** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

----

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                          |
| **For the quarterly period  ended June 30, 2004**                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                         |
| **For the transition  period from                                  to                               ** |

 

**Commission file****number0-12138**

 

**New England Realty AssociatesLimited Partnership**

(Exact Name of Registrant as Specified in ItsCharter)

 
| **Massachusetts**                                                | ** ** | **04-2619298**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or  Organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **39  Brighton Avenue, Allston, Massachusetts**                  | ** ** | **02134**                             |
| (Address of Principal  Executive Offices)                        |       | (Zip Code)                            |

 

Registrant’sTelephone Number, Including Area Code **(617) 783-0039**

 

**Not Applicable**

(Former Name, Former Address and FormerFiscal Year, if Changed Since Last Report)

 

Indicate by check ý whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.  Yes  ý    No  o

 

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

 

 

----

 

INDEX

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

 

2

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# **NEW ENGLAND REALTY ASSOCIATES, L.P.**

# **PART I – FINANCIALINFORMATION**

# ** **

# **Item I. Financial Statements**

# ** **

Theaccompanying unaudited consolidated balance sheets,statements of income, changes in partners’ capital, and cash flows and relatednotes thereto, have been prepared in accordance with generally acceptedaccounting principles in the United States of America (“GAAP”) for interimfinancial information and in conjunction with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the disclosures required by GAAP for complete financial statements. Thefinancial statements reflect all adjustments consisting only of normal,recurring adjustments, which are in the opinion of management, necessary for afair presentation for the interim periods. 

 

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

 

Theresults of operations for the six month periods ended June 30, 2004 are notnecessarily indicative of the results to be expected for the entire fiscal yearor any other period. 

 

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                          | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|
| ** **                                                          | ** ** | **(Unaudited)**    | ** **  | ** **             | ** ** |
| **Assets**                                                          |       |               |        |                   |       |
| Rental  Properties                                                  |       | $                  | 105,676,629 |                   | $          | 104,192,876 |   |
| Cash and Cash  Equivalents                                          |       | 22,024,552         |        | 24,362,328             |       |
| Rents Receivable                                                    |       | 609,478            |        | 550,772                |       |
| Real Estate Tax  Escrows                                            |       | 685,690            |        | 667,949                |       |
| Prepaid Expenses  and Other Assets                                  |       | 2,743,548          |        | 2,649,617              |       |
| Investment in  Joint Venture                                        |       | 1,242,331          |        | 1,315,383              |       |
| Financing and  Leasing Fees                                         |       | 672,835            |        | 725,371                |       |
|                                                                |       |               |        |                   |       |
| **Total  Assets**                                                   |       | $                  | 133,655,063 |                   | $          | 134,464,296 |   |
|                                                                |       |               |        |                   |       |
| **Liabilities  and Partners’ Capital**                         |       |               |        |                   |       |
| Mortgage Notes  Payable                                             |       | $                  | 115,555,219 |                   | $          | 115,911,209 |   |
| Accounts Payable  and Accrued Expenses                              |       | 1,762,754          |        | 1,620,023              |       |
| Advance Rental  Payments and Security Deposits                      |       | 3,639,779          |        | 3,371,087              |       |
|                                                                |       |               |        |                   |       |
| **Total  Liabilities**                                              |       | 120,957,752        |        | 120,902,319            |       |
|                                                                |       |               |        |                   |       |
| Commitments and  Contingent Liabilities (Notes 2, 9 and 15)         |       |               |        |                   |       |
|                                                                |       |               |        |                   |       |
| Partners’  Capital  173,252 units outstanding in 2004 and 2003 |       | 12,697,311         |        | 13,561,977             |       |
|                                                                |       |               |        |                   |       |
| **Total  Liabilities and Partners’ Capital**                   |       | $                  | 133,655,063 |                   | $          | 134,464,296 |   |

 

See notes to consolidatedfinancial statements.

 

3

----

 

**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                       |       |                             |       |                           |       |   |   |   |   |
| Rental income                                 |       | $                                | 7,708,025  |                           | $          | 7,773,317 |   | $ | 15,453,837 |   | $ | 15,234,609 |   |
| Laundry and  sundry income                    |       | 79,474                           |       | 80,266                         |       | 160,924 |   | 151,066 |   |
|                                          |       | 7,787,499                        |       | 7,853,583                      |       | 15,614,761 |   | 15,385,675 |   |
| Expense                                       |       |                             |       |                           |       |   |   |   |   |
| Administrative                                |       | 323,195                          |       | 356,740                        |       | 653,081 |   | 720,556 |   |
| Depreciation and  amortization                |       | 1,447,281                        |       | 1,261,480                      |       | 2,921,669 |   | 2,374,343 |   |
| Interest                                      |       | 1,974,141                        |       | 1,839,294                      |       | 3,977,036 |   | 3,498,461 |   |
| Management fees                               |       | 319,479                          |       | 324,020                        |       | 637,940 |   | 620,358 |   |
| Operating                                     |       | 700,339                          |       | 628,211                        |       | 1,792,480 |   | 1,619,027 |   |
| Renting                                       |       | 130,966                          |       | 142,356                        |       | 240,164 |   | 205,321 |   |
| Repairs and  maintenance                      |       | 1,199,646                        |       | 1,045,828                      |       | 2,272,653 |   | 1,858,939 |   |
| Taxes and  insurance                          |       | 879,579                          |       | 858,913                        |       | 1,762,383 |   | 1,654,122 |   |
|                                          |       | 6,974,626                        |       | 6,456,842                      |       | 14,257,406 |   | 12,551,127 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Income Before  Other Income                   |       | 812,873                          |       | 1,396,741                      |       | 1,357,355 |   | 2,834,548 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other Income  (Loss)                          |       |                             |       |                           |       |   |   |   |   |
| Interest income                               |       | 64,556                           |       | 43,500                         |       | 134,723 |   | 99,028 |   |
| (Loss) from  investment in joint venture      |       | (41,022                          | )          | (25,361                        | )          | (73,052 | ) | (46,038 | ) |
|                                          |       | 23,534                           |       | 18,139                         |       | 61,671 |   | 52,990 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net Income                                    |       | $                                | 836,407    |                           | $          | 1,414,880 |   | $ | 1,419,026 |   | $ | 2,887,538 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net Income per  Unit                          |       | $                                | 4.83       |                           | $          | 8.17 |   | $ | 8.19 |   | $ | 16.67 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted Average  Number of Units Outstanding |       | 173,252                          |       | 173,252                        |       | 173,252 |   | 173,252 |   |

 

See notes to consolidatedfinancial statements.

 

4

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# **NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGESIN PARTNERS’ CAPITAL**

**(UNAUDITED**)

 
| ** **                                                                 | ** ** | **Limited** | ** ** | **General  Partnership** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|-------------|------------|--------------------------|------------|-----------|------------|
| **Class A**                                                                | ** ** | **Class B** |
| Balance, January  1, 2003                                                  |       | $           | 12,699,650 |                     | $          | 3,019,620 |       | $ | 158,956 |   | $ | 15,878,226 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Distribution to  Partners                                                  |       | (2,241,717  | )          | (532,408                 | )          | (28,021   | )          | (2,802,146 | ) |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Net Income                                                                 |       | 2,310,030   |       | 548,632                  |       | 28,876    |       | 2,887,538 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Balance, June  30, 2003                                                    |       | $           | 12,767,963 |                     | $          | 3,035,844 |       | $ | 159,811 |   | $ | 15,963,618 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at June 30, 2003 |       | 138,602     |       | 32,918                   |       | 1,732     |       | 173,252 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Balance, January  1, 2004                                                  |       | $           | 10,846,650 |                     | $          | 2,579,532 |       | $ | 135,795 |   | $ | 13,561,977 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Distribution to  Partners                                                  |       | (1,826,954  | )          | (433,901                 | )          | (22,837   | )          | (2,283,692 | ) |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Net Income                                                                 |       | 1,135,221   |       | 269,615                  |       | 14,190    |       | 1,419,026 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Balance, June  30, 2004                                                    |       | $           | 10,154,917 |                     | $          | 2,415,246 |       | $ | 127,148 |   | $ | 12,697,311 |   |
|                                                                       |       |        |       |                     |       |      |       |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at June 30, 2004 |       | 138,602     |       | 32,918                   |       | 1,732     |       | 173,252 |   |

 

See notes to consolidatedfinancial statements

 

5

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**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

##### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Cash Flows from  Operating Activities                                             |       |                           |       |   |   |
| Net income                                                                        | ** ** | **$**                          | 1,419,026  | ** ** | **$** | 2,887,538 | ** ** |
|                                                                              |       |                           |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                           |       |   |   |
| Depreciation and  amortization                                                    |       | 2,921,669                      |       | 2,374,343 |   |
| Loss from  investments in joint venture                                           |       | 73,052                         |       | 46,038 |   |
| Change in  operating assets and liabilities                                       |       |                           |       |   |   |
| (Increase) in  rents receivable                                                   |       | (58,706                        | )          | (155,188 | ) |
| (Increase) in  financing and leasing fees                                         |       | —                         |       | (47,373 | ) |
| Increase  (Decrease) in accounts payable and accrued expense                      |       | 142,730                        |       | (262,406 | ) |
| (Increase) in  real estate tax escrow                                             |       | (17,741                        | )          | (145,419 | ) |
| (Increase) in  prepaid expenses and other assets                                  |       | (102,966                       | )          | (652,765 | ) |
| Increase in  advance rental payments and security deposits                        |       | 268,693                        |       | 346,545 |   |
|                                                                              |       |                           |       |   |   |
| Total  Adjustments                                                                |       | 3,226,731                      |       | 1,503,775 |   |
|                                                                              |       |                           |       |   |   |
| Net cash  provided by operating activities                                        |       | 4,645,757                      |       | 4,391,313 |   |
|                                                                              |       |                           |       |   |   |
| Cash Flows (used  in) investing activities                                        |       |                           |       |   |   |
| Distribution  from joint venture                                                  |       | —                         |       | 35,000 |   |
| Purchase and  improvement of rental properties                                    |       | (4,343,851                     | )          | (9,950,160 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash (used  in) investing activities                                          |       | (4,343,851                     | )          | (9,915,160 | ) |
|                                                                              |       |                           |       |   |   |
| Cash Flows (used  in) financing activities                                        |       |                           |       |   |   |
| Principal  payments of mortgages payable                                          |       | (355,990                       | )          | (448,110 | ) |
| Distributions to  partners                                                        |       | (2,283,692                     | )          | (2,802,146 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash (used  in) financing activities                                          |       | (2,639,682                     | )          | (3,250,256 | ) |
|                                                                              |       |                           |       |   |   |
| Net Decrease in  Cash and Cash Equivalents                                        |       | (2,337,776                     | )          | (8,774,103 | ) |
| Cash and Cash  Equivalents, at beginning of period                                |       | 24,362,328                     |       | 18,974,446 |   |
|                                                                              |       |                           |       |   |   |
| Cash and Cash  Equivalents, at end of period                                      | ** ** | **$**                          | 22,024,552 | ** ** | **$** | 10,200,343 | ** ** |

 

See notes to consolidatedfinancial statements.

 

6

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**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30,2004**

 

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES

 

*Line ofBusiness: *New EnglandRealty Associates Limited Partnership (“NERA” or the “Partnership”) wasorganized in Massachusetts during 1977. NERA and its subsidiaries own andoperate various residential apartment buildings, condominium units andcommercial properties located in Massachusetts and New Hampshire. NERA has alsomade investments in other real estate partnerships and has participated inother real estate-related activities, primarily located in Massachusetts. Inconnection with the mortgages referred to in Note 5, a substantial numberof NERA’s properties are owned by separatesubsidiaries without any change in the historical cost basis. 

 

*Principlesof Consolidation:*  The consolidated financial statementsinclude the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100%ownership interest in each subsidiary except for the limited liability companyformed in November 2001, in which the Partnership has a 50% ownershipinterest. The consolidated group is referred to as the “Partnerships.” Minorityinterests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated inconsolidation. The Partnership accounts for its investment in theabove-mentioned limited liability company using the equity method. 

 

*AccountingEstimates:*  The preparation of the financial statements,in conformity with accounting principles generally accepted in the United Stateof America, requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Accordingly,actual results could differ from those estimates. 

 

*RevenueRecognition:*  Rental income from residential andcommercial properties is recognized over the term of the related lease. Amounts60 days in arrears are charged against income. Certain leases of thecommercial properties provide for increasing stepped minimum rents, which areaccounted for on a straight-line basis over the term of the lease. 

 

*RentalProperties:*  Rental properties are stated at cost lessaccumulated depreciation. Maintenance and repairs are charged to expense asincurred; improvements and additions are capitalized. When assets are retiredor otherwise disposed of, the cost of the asset and related accumulateddepreciation is eliminated from the accounts, and any gain or loss on suchdisposition is included in income. Fully depreciated assets are removed fromthe accounts.  Rental properties aredepreciated on a straight-line basis over their estimated useful lives. 

 

In the event that factsand circumstances indicate that the carrying value of a rental property may beimpaired, an analysis of recoverability is prepared. The estimated futureundiscounted cash flows are compared to the asset’s carrying value to determineif a write-down to fair value is required. 

 

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

 

*IncomeTaxes:*  The financial statements have been preparedunder the basis that NERA and its subsidiaries are entitled to tax treatment aspartnerships. Accordingly, no provision for income taxes has been recorded. 

 

*CashEquivalents:*  The Partnership considers cash equivalentsto be all highly liquid instruments purchased with maturity of three months orless. 

 

*SegmentReporting:*  Operating segments are revenue-producingcomponents of the Partnership for which separate financial information isproduced internally for management. Under the definition, NERA operated, forall periods presented, as one segment. 

 

7

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*ComprehensiveIncome:*  Comprehensive income is defined as changes inpartners’ equity, exclusive of transactions with owners (such as capitalcontributions and dividends). NERA did not have any comprehensive income itemsin 2004 or 2003 other than net income as reported. 

 

*Income Per Unit:*  Net income per unit hasbeen calculated based on the weighted average number of units outstandingduring each year presented. The Partnership has no dilutive units and,therefore, basic net income is the same as diluted net income per unit (seeNote 7). 

 

*Concentrationof Credit Risks and Financial Instruments:*  ThePartnerships’ properties are located in New England, and the Partnerships aresubject to the general economic risks related thereto.  No single tenantaccounted for more than 5% of the Partnerships’ revenues in 2004 or 2003. The Partnerships make their temporary cash investments with high-credit-qualityfinancial institutions.  At June 30, 2004, substantially all of thePartnerships’ cash and cash equivalents were held in interest-bearing accountsat financial institutions, earning interest at rates from 0.84% to 1.34%. At June 30, 2004 and December 31, 2003, approximately $22,000,000 and$24,000,000 of cash and cash equivalents exceeded federally insured amounts. 

 

*Advertising Expense:* Advertising is expensed as incurred. Advertising expense was $107,096 and$69,194 for the six months ended June 30, 2004 and 2003, respectively.

 

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

 

NOTE 2—RENTAL PROPERTIES

 

**As of June 30, 2004, thePartnership and its Subsidiary Partnerships owned 2,376 residential apartmentunits in residential and mixed-use complexes (collectively, the “ApartmentComplexes”).  The Partnership also owns 24 condominium units in tworesidential condominium complexes, all of which are leased to residentialtenants (collectively referred to as the “Condominium Units”).  TheApartment Complexes and Condominium Units are located primarily in the greatermetropolitan Boston, Massachusetts area.**

** **

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

** **

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

** **

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

 

8

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Rental properties consist of the following:

 
| ** **                            | ** ** | **JUNE 30,  2004** | ** **  | **DECEMBER 31,  2003** | ** ** | **USEFUL  LIFE** | ** ** |
|---------------------------------------|------------|--------------------|-------------|------------------------|------------|------------------|------------|
| Land,  improvements, and parking lots |       | $                  | 23,051,665  |                   | $          | 22,992,176       |       | 10-31 | years |   |
| Buildings and  improvements           |       | 101,937,741        |        | 101,538,576            |       | 15-31            | years      |   |
| Kitchen cabinets                      |       | 3,246,811          |        | 2,403,447              |       | 5-10             | years      |   |
| Carpets                               |       | 2,648,422          |        | 2,292,225              |       | 5-10             | years      |   |
| Air conditioning                      |       | 707,150            |        | 691,408                |       | 7-10             | years      |   |
| Laundry  equipment                    |       | 84,495             |        | 79,580                 |       | 5-7              | years      |   |
| Elevators                             |       | 426,929            |        | 328,097                |       | 20               | years      |   |
| Swimming pools                        |       | 143,353            |        | 98,105                 |       | 10               | years      |   |
| Equipment                             |       | 1,536,188          |        | 1,348,725              |       | 5-7              | years      |   |
| Motor vehicles                        |       | 126,236            |        | 126,236                |       | 5                | years      |   |
| Fences                                |       | 217,548            |        | 127,276                |       | 5-10             | years      |   |
| Furniture and  fixtures               |       | 3,794,210          |        | 3,566,543              |       | 5-7              | years      |   |
| Smoke alarms                          |       | 102,886            |        | 88,157                 |       | 5-7              | years      |   |
| Construction in  progress             |       | 3,556,728          |        | 1,555,960              |       | —           |       |   |
|                                  |       | 141,580,362        |        | 137,236,511            |       |             |       |   |
| Less accumulated  depreciation        |       | 35,903,733         |        | 33,043,635             |       |             |       |   |
|                                  |       | $                  | 105,676,629 |                   | $          | 104,192,876      |       |   |   |   |

