.76 $ 3.34 $ 12.84
Net Income per Depositary Receipt....... $ .26 $ .32 $ .37 $ .33 $ 1.28
</TABLE>
38
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--QUARTERLY FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 TOTAL
------------ ------------ ------------- ------------ -------------
(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>
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 623,078
<SECURITIES> 3,060,373
<RECEIVABLES> 509,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,442,754
<PP&E> 70,530,006
<DEPRECIATION> 19,661,624
<TOTAL-ASSETS> 58,406,104
<CURRENT-LIABILITIES> 2,811,672
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,271,880
<TOTAL-LIABILITY-AND-EQUITY> 58,406,104
<SALES> 18,271,479
<TOTAL-REVENUES> 18,447,450
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,853,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,607,860
<INCOME-PRETAX> 2,225,019
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,225,019
<EPS-PRIMARY> 12.84
<EPS-DILUTED> 12.84
</TABLE>
