**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

 

----

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                                            | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| **For the transition period from                                     to                                  ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| **Commission  file number 0-12138**                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

| **New England Realty Associates Limited Partnership**                               |
|-------------------------------------------------------------------------------------|
| (Exact  Name of Registrant as Specified in Its Charter)                             |
|                                                                                |   |   |
| **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’s Telephone Number, Including Area Code **(617) 783-0039**          |
|                                                                                |   |   |
| **Not  Applicable**                                                                 |
| (Former  Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

 

Indicate by check ýwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý    No o

 

 

----

 

INDEX

 
| PART I - FINANCIAL  INFORMATION |
|---------------------------------|
|                            |   |
| Item 1.                         | Financial Statements. |
|                            |   |
|                            | Consolidated Balance Sheets  as of March 31, 2003 and December 31, 2002 |
|                            |   |
|                            | Consolidated  Statements of Income for the Three Months Ended March 31, 2003 and March 31,  2002 |
|                            |   |
|                            | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2003 and March  31, 2002 |
|                            |   |
|                            | Consolidated  Statement of Changes in Partners’ Capital |
|                            |   |
|                            | 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

----

 

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                |   | **March 31,  2003** |        | **December  31,  2002** |   |
|---------------------------------------------------------------------|--------|---------------------|-------------|-------------------------|--------|
|                                                                |   | **(Unaudited)**     |        |                    |   |
| **Assets**                                                          |   |                |        |                    |   |
| Rental  Properties                                                  |   | $                   | 78,599,753  |                    | $      | 79,172,450 |   |
| Cash and Cash  Equivalents                                          |   | 17,893,433          |        | 18,974,446              |   |
| Rents Receivable                                                    |   | 616,023             |        | 475,906                 |   |
| Real Estate Tax  Escrows                                            |   | 492,885             |        | 391,253                 |   |
| Prepaid Expenses  and Other Assets                                  |   | 3,084,097           |        | 2,556,572               |   |
| Investment  in Partnership                                          |   | 1,394,592           |        | 1,430,269               |   |
| Financing and  Leasing Fees                                         |   | 660,557             |        | 684,322                 |   |
| **Total  Assets**                                                   |   | $                   | 102,741,340 |                    | $      | 103,685,218 |   |
|                                                                |   |                |        |                    |   |
| **Liabilities and Partners’ Capital**                          |   |                |        |                    |   |
| Mortgage Notes  Payable                                             |   | $                   | 82,647,820  |                    | $      | 82,871,406 |   |
| Accounts Payable  and Accrued Expenses                              |   | 1,209,491           |        | 1,676,628               |   |
| Advance Rental  Payments and Security Deposits                      |   | 3,193,676           |        | 3,258,958               |   |
| Total  Liabilities                                                  |   | 87,050,987          |        | 87,806,992              |   |
|                                                                |   |                |        |                    |   |
| Commitments and  Contingent Liabilities (Note 9)                    |   |                |        |                    |   |
|                                                                |   |                |        |                    |   |
| Partners’  Capital  173,252 units outstanding in 2003 and 2002 |   | 15,690,353          |        | 15,878,226              |   |
| **Total Liabilities and Partners’  Capital**                   |   | $                   | 102,741,340 |                    | $      | 103,685,218 |   |

 

See notes to consolidated financial statements.

 

3

----

 

**NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
|                                                      |   | **Three  Months Ended  March 31,** |      |
|-----------------------------------------------------------|--------|------------------------------------|-----------|
|                                                      |   | **(Unaudited)**                    |      |
|                                                      |   | **2003**                           |      | **2002** |   |
| Revenue                                                   |   |                               |      |   |   |
| Rental income                                             |   | $                                  | 7,461,292 |   | $ | 7,218,101 |   |
| Laundry and  sundry income                                |   | 70,800                             |      | 56,618 |   |
|                                                      |   | 7,532,092                          |      | 7,274,719 |   |
| Expense                                                   |   |                               |      |   |   |
| Administrative                                            |   | 363,816                            |      | 369,409 |   |
| Depreciation and  amortization                            |   | 1,112,863                          |      | 1,038,381 |   |
| Interest                                                  |   | 1,659,167                          |      | 1,584,656 |   |
| Management fees                                           |   | 296,338                            |      | 295,915 |   |
| Operating                                                 |   | 990,816                            |      | 708,205 |   |
| Renting                                                   |   | 62,965                             |      | 64,965 |   |
| Repairs and  maintenance                                  |   | 813,111                            |      | 675,960 |   |
| Taxes  and insurance                                      |   | 795,209                            |      | 729,310 |   |
|                                                      |   | 6,094,285                          |      | 5,466,801 |   |
|                                                      |   |                               |      |   |   |
| Income Before  Other Income and Discontinued Operations   |   | 1,437,807                          |      | 1,807,918 |   |
| Other Income  (Loss)                                      |   |                               |      |   |   |
| Interest  income                                          |   | 55,528                             |      | 66,062 |   |
| (Loss)  from investment in joint venture                  |   | (20,677                            | )         | (5,808 | ) |
|                                                      |   | 34,851                             |      | 60,254 |   |
|                                                      |   |                               |      |   |   |
| Income From  Continuing Operations                        |   | 1,472,658                          |      | 1,868,172 |   |
|                                                      |   |                               |      |   |   |
| Discontinued  Operations                                  |   |                               |      |   |   |
| Income from  discontinued operations                      |   | —                             |      | 35,233 |   |
| Gain on sale of  real estate from discontinued operations |   | —                             |      | — |   |
|                                                      |   |                               |      |   |   |
| Net Income                                                |   | $                                  | 1,472,658 |   | $ | 1,903,405 |   |
|                                                      |   |                               |      |   |   |
| Income per Unit                                           |   |                               |      |   |   |
| Income before  discontinued operations                    |   | $                                  | 8.50      |   | $ | 10.78 |   |
| Income from  discontinued operations                      |   | —                             |      | 0.20 |   |
|                                                      |   |                               |      |   |   |
| Net  Income per Unit                                      |   | $                                  | 8.50      |   | $ | 10.98 |   |
|                                                      |   |                               |      |   |   |
| Weighted  Average Number of Units Outstanding             |   | 173,252                            |      | 173,252 |   |

 

See notes to consolidated financial statements.

 

4

----

 

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL**

**(UNAUDITED**)

 
|                                                                        |   | **Limited** |       | **General** |   |            |   |
|-----------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|-----------------|--------|
|                                                                        |   | **Class A** |       | **Class B** |   | **Partnership** |   | **Total** |   |
| Balance, January  1, 2002                                                   |   | $           | 9,982,006  |        | $      | 2,374,180       |   | $ | 124,986 |   | $ | 12,481,172 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Distribution to  Partners                                                   |   | (886,231    | )          | (210,480    | )      | (11,078         | )      | (1,107,789 | ) |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Net Income                                                                  |   | 1,522,723   |       | 361,647     |   | 19,035          |   | 1,903,405 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Balance, March  31, 2002                                                    |   | $           | 10,618,498 |        | $      | 2,525,347       |   | $ | 132,943 |   | $ | 13,276,788 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at March 31, 2002 |   | 138,602     |       | 32,918      |   | 1,732           |   | 173,252 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Balance, January  1, 2003                                                   |   | $           | 12,699,650 |        | $      | 3,019,620       |   | $ | 158,956 |   | $ | 15,878,226 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Distribution to  Partners                                                   |   | (1,328,425  | )          | (315,501    | )      | (16,605         | )      | (1,660,531 | ) |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Net Income                                                                  |   | 1,178,126   |       | 279,805     |   | 14,727          |   | 1,472,658 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Balance, March  31, 2003                                                    |   | $           | 12,549,351 |        | $      | 2,983,924       |   | $ | 157,078 |   | $ | 15,690,353 |   |
|                                                                        |   |        |       |        |   |            |   |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at March 31, 2003 |   | 138,602     |       | 32,918      |   | 1,732           |   | 173,252 |   |

 

See notes to consolidated financial statements

 

5

----

 