 

**At June 30, 2004, construction inprogress consists of $3,556,728 at Westgate Apartments LLC for design,approvals, site work, and the commencement of construction of 20 additionalresidential units.  Estimated total costs will exceed $4,000,000, withconstruction scheduled to be completed in September or October of 2004.**

** **

NOTE 3—RELATED PARTY TRANSACTIONS

 

The Partnerships’properties are managed by an entity that is owned by the majority shareholderof the General Partner. The management fee is equal to 4% of rental revenue andlaundry income. Total fees paid were approximately $638,000 and $620,000 forthe six months ended June 30, 2004 and 2003, respectively.  

 

The Partnership Agreement permits the General Partner or managementcompany to charge the costs of professional services (such as counsel,accountants and contractors) to NERA. During the six months ended June 30, 2004 and 2003, approximately$2,537,000 and $316,000 was charged to NERA for legal, construction,maintenance, rental and architectural services and supervision of capital improvements.Of the 2004 expenses referred to above, approximately $100,000 consisted ofrepairs and maintenance and $81,000 of administrative expense; approximately$2,355,000 of construction, architectural services and supervision of capitalprojects was capitalized in rental properties. Of the 2003 expenses referred to above, approximately $135,000 consistedof repairs and maintenance and $122,000 of administrative expense;approximately $59,000 of construction, architectural services and supervisionof capital projects was capitalized in rental properties. Additionally in eachof the six months ended June 30, 2004 and 2003 the Partnership paid to themanagement company $40,000, for in-house accounting services, which werepreviously provided by an outside company. Included in accounts payable andaccrued expenses at June 30, 2004 and December 31, 2003 is $593,705 and$455,299 due to the management company. The Partnership Agreement entitles the General Partner or the managementcompany to receive certain commissions upon the sale of Partnership propertyonly to the extent that total commissions do not exceed 3%.

 

9

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

 

On January 1, 2004, NERA’s employees weretransferred to the management company’s payroll.  The Partnership reimburses the managementcompany for the payroll and related expenses of the employees working directlyon NERA properties.  Total reimbursementwas approximately $600,000 for the six months ended June 30, 2004.

 

In 1996, prior tobecoming an employee and President of the management company, the currentPresident performed asset management consulting services to the Partnership.This individual continues to perform this service and to receive an assetmanagement fee from the Partnership, receiving $25,000 for the six months endedJune 30, 2004 and $50,000 for the year ended December 31, 2003. 

 

 On November 8, 2001, thePartnership, the majority shareholder of the General Partner and the Presidentof the management company formed a limited liability company to purchase a40-unit apartment building in Cambridge, Massachusetts. The ownershippercentages are 50%, 471⁄2 % and 21⁄2 %, respectively.  

 

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

 

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

 

NOTE 4—OTHER ASSETS

 

**Included in prepaid expenses andother assets at June 30, 2004 and December 31, 2003 is approximately$494,000 and $653,000, respectively, held in escrow to fund future capitalimprovements.**

** **

**Financing and leasing fees of$672,835 and $725,371 are net of accumulated amortization of $338,640 and$286,104 at June 30, 2004 and December 31, 2003, respectively.**

** **

NOTE 5—MORTGAGES NOTES PAYABLE 

 

**At June 30, 2004 andDecember 31, 2003, the mortgages payable consisted of various loans, allof which were secured by first mortgages on properties referred to in Note2.  At June 30, 2004, the fixed interest rates on these loans ranged from4.84% to 8.46%, payable in monthly installments aggregating approximately$732,000, including interest, to various dates through 2016.  The majorityof the mortgages are subject to prepayment penalties.  At December 31,2003, the weighted average effective interest rate on the above mortgages was6.86%.  The effective rate includes theamortization expense of deferred financing costs.  The weighted average of the fixed debtinterest rate was 6.78%.  See Note 12 forfair value information.**

 

10

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**The Partnerships have pledgedtenant leases as additional collateral for certain of these loans.  Approximate annual maturities atJune 30, 2004 are as follows:**

** **
| 2005- current  maturities |   | $          | 749,000     |   |
|---------------------------|--------|------------|-------------|--------|
| 2006                      |   | 823,000    |        |
| 2007                      |   | 4,434,000  |        |
| 2008                      |   | 4,421,000  |        |
| 2009                      |   | 5,627,000  |        |
| Thereafter                |   | 99,501,000 |        |
|                      |   | $          | 115,555,000 |   |

** **

**On August 1, 2003, thePartnership refinanced four mortgage loans with outstanding balances totalingapproximately $11,526,000 and interest rates that ranged from 8.38% to 8.75%.These four mortgages were scheduled to mature in 2005, with final paymentstotaling approximately $11,000,000 due in 2005. The total of the four newmortgage loans is $26,750,000, with interest rates from 4.84% to 5.30%. These new loans require interest payments for 10 years, when the entire$26,750,000 becomes due.  The total monthly payments on the old loans wereapproximately $101,000 including principal of approximately $20,000.  Thetotal monthly interest payments on the new mortgages are approximately$109,000, resulting in an increased monthly payment for these four propertiesof $8,000 or $96,000 per year.  Annual interest expense increasedapproximately $340,000 due to the increased debt.  The new mortgages alsocontain substantial prepayment penalties if paid before maturity.  ThePartnership’s cash reserves were increased approximately $13,000,000 as aresult of these refinancings.**

** **

**The Partnership recorded a loss inthe third quarter of 2003 on the early extinguishment of debt of approximately$1,435,000 because of prepayment penalties of approximately $1,355,000, and thewrite-off of deferred financing fees of approximately $80,000.  Deferredfinancing fees on the new mortgages, of approximately $132,000 will beamortized over their 10-year term.**

** **

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

** **

NOTE 6—ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The lease agreementsrequire the majority of tenants to maintain a one-month advance rental paymentplus security deposits.  Amounts received for prepaid rents ofapproximately $2,100,000 are included with cash and cash equivalents andsecurity deposits of approximately $1,100,000 are included with otherassets.  

 

NOTE 7—PARTNERS’ CAPITAL

 

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

 

11

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

** **

**In February 2004, the Partnershipvoted to pay a quarterly distribution $6.60 per unit payable on March 31, 2004,and June 30, 2004.  In August 2004 thePartnership voted to pay a quarterly distribution of $7.00 ($0.70 per**receipt) on September 30, 2004.

** **

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

 
| ** **                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|                               |       |                          |       |   |   |
| Net income per  depositary receipt |       | $                             | 0.82       |   | $ | 1.67 |   |
|                                    |            |                               |            |  |  |  |  |

 

NOTE 8—TREASURY UNITS

 

Treasury units at June 30, 2004 are as follows:

 
| Class A             |   | 5,681 |   |
|---------------------|--------|-------|--------|
| Class B             |   | 1,228 |   |
| General Partnership |   | 64    |   |
|                |   | 6,973 |   |

 

NOTE 9—COMMITMENTS AND CONTINGENCIES

 

**From time to time, the Partnershipsare involved in various ordinary routine litigation incidentalto their business. The Partnership either has insurance coverage or hasprovided for any uninsured claims, which, in the aggregate, are notsignificant. The Partnerships are not involved in any material pending legalproceedings.**

** **

NOTE 10—RENTAL INCOME

 

**During the three months ended June30, 2004, approximately 93% of rental income was related to residentialapartments and condominium units with leases of one year or less.  Theremaining 7% was related to commercial properties, which have minimum futurerental income on non-cancelable operating leases as follows:**

 

12

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| ** ** | ** ** | **Commercial  Property Leases** | ** ** |
|------------|------------|---------------------------------|------------|
|       |       |                            |       |
| 2005       |       | $                               | 1,722,000  |   |
| 2006       |       | 1,240,000                       |       |
| 2007       |       | 1,250,000                       |       |
| 2008       |       | 1,191,000                       |       |
| 2009       |       | 1,115,000                       |       |
| Thereafter |       | 5,000,000                       |       |
|       |       | $                               | 11,518,000 |   |

 

**The aggregate minimum future rentalincome does not include contingent rentals that may be received under variousleases in connection with percentage rents, common area charges and real estatetaxes.  Aggregate contingent rentals wereapproximately $185,000 for the six months ended June 30, 2004 and $382,000 forthe year ended December 31, 2003, respectively.**

** **

Rents receivable are netof allowances for doubtful accounts of $378,832 and $221,942 at June 30, 2004and December 31, 2003, respectively. Included in rents receivable is approximately $371,000 resulting fromrecognizing rental income from non-cancelable commercial leases with futurerental increases on a straight-line basis.  The majority of this amount isfor a long-term lease with Staples at Staples Plaza in Framingham,Massachusetts.

 

NOTE 11—CASH FLOW INFORMATION

 

During the six monthsended June 30, 2004 and 2003, cash paid for interest was approximately$3,952,000 and $3,454,000 respectively.

 

NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following methods andassumptions were used by the Partnership in estimating the fair value of itsfinancial instruments:

 

•                  Cash and cashequivalents, other assets, investment in partnerships, accounts payable, andadvance rents and security deposits: fair value approximates the carrying value of such assets and liabilities.

 

•                  Mortgage notespayable:  fair value is generally basedon estimated future cash flows which are discounted using the quoted marketrate for an independent source of similar obligations.  Refer to the table below for the carryingamount and estimated fair value of such instruments.

 
| ** **              | ** ** | **Carrying  Amount** | ** **  | **Estimated  Fair Value** | ** ** |
|-------------------------|------------|----------------------|-------------|---------------------------|------------|
| Mortgage notes  payable |       |                 |        |                      |       |
| At June 30, 2004        |       | $                    | 115,555,219 |                      | $          | 119,039,064 |   |
| At December 31,  2003   |       | 115,911,209          |        | 121,997,197               |       |
|                         |            |                      |             |                           |            |  |  |

 

13

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**Disclosure about fair value offinancial instruments is based on pertinent information available to managementas of June 30, 2004 and December 31, 2003. Although management is not aware of any factors that would significantlyaffect the fair value amounts, such amounts have not been comprehensivelyrevalued for purposes of these financial statements since June 30, 2004 andcurrent estimates of fair value may differ significantly from the amountspresented herein.**

 

NOTE 13—TAXABLE INCOME AND TAX BASIS

 

**Taxable income reportable by thePartnership and includable in its partner’s tax returns is different thanfinancial statement income because of accelerated depreciation, different taxlives, and timing differences related to prepaid rents and allowances. Taxable income is approximately $600,000 less than statement income for the sixmonths ended June 30, 2004 and approximately $700,000 less than statementincome for the year ended December 31, 2003. The cumulative tax basis of the Partnership’s real estate at June 30,2004 is approximately $743,000 greater than the statement basis.**

** **

NOTE 14—NEW ACCOUNTING PRONOUNCEMENTS

 

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

** **

**The Partnership’s adoption ofFAS 144 resulted in: (i) the net operatingresults of properties sold during 2002 being presented as income fromdiscontinued operations for all periods presented and (ii) the gain on thesale of operating properties sold, net of sale costs, being presented as incomefrom discontinued operations for the year 2002. Implementation of FAS 144will impact how information is classified on the income statement but will haveno effect on net income.**

** **

**In April 2002, the FASB issuedFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FAS Statement No. 13, and Technical Corrections.” FAS 145eliminates extraordinary accounting treatment for or loss on debtextinguishment and amends other existing authoritative pronouncements; it makesvarious technical corrections, clarifies meanings, and describes theirapplicability under changed conditions. The provisions of FAS 145 becameeffective for the Partnership beginning in 2003. However, early application ofFAS 145 was encouraged, and the Partnership adopted FAS 145 in 2002.Debt extinguishments reported as extraordinary items prior to scheduled or early adoptions of FAS 145 would bereclassified in most cases following adoption.**

 

14

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**In April 2003, the FASB issued SFASNo. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.” SFAS No. 149 amends and clarifies the accounting guidance on (1)derivative instruments (including certain derivative instruments embedded inother contracts) and (2) hedging activities that fall within the scope of SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFASNo. 149 also amends certain other existing pronouncements, which will result inmore consistent reporting of contracts that are derivatives in their entiretyor that contain embedded derivatives that warrant separate accounting. SFAS No.149 is effective (1) for contracts entered into or modified after June 30,2003, with certain exceptions, and (2) for hedging relationships designatedafter June 30, 2003. The guidance is to be applied prospectively. ThePartnership does not expect the adoption of SFAS No. 149, if required, to havea material impact on the Partnership’s financial position or results ofoperations or cash flows.**

** **

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

 

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

** **

**NOTE 15—SUBSEQUENT EVENTS**

** **

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

 

In July and August 2004, The Partnership committed to investapproximately $10,000,000 for a 50% ownership in each of two new joint venturesmore fully described below.  The other50% ownership in the joint ventures will be owned in the same manner as ThePartnership’s November 2001 acquisition in Cambridge, Massachusetts more fullydescribed in Note 3 to this financial statement.

 

The first joint venture is to purchase a 280 unit apartment complexlocated in Watertown, Massachusetts for $56,000,000. The investors are toinvest approximately $16,000,000 and obtain a mortgage for the balance of thepurchase and to finance improvements of approximately $3,000,000.

 

The second joint venture is to purchase a 42 unit apartment complex inLexington, Massachusetts for $10,200,000. The investors will invest between $3,000,000 to$4,000,000 and the balance will be financed.

 

15

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Item 2 — MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATION

 

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

 

The Partnership has retained The Hamilton Company (“Hamilton”) tomanage and administer the Partnership’s properties.  Hamilton is a full-service real estatemanagement company, which has legal, construction, maintenance, architectural,accounting and administrative departments. The Partnership’s properties represent approximately 33% of the totalproperties and 67% of the residential properties managed by Hamilton.  Substantially all of the other propertiesmanaged by Hamilton are owned, wholly or partially, directly or indirectly, byHarold Brown.  The Partnership’s SecondAmended and Restated Contract of Limited Partnership (the “Partnership Agreement”)expressly provides that the general partner may employ a management company tomanage the properties, and that such management company may be paid a fee of 4%of rental receipts for administrative and management services (the “ManagementFee”).  The Partnership annually paysHamilton the full Management Fee, in monthly installments.

 

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

 

Beyond the Management Fee, the Partnership Agreement further providesfor the employment of outside professionals to provide services to thePartnership and allows NewReal to charge the Partnership for the cost ofemploying professionals to assist with the administration of the Partnership’sproperties.  In addition to theManagement Fee, from time to time the Partnership pays Hamilton for repairs andmaintenance services, legal services, construction services and accountingservices.  The costs charged by Hamiltonfor these services are at the same hourly rate charged to all entities managedby Hamilton, and management believes such rates are competitive in themarketplace.

 

Hamilton accounted for approximately 4% and 6% of the repair andmaintenance expense paid for by the Partnership in the six months ended June30, 2004 and the year ended December 31, 2003, respectively.  Of the funds paid to Hamilton for thispurpose, the great majority was to cover the cost of services provided by theHamilton maintenance department, including

 

16

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plumbing, electrical, and carpentry services, snow removal and the useof equipment such as fork lifts. However, several of the larger Partnership properties have their ownmaintenance staff.  Further, thoseproperties that do not have their own maintenance staff but are located morethan a reasonable distance from Hamilton’s headquarters in Allston,Massachusetts are generally serviced by local, independent companies.

 

Hamilton’s legal department handles most of the Partnership’s evictionand collection matters.  Additionally, itprepares most long-term commercial lease agreements and represents thePartnership in selected purchase and sale transactions.  Overall, Hamilton provided approximately 77%of the legal services paid for by the Partnership during the six months ended June30, 2004 and approximately 66% for the year ended December 31, 2003.

 

The Partnership requires that three bids be obtained for constructioncontracts in excess of $5,000.  Hamiltonmay be one of the three bidders on a particular project and may be awarded thecontract if its bid and its ability to successfully complete the project aredeemed appropriate.  For contracts thatare not awarded to Hamilton, Hamilton charges the Partnership a constructionsupervision fee equal to 5% of the contract amount.  The architectural department at Hamilton alsoprovides services to the Partnership on an as-needed basis.  In 2004 and 2003, Hamilton provided themajority of the construction services and architectural services paid for bythe Partnership.

 

Prior to 1991, the Partnership employed an outside, unaffiliatedcompany to perform its bookkeeping and accounting functions.  Since that time, such services have beenprovided by Hamilton’s accounting staff, which consists of approximately tenpeople.  Hamilton currently charges thePartnership $80,000 ($20,000 per quarter) per year for bookkeeping andaccounting services.

 

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

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements, in accordancewith accounting principles generally accepted in the United States of America,requires the Partnership to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses and relateddisclosures of contingent assets and liabilities.  The Partnership regularly and continuallyevaluates its estimates, including those related to acquiring, developing andassessing the carrying values of its real estate properties and its investmentsin and advances to joint ventures.  ThePartnership bases its estimates on historical experience, current marketconditions, and on various other assumptions that are believed to be reasonableunder the circumstances.  See Note 1 tothe Consolidated Financial Statements, Principles of Consolidation.

 

Revenue Recognition: Revenues from rental property are recognized whendue from tenants.

 

17

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Residential leases are generally for terms of one year or less, andcommercial leases are generally for five to ten years, with renewal options atincreased rents.  Significant commercialleases with stepped increases over the term of the lease are recorded on thestraight-line basis.

 

Real Estate and Depreciation: Real estate assets are stated at thelower of cost or fair value, as appropriate, less accumulateddepreciation.  Costs related to theacquisition, development, construction and improvement of properties arecapitalized including interest, internal wages and benefits, real estate taxesand insurance.  Capitalization usuallybegins with commencement of development activity and ends when the property isready for leasing.  Replacements andimprovements— such as HVAC equipment, structural replacements, windows,appliances, flooring, carpeting and kitchen/bath replacements and renovationsare capitalized and depreciated over their estimated useful lives as follows:

 

Depreciation is computed on a straight-line basis over the estimateduseful lives of the related assets.  Inassessing estimated useful lives, the Partnership makes assumptions based onhistorical experience acquired from both within and outside the Partnership.  These assumptions have a direct impact on thePartnership’s net income.

 

Ordinary repairs and maintenance, such as unit cleaning and paintingand appliance repairs, are expensed.

 

If there is an event or change in circumstances that indicates animpairment in the value of a property, the Partnership’s policy is to assessthe impairment by making a comparison of the current and projected operatingcash flows of the property over its remaining useful life, on an undiscountedbasis, to the carrying amount of the property. If the carrying value is in excess of the estimated projected operatingcash flows of the property, we would recognize an impairment loss equivalent tothe amount required to adjust the carrying amount to its estimated fairvalue.  The Partnership has not recognizedan impairment loss since 1995.

 

With respect to investments in and advances to joint ventures, thePartnership looks to the underlying properties to assess performance and therecoverability of carrying amounts for those investments in a manner similar todirect investments in real estate properties. An impairment charge is recorded if the carrying value of the investmentexceeds its fair value.

 

Legal Contingencies

 

The Partnership is subject to various legal proceedings and claims thatarise, from time to time, in the ordinary course of business.  These matters are frequently covered byinsurance.  If it is determined that aloss is likely to occur, the estimated amount of the loss is recorded in thefinancial statements.  Both the amount ofthe loss and the point at which its occurrence is considered likely can bedifficult to determine.

 

18

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## RESULTSOF OPERATIONS

##  

**Comparison of the three months ended June 30, 2004to the three months ended June 30, 2003**

 

The Partnership and its Subsidiary Partnerships earned income beforeother income of $812,873 during the three months ended June 30, 2004 comparedto $1,396,741 for the three months ended June 30, 2003, a decrease of$583,868(42%).  As more fully describedin the schedules below, this decrease in operating income is largely due to anincrease in operating expenses and increases in vacancy rates.  Due to the softening residential rentalmarket, rental income at many of the properties decreased in the three monthsended June 30, 2004 and expenses continued to increase.

 

The rental activity is summarized as follows:

 
| ** **         | ** ** | **Occupancy Date**  | ** ** |
|--------------------|------------|---------------------|------------|
| ** **         | ** ** | **August 4,  2004** | ** ** | **May 3,  2004** | ** ** | **February 25,  2004** | ** ** | **August 11,  2003** | ** ** |
|               |       |                |       |   |   |   |   |   |   |
| Residential        |       |                |       |   |   |   |   |   |   |
| Units              |       | 2,400               |       | 2,400 |   | 2,400 |   | 2,395 |   |
| Vacancies          |       | 99                  |       | 72 |   | 37 |   | 70 |   |
| Vacancy rate       |       | 4.1                 | %          | 3.0 | % | 1.5 | % | 2.9 | % |
|               |       |                |       |   |   |   |   |   |   |
| Commercial         |       |                |       |   |   |   |   |   |   |
| Total square  feet |       | 85,275              |       | 85,275 |   | 85,275 |   | 85,275 |   |
| Vacancy            |       | 4,700               |       | 4,700 |   | 0 |   | 0 |   |
| Vacancy rate       |       | 5.5                 | %          | 5.5 | % | 0 | % | 0 | % |

 
| ** **              | ** ** | **Rental Income (in thousands)  Three Months Ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **              | ** ** | **2004**                                                      | ** ** | **2003** | ** ** |
| Total rents             |       | $                                                             | 7,708      |   | $ | 7,773 |   |
| Residential  percentage |       | 93                                                            | %          | 93 | % |
| Commercial  percentage  |       | 7                                                             | %          | 7 | % |
| Contingent  rentals     |       | $                                                             | 89         |   | $ | 90 |   |

 

19

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***Three MonthsEnded June 30, 2004 Compared to Three Months Ended June 30, 2003***

 
| ** **                                      | ** ** | **June 30,** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                        | ** ** | **2003**     |
|                                            |       |         |       |               |       |                |       |   |   |
| Revenues:                                       |       |         |       |               |       |                |       |   |   |
| Rental income                                   |       | $            | 7,708,025  |               | $          | 7,773,317           |       | $ | (65,292 | ) | -0.8 | % |
| Laundry and  sundry income                      |       | 79,474       |       | 80,266             |       | (792                | )          | -1.0 | % |
|                                            |       | 7,787,499    |       | 7,853,583          |       | (66,084             | )          | -0.8 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Expenses:                                       |       |         |       |               |       |                |       |   |   |
| Administrative                                  |       | 323,195      |       | 356,740            |       | (33,545             | )          | -9.4 | % |
| Depreciation and  amortization                  |       | 1,447,281    |       | 1,261,480          |       | 185,801             |       | 14.7 | % |
| Interest                                        |       | 1,974,141    |       | 1,839,294          |       | 134,847             |       | 7.3 | % |
| Management fees                                 |       | 319,479      |       | 324,020            |       | (4,541              | )          | -1.4 | % |
| Operating                                       |       | 700,339      |       | 628,211            |       | 72,128              |       | 11.5 | % |
| Renting                                         |       | 130,966      |       | 142,356            |       | (11,390             | )          | -8.0 | % |
| Repairs and  maintenance                        |       | 1,199,646    |       | 1,045,828          |       | 153,818             |       | 14.7 | % |
| Taxes and insurance                             |       | 879,579      |       | 858,913            |       | 20,666              |       | 2.4 | % |
|                                            |       | 6,974,626    |       | 6,456,842          |       | 517,784             |       | 8.0 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Income before  other income                     |       | 812,873      |       | 1,396,741          |       | (583,868            | )          | -41.8 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Other Income                                    |       |         |       |               |       |                |       |   |   |
| Interest income                                 |       | 64,556       |       | 43,500             |       | 21,056              |       | 48.4 | % |
| Income (loss)  from investment in joint venture |       | (41,022      | )          | (25,361            | )          | (15,661             | )          | 61.8 | % |
|                                            |       | 23,534       |       | 18,139             |       | 5,395               |       | 29.7 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Net Income                                      |       | 836,407      |       | 1,414,880          |       | (578,473            | )          | -40.9 | % |
|                                                 |            |              |            |                    |            |                     |            |  |  |  |  |  |

 

20

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Thefollowing is a comparative schedule for the three months ended June 30, 2004and 2003 of the changes in revenue from rental operations excluding the 2003acquisitions to the dates of acquisition.

 
| ** **                    | ** ** | **Total  Partnership  2004** | ** ** | **Less  Acquired  Properties** | ** ** | **Same  Properties  in 2004** | ** ** | **Same  Properties  in 2003** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|-------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|-------------------------------|------------|--------------------|------------|---------------------|------------|
| Revenues:                     |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Rental income                 |       | $                            | 7,708,025  |                           | $          | 219,345                       |       | $                             | 7,488,680  |               | $          | 7,773,317           |       | $ | (284,637 | ) | -3.7 | % |
| Laundry and sundry income     |       | 79,474                       |       | 3,580                          |       | 75,894                        |       | 80,266                        |       | (4,372             | )          | -5.4                | %          |
|                          |       | 7,787,499                    |       | 222,925                        |       | 7,564,574                     |       | 7,853,583                     |       | (289,009           | )          | -3.7                | %          |
|                          |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Expenses:                     |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Administrative                |       | 323,195                      |       | 3,903                          |       | 319,292                       |       | 356,740                       |       | (37,448            | )          | -10.5               | %          |
| Depreciation and amortization |       | 1,447,281                    |       | 110,207                        |       | 1,337,074                     |       | 1,261,480                     |       | 75,594             |       | 6.0                 | %          |
| Interest                      |       | 1,974,141                    |       | 99,170                         |       | 1,874,971                     |       | 1,839,294                     |       | 35,677             |       | 1.9                 | %          |
| Management fees               |       | 319,479                      |       | 8,175                          |       | 311,304                       |       | 324,020                       |       | (12,716            | )          | -3.9                | %          |
| Operating                     |       | 700,339                      |       | 21,779                         |       | 678,560                       |       | 628,211                       |       | 50,349             |       | 8.0                 | %          |
| Renting                       |       | 130,966                      |       | 4,042                          |       | 126,924                       |       | 142,356                       |       | (15,432            | )          | -10.8               | %          |
| Repairs and maintenance       |       | 1,199,646                    |       | 33,676                         |       | 1,165,970                     |       | 1,045,828                     |       | 120,142            |       | 11.5                | %          |
| Taxes and insurance           |       | 879,579                      |       | 21,296                         |       | 858,283                       |       | 858,913                       |       | (630               | )          | -0.1                | %          |
|                          |       | 6,974,626                    |       | 302,248                        |       | 6,672,378                     |       | 6,456,842                     |       | 215,536            |       | 3.3                 | %          |
|                          |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Income before other income    |       | 812,873                      |       | (79,323                        | )          | 892,196                       |       | 1,396,741                     |       | (504,545           | )          | -36.1               | %          |
|                               |            |                              |            |                                |            |                               |            |                               |            |                    |            |                     |            |  |  |  |  |  |

 

Rental income for the three months ended June 30, 2004 wasapproximately $7,708,000 compared to approximately $7,773,000 for the threemonths ended June 30, 2003, a decrease of approximately $65,000(.8%).  The properties with the most significantdecreases were Westgate Woburn, a decrease of approximately $100,000; RedwoodHills, a decrease of approximately $40,000; and decreases of approximately $30,000 each at 1144 Commonwealth Avenue and Hamilton Oaks. There were smallerdecreases at most other properties.  Thedecrease in rental income is due to increased vacancies, rental concessions andsome reductions in rents for new leases. The reductions were offset by the rental income at the propertiesacquired in 2003.

 

Total expenses for the three months ended June 30, 2004 wereapproximately $6,975,000 compared to approximately $6,457,000 for the threemonths ended June 30, 2003, an increase of approximately $518,000(8%). Asdisclosed in the schedule above, certain increases are the result of theacquisitions in 2003. Repairs and maintenance expenses increased approximately$154,000(15%) due to ongoing refurbishment, repair and clean up of rental unitsin an effort to reduce vacancies. Operating expenses increased approximately$72,000(11%) due to increased heat and other utilities. Taxes and insuranceincreased approximately $21,000(2%) due to increased taxes and insurancepremiums. Renting expenses decreased approximately $11,000(8%) due to decreasesrental commissions.  Administrativeexpenses decreased approximately $34,000 (9%) primarily due to a reduction inprofessional fees.  Total depreciationand amortization increased approximately $186,000(15%) primarily due to thesignificant acquisitions made in 2003 and continuing improvements.

 

The Partnership has a 50% ownership interest in a limited liabilityPartnership that owns a 40 unit residential property in Cambridge,Massachusetts.  For the three monthsended June 30,

 

21

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2004, the Partnership’s share of loss on this investment is $41,022compared to a loss of $25,361 for the three months ended June 30, 2003, anincrease of $15,661(62%).  This is due tovacancies and decreased rents on some new leases.  There was one unit vacant at August 4, 2004.

 

Interest income was approximately $64,556 for the three months endedJune 30, 2004 compared to $43,500 for the three months ended June 30, 2003 anincreased $21,056 (48%).  This is dueprimarily due to an increase in the cash available for investment and someincreases in rates earned.  Totalinterest expense increased approximately $135,000 due to the increased mortgagedebt.

 

As a result of the changes discussed above, net income for the threemonths ended June 30, 2004 was $836,407 compared to $1,414,880 for the threemonths ended June 30, 2003, a decrease of $578,473 (41%).

 

**Comparison of the six months ended June 30, 2004to the six months ended June 30, 2003**

 

The Partnership and its Subsidiary Partnerships earned income beforeother income of $1,357,355 for the six months ended June 30, 2004 compared to$2,834,548 for the six months ended June 30, 2003 a decrease of$1,477,193(52%).  The following is asummary of the Partnership’s rental income for the six months ended June 30,2004 and 2003.  As more fully describedin the schedules below, this decrease is primarily due to increased vacanciesand increases in operating expenses including significant depreciation andinterest expense.

 

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***Six Months Ended June 30, 2004 Compared to Six Months Ended June 30,2003***

 
| ** **                                      | ** ** | **June 30,** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                        | ** ** | **2003**     |
|                                            |       |         |       |               |       |                |       |   |   |
| Revenues:                                       |       |         |       |               |       |                |       |   |   |
| Rental income                                   |       | $            | 15,453,837 |               | $          | 15,234,609          |       | $ | 219,228 |   | 1.4 | % |
| Laundry and  sundry income                      |       | 160,924      |       | 151,066            |       | 9,858               |       | 6.5 | % |
|                                            |       | 15,614,761   |       | 15,385,675         |       | 229,086             |       | 1.5 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Expenses                                        |       |         |       |               |       |                |       |   |   |
| Administrative                                  |       | 653,081      |       | 720,555            |       | (67,474             | )          | -9.4 | % |
| Depreciation and  amortization                  |       | 2,921,669    |       | 2,374,343          |       | 547,326             |       | 23.1 | % |
| Interest                                        |       | 3,977,036    |       | 3,498,462          |       | 478,574             |       | 13.7 | % |
| Management fees                                 |       | 637,940      |       | 620,358            |       | 17,582              |       | 2.8 | % |
| Operating                                       |       | 1,792,480    |       | 1,619,028          |       | 173,452             |       | 10.7 | % |
| Renting                                         |       | 240,164      |       | 205,321            |       | 34,843              |       | 17.0 | % |
| Repairs and  maintenance                        |       | 2,272,653    |       | 1,858,939          |       | 413,714             |       | 22.3 | % |
| Taxes and  insurance                            |       | 1,762,383    |       | 1,654,121          |       | 108,262             |       | 6.5 | % |
|                                            |       | 14,257,406   |       | 12,551,127         |       | 1,706,279           |       | 13.6 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Income before  other income                     |       | 1,357,355    |       | 2,834,548          |       | (1,477,193          | )          | -52.1 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Other Income  (Loss)                            |       |         |       |               |       |                |       |   |   |
| Interest income                                 |       | 134,723      |       | 99,028             |       | 35,695              |       | 36.0 | % |
| Income (loss)  from investment in joint venture |       | (73,052      | )          | (46,038            | )          | (27,014             | )          | 58.7 | % |
|                                            |       | 61,671       |       | 52,990             |       | 8,681               |       | 16.4 | % |
|                                            |       |         |       |               |       |                |       |   |   |
| Net Income                                      |       | 1,419,026    |       | 2,887,538          |       | (1,468,512          | )          | -50.9 | % |
|                                                 |            |              |            |                    |            |                     |            |  |  |  |  |  |

 

23

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The following is a comparative schedule for the six months ended June30, 2004 and 2003 of the changes in revenue from rental operations excludingthe 2003 acquisitions to the dates of acquisition.

 
| ** **                    | ** ** | **Total  Partnership  2004** | ** ** | **Less  Acquired  Properties** | ** ** | **Same  Properties  in 2004** | ** ** | **Same  Properties  in 2003** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|-------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|-------------------------------|------------|--------------------|------------|---------------------|------------|
| Revenues:                     |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Rental income                 |       | $                            | 15,453,837 |                           | $          | 802,336                       |       | $                             | 14,651,501 |               | $          | 15,234,609          |       | $ | (583,108 | ) | -3.8 | % |
| Laundry and sundry income     |       | 160,924                      |       | 14,660                         |       | 146,264                       |       | 151,066                       |       | (4,802             | )          | -3.2                | %          |
|                          |       | 15,614,761                   |       | 816,996                        |       | 14,797,765                    |       | 15,385,675                    |       | (587,910           | )          | -3.8                | %          |
|                          |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Expenses                      |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Administrative                |       | 653,081                      |       | 18,371                         |       | 634,710                       |       | 720,555                       |       | (85,845            | )          | -11.9               | %          |
| Depreciation and amortization |       | 2,921,669                    |       | 437,599                        |       | 2,484,070                     |       | 2,374,343                     |       | 109,727            |       | 4.6                 | %          |
| Interest                      |       | 3,977,036                    |       | 356,971                        |       | 3,620,065                     |       | 3,498,462                     |       | 121,603            |       | 3.5                 | %          |
| Management fees               |       | 637,940                      |       | 31,774                         |       | 606,166                       |       | 620,358                       |       | (14,192            | )          | -2.3                | %          |
| Operating                     |       | 1,792,480                    |       | 114,984                        |       | 1,677,496                     |       | 1,619,028                     |       | 58,468             |       | 3.6                 | %          |
| Renting                       |       | 240,164                      |       | 12,787                         |       | 227,377                       |       | 205,321                       |       | 22,056             |       | 10.7                | %          |
| Repairs and maintenance       |       | 2,272,653                    |       | 129,830                        |       | 2,142,823                     |       | 1,858,939                     |       | 283,884            |       | 15.3                | %          |
| Taxes and insurance           |       | 1,762,383                    |       | 85,721                         |       | 1,676,662                     |       | 1,654,121                     |       | 22,541             |       | 1.4                 | %          |
|                          |       | 14,257,406                   |       | 1,188,037                      |       | 13,069,369                    |       | 12,551,127                    |       | 518,242            |       | 4.1                 | %          |
|                          |       |                         |       |                           |       |                          |       |                          |       |               |       |                |       |
| Income before other income    |       | 1,357,355                    |       | (371,041                       | )          | 1,728,396                     |       | 2,834,548                     |       | (1,106,152         | )          | -39.0               | %          |
|                               |            |                              |            |                                |            |                               |            |                               |            |                    |            |                     |            |  |  |  |  |  |

 

Rental income for the sixmonths ended June 30, 2004 was approximately $15,454,000 compared toapproximately $15,235,000 for the six months ended June 30, 2003 an increase ofapproximately $219,000(1%).  As indicatedin the table above, the increase in rental income is due primarily to theacquisition of the School Street property in April 2003.  Rental income at the Partnership’s existingproperties actually decreased during the six months ended June 30, 2004 by$583,000(4%).  The most significantdecrease in rental income was at the Westgate Apartments in Woburn,Massachusetts with a decrease of approximately $230,000 (15%).  This decrease is due to vacancies and rentalcredits given to new tenants in the ongoing effort to stay competitive in arelatively soft rental market at that location. Other significant decreases in rental income were at Redwood Hills ofapproximately $72,000(7%), at 1144 Commonwealth Avenue of approximately$57,000(4%), at Hamilton Oaks of approximately $48,000(3%), at Brookside ofapproximately $34,000 (12%), and at North Beacon of approximately$29,000(4%).  Most other residentialproperties experienced smaller decreases in rental income.  Additionally, bad debts increasedapproximately $89,000.

 

Total expenses for the six months ended June 30, 2004 wereapproximately $14,257,000 compared to approximately $12,551,000 for the sixmonths ended June 30, 2003, an increase of approximately $1,706,000(14%).  As indicated in the chart above,approximately $1,188,000 of this increase represents the property acquired in2003.  Other comparable increases includerepairs and maintenance expenses of approximately $283,000(15%), interestexpense of

 

24

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approximately $122,000 (4%) and depreciation and amortization expenseof approximately $110,000(5%).  Anexplanation of these increases is discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Partnership’s principal source of cash during 2004 and 2003 was thecollection of rents as well as the refinancing of Partnership properties duringthe third quarter of 2003.

 

The majority of cash and cash equivalents of $22,024,552 at June 30,2004 and $24,362,328 at December 31, 2003 was held in interest bearing accountsat credit worthy financial institutions.

 

This decrease of $2,337,776 for the six months ended June 30, 2004 issummarized as follows:

 
| ** **                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Cash provided by  operating activities       |       | $                             | 4,645,757  |   | $ | 4,391,313 |   |
| Cash (used in)  investing activities         |       | (4,343,851                    | )          | (9,915,160 | ) |
| Cash (used in)  other financing activities   |       | (355,990                      | )          | (448,110 | ) |
| Dividends paid                               |       | (2,283,692                    | )          | (2,802,146 | ) |
| Net (decrease)  in cash and cash equivalents |       | $                             | (2,337,776 | ) | $ | (8,774,103 | ) |

 

The cash provided by operating activities is primarily due to the netincome plus depreciation expense.  Thedecrease in cash used in investing activities is due to the School Streetacquisition made in April 2003.  Thedecrease in cash used in financing activities was due to the decrease in theprincipal payments of the mortgages refinanced in 2003 and a non-recurringspecial dividend paid in March 2003.

 

On August 1, 2003, the Partnership refinanced four mortgage loans witha total outstanding balance of approximately $11,526,000, earning interest atrates ranging from 8.38% to 8.75%.  Allof these loans matured in 2005.  ThePartnership borrowed a total of $26,750,000, with interest rates ranging from4.84% to 5.30%.  The new loans arerepresented by ten-year notes with interest only payments during their entireterms.  The total monthly payment on theold loans was approximately $101,000 including principal of approximately$20,000.  The total monthly payment onthe new loan is approximately $109,000, resulting in an increase in annualpayments of approximately $96,000. Annual interest expense will increase approximately $340,000 due to theincreased debt.  The Partnership’s cashreserves have increased approximately $13,000,000 as a result of thisrefinancing.  There are substantialprepayment penalties if paid before maturity.

 

On June 30, 2003, the Partnership purchased five condominium units froma group of investors who are also affiliated with the Partnership.  In the event any of these units are soldduring the three year period commencing on the date of acquisition and the saleprice is less than the price paid by the Partnership for such units, HaroldBrown has agreed to indemnify the Partnership for

 

25

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the difference.  The totalpurchase price for the five units was $2,421,286 including closing costs.  This acquisition was funded from cashreserves.  In August 2003, thePartnership obtained a $1,600,000 mortgage loan for three years, with interestonly payments at 5.25% and no prepayment penalties, secured by these fivecondominium units.

 

On April 25, 2003, the Partnership acquired a 184 unit residentialproperty located at 9 School Street in Framingham, Massachusetts for a totalpurchase price of $23,368,000.  ThePartnership obtained a mortgage of $17,000,000 with an interest rate of5.47%.  The balance of approximately$6,368,000 was funded from cash reserves. The mortgage has a ten-year term and is amortized over 30 years, withinterest only payments for the first three years.  There is a significant prepayment penalty ifthe mortgage is prepaid prior to its ten-year maturity.

 

In February 2004, the Partnership voted to pay a quarterly distributionof $6.60 ($0.66 per depositary receipts) per unit payable on March 31,2004.  The total distribution paid onMarch 31, 2004 was $1,142,077. Additionally, in April 2004 the Partnership voted to pay the samequarterly distribution on June 30, 2004. In August 2004, the Partnership voted to pay quarterly distribution onSeptember 30, 2004 of $7.00 ($0.70 per receipt)

 

In February 2003, the Partnership voted to increase the quarterlydistribution to $6.60 per unit ($0.66 per depositary receipt) and pay anadditional one-time distribution of $3.00 ($0.30 per depositary receipt) perunit for a total distribution of $9.60 per unit payable on March 31, 2003.  The total distribution paid to the partnerson March 31, 2003 was $1,660,531.

 

During the six months ended June 30, 2004, the Partnership and itsSubsidiary Partnerships completed certain improvements to their properties at atotal cost of approximately $2,343,000. The most significant improvements were made at the following properties:$410,526 at Westgate in Woburn, Massachusetts; $292,754 at 62 Boylston Street,Boston, Massachusetts; $242,501 at Westside Colonial in Brockton,Massachusetts;  $224,157 at Hamilton Oaksin Brockton, Massachusetts; $153,914 at School Street in Framingham, Massachusetts;$146,196 at 1144 Commonwealth Avenue in Brighton, Massachusetts and $132,368 atRedwood Hills in Worcester, Massachusetts. All such improvements were funded from the Partnership’s cash reservesand escrow accounts established in connection with the refinancing ofapplicable properties.

 

In addition to theimprovements made to date in 2004, the Partnership and its SubsidiaryPartnerships plan to invest approximately $400,000 in capital improvementsduring the balance of 2004, the majority of which will be spent at Middlesexand Redwood Hills.  These improvementswill be funded from escrow accounts established in connection with therefinancing of applicable properties, as well as from the Partnership’s cashreserve.  An additional $500,000 will beneeded to complete the Westgate addition.

 

The Partnership anticipates that cash from operations andinterest-bearing investments will be sufficient to fund its current operationsand to finance current improvements to its properties.  The Partnership’s net income and cash flowmay fluctuate dramatically from year to year as a result of the sale ofproperties, unanticipated increases in expenses, or the loss of significanttenants.

 

26

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The Partnership is constructing 20 additional residential units at acost of approximately $4,000,000 at the Westgate Apartments in Woburn,Massachusetts available for occupancy in the fall of 2004.  The construction costs incurred to date ofapproximately $3,557,000, including approximately $1,558,000 in 2004, have beencapitalized as construction in progress.

 

As more fully described in note 15 to the financial statements, thePartnership has committed to invest approximately $10,000,000 for 50% ownershipin two new joint ventures purchasing 322 residential units in two apartmentcomplexes.

 

Factors That May Affect Future Results

 

Certain information contained herein includes forward-lookingstatements, which are made pursuant to the safe harbor provisions of thePrivate Securities Liquidation Reform Act of 1995 (the “Act”).  While forward looking statements reflectmanagement’s good faith beliefs when those statements are made, caution shouldbe exercised in interpreting and relying on such forward looking statements,the realization of which may be impacted by known and unknown risks anduncertainties, events that may occur subsequent to the forward-lookingstatements, and other factors which may be beyond the Partnership’s control andwhich can materially affect the Partnership’s actual results, performance orachievements for 2004 and beyond.

 

Along with risks detailed from time to time in the Partnership’sfilings with the Securities and Exchange Commission, some factors that couldcause the Partnership’s actual results, performance or achievements to differmaterially from those expressed or implied by forward-looking statementsinclude but are not limited to the following:

 

The Partnership depends on the real estate marketswhere its properties are located and these markets may be adversely affected bylocal economic market conditions, which are beyond the Partnership’s control.

 

The Partnership is subject to the general economicrisks affecting the real estate industry, such as dependence on tenant’sfinancial condition and the need to enter into new leases or renew leases onterms favorable to tenants in order to generate rental revenues.  The Partnership is also impacted by changingeconomic conditions making alternative housing arrangements more or lessattractive to the Partnership’s tenants, such as the interest rates on singlefamily home mortgages and the availability and purchase price of single-familyhomes in the greater Boston metropolitan area.

 

The Partnership is subject to increases in heating andutility costs that my arise as a result of economic and market conditions andfluctuations in seasonal weather conditions.

 

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

 

Given the nature of the real estate business, thePartnership is subject to potential environmental liabilities.  These include environmental contamination inthe soil at the Partnership’s or neighboring real estate, whether caused by thePartnership, previous

 

27

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owners of the subject property or neighbors of thesubject property, and the presence of hazardous materials in the Partnership’sbuildings, such as asbestos, mold and radon gas.  Management is not aware of any materialenvironmental liabilities at this time.

 

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

 

Insurance coverage for and relating to commercialproperties is increasingly costly and difficult to obtain.  In addition, insurance carriers have excludedcertain specific items from standard insurance policies, which have resulted inincreased risk exposure for the Partnership. These include insurance coverage for acts of terrorism and war, andcoverage for mold and other environmental conditions.  Coverage for these items is eitherunavailable, or prohibitively expensive.

 

Market interest rates could adversely affect themarket prices for Class A Partnership Units and depositary receipts as well asperformance and cash flow.

 

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

 

The residential real estate market in the Greater Boston area hassoftened and the Partnership anticipates the climate will remain the same inthe foreseeable future.  This may resultin increases in vacancy rates and/or a reduction in rents. The Partnershipbelieves its present cash reserves as well as anticipated rental revenue willbe sufficient to fund its current operations, and to finance current plannedimprovements to its properties and continue dividend payments in theforeseeable future.

 

Since the Partnership’s long-term goals include the acquisition ofadditional properties, a portion of the proceeds from the refinancing and saleof properties is reserved for this purpose. The Partnership will consider refinancing existing properties if thePartnership’s cash reserves are insufficient to repay existing mortgages or ifthe Partnership needs additional funds for future acquisitions.

 

28

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Item 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

As of June 30, 2004, the Partnership and its subsidiary Partnershipscollectively have approximately $115,555,000 in long-term debt, all of whichhave fixed interest rates.  Accordingly,the fair value of these debt instruments is affected by changes in marketinterest

rates.  For information regardingthe fair value and maturity dates of these debt obligations, see Notes 5 and 12to the Consolidated Financial Statements.

 

For additional disclosures about market risk, see “Item 2 –Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Factors that May Affect Future Results.”

 

Item 4—CONTROLS AND PROCEDURES

 

Our principal executive officer and principal financial officer havewithin 90 days of the filing date of this quarterly report, evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule13a-14© and 15d-14© under the Securities and Exchange Act of 1934, as amended)and have determined that such disclosure controls and procedures areadequate.  There have been no significantchanges in internal controls or in other factors that could significantlyaffect our internal controls since the date of evaluation.  We do not believe any significantdeficiencies or material weaknesses exist in our internal controls.  Accordingly, no corrective actions have beentaken. We continue to review and document our disclosure controls andprocedures, including our internal controls over financial reporting, and mayfrom time to time, make changes aimed at enhancing their effectiveness and toensure our systems evolve with our business.

 

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PART II - OTHER INFORMATION

 

Item1.    Legal Proceedings

 

None.

 

Item 2.    Changes in Securities

 

None.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

None.

 

Item5.    Other Information

 

None.

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)           See the exhibit index below.

 

(b)           8-K filed on July 22, 2004, reporting on Item 5(relating to the extension of the term of the Partnership through 2057).

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
| Date:     August 13,  2004 |
|----------------------------------------------------------|
|                                                     |
|                                                     | NEW ENGLAND REALTY ASSOCIATES  LIMITED PARTNERSHIP |
|                                                     |   |   |
|                                                     | By: | NEW REAL, INC., |
|                                                     |   | its General Partner* |
|                                                     |   |   |
|                                                     | By: | /s/ Ronald Brown |   |
|                                                     |   | Ronald Brown, President |
|                                                     |   |   |
|                                                     |
|                                                     | * | Functional equivalent of Chief Executive Officer,  Principal Financial Officer and Principal Accounting Officer |
|                                                          |  |  |  |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                        |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                              |
| (31.1)           |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Ronald Brown, Principal Executive Officer of  the Partnership (President and a Director of NewReal, Inc., sole General  Partner of the Partnership)   |
|             |       |                                                                                                                                                                                                                              |
| (31.2)           |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Harold Brown, Principal Financial Officer of  the Partnership (Treasurer and a Director of NewReal, Inc., sole General  Partner of the Partnership)   |
|             |       |                                                                                                                                                                                                                              |
| (32.1)           |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Ronald Brown, Principal Executive Officer of  the Partnership (President and a Director of NewReal, Inc., sole General  Partner of the Partnership). |
|             |       |                                                                                                                                                                                                                              |
| (32.2)           |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Harold Brown, Principal Financial Officer of  the Partnership (Treasurer and a Director of NewReal, Inc., sole General  Partner of the Partnership). |

 

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