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                              |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                              |   | **(Unaudited)**                    |       |
|                                                                              |   | **2003**                           |       | **2002** |   |
|                                                                              |   |                               |       |   |   |
| Cash Flows from  Operating Activities                                             |   |                               |       |   |   |
| Net  income                                                                       |   | $                                  | 1,472,658  |   | $ | 1,903,405 |   |
|                                                                              |   |                               |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |                               |       |   |   |
| Depreciation and  amortization                                                    |   | 1,112,863                          |       | 1,065,050 |   |
| Loss from  investments in partnership and joint venture                           |   | 20,677                             |       | 5,808 |   |
| Change in  operating assets and liabilities                                       |   |                               |       |   |   |
| (Increase) in  rents receivable                                                   |   | (140,117                           | )          | (40,941 | ) |
| (Increase) in  financing and leasing fees                                         |   | (4,649                             | )          | (15,867 | ) |
| (Decrease) in  accounts payable and accrued expense                               |   | (467,137                           | )          | (127,084 | ) |
| Decrease  (increase) in real estate tax escrow                                    |   | (101,632                           | )          | 44,809 |   |
| Decrease  (increase) in prepaid expenses and other assets                         |   | (27,525                            | )          | 7,397 |   |
| Increase  (decrease) in advance rental payments and security deposits             |   | (65,282                            | )          | 40,087 |   |
| Total  Adjustments                                                                |   | 327,198                            |       | 979,259 |   |
| Net cash  provided by operating activities                                        |   | 1,799,856                          |       | 2,882,664 |   |
| Cash Flows from  Investing Activities                                             |   |                               |       |   |   |
| Distribution  from Partnership                                                    |   | 15,000                             |       | 379,503 |   |
| Down payment on  acquisition                                                      |   | (500,000                           | )          | — |   |
| Purchase and  improvement of rental properties                                    |   | (511,752                           | )          | (344,183 | ) |
| Net cash (used  in) provided by  investing activities                        |   | (996,752                           | )          | 35,320 |   |
| Cash Flows from  Financing Activities                                             |   |                               |       |   |   |
| Principal  payments of mortgages payable                                          |   | (223,586                           | )          | (202,252 | ) |
| Distributions  to partners                                                        |   | (1,660,531                         | )          | (1,107,789 | ) |
| Net cash (used  in) financing activities                                          |   | (1,884,117                         | )          | (1,310,041 | ) |
| Net (Decrease)  Increase in Cash and Cash Equivalents                             |   | (1,081,013                         | )          | 1,607,943 |   |
|                                                                              |   |                               |       |   |   |
| Cash and Cash  Equivalents, at beginning of year                                  |   | 18,974,446                         |       | 16,690,943 |   |
| Cash and Cash  Equivalents, at end of year                                        |   | $                                  | 17,893,433 |   | $ | 18,298,886 |   |

 

See notes to consolidated financial statements.

 

6

----

 

**NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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 and operate various residential apartmentbuildings, condominium units and commercial properties located inMassachusetts, Connecticut and New Hampshire. NERA has also made investments in other real estate partnerships and hasparticipated in other real estate-related activities, primarily located inMassachusetts.  In connection with themortgages referred to in Note 5, a substantial number of NERA’s properties areowned by separate subsidiaries without any change in the historical cost basis.

 

*Principlesof Consolidation:*  Theconsolidated financial statements include the accounts of NERA and itssubsidiaries.  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% interest.  The consolidated group is referred to as the“Partnerships.”  Minority interests arenot recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated inconsolidation.  The Partnership accountsfor its investment in the above mentioned limited liability company using theequity method.

 

*AccountingEstimates:*  Thepreparation of financial statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period. Accordingly, actual results could differ from those estimates.

 

*RevenueRecognition:*  Rentalincome from residential and commercial properties is recognized over the termof the related lease.  Amounts 60 daysin arrears are charged against income. Certain leases of the commercialproperties provide for increasing stepped minimum rents, which are accountedfor on a straight-line basis over the term of the lease.

 

*RentalProperties:*  Rentalproperties are stated at cost less accumulated depreciation.  Maintenance and repairs are charged toexpense as incurred; improvements and additions are capitalized.  When assets are retired or otherwisedisposed of, the cost of the asset and related accumulated depreciation iseliminated from the accounts, and any gain or loss on such disposition isincluded in income.  Rental propertiesare depreciated on a straight-line basis over their estimated useful lives. Inthe event that facts and circumstances indicate that the carrying value of arental property may be impaired, an analysis of recoverability isprepared.  The estimated futureundiscounted cash flows are compared to the asset’s carrying value to determineif a write-down to fair value or discounted cash flow value is required.

 

*Financingand Leasing Fees:* Financing fees are capitalized and amortized, using the interest method,over the life of the related mortgages. Leasing fees are capitalized andamortized on a straight-line basis over the life of the related lease.

 

*IncomeTaxes:*  The financialstatements have been prepared under the basis that NERA and its subsidiariesare entitled to tax treatment as partnerships. Accordingly, no provision for income taxes on income has been recorded.

 

*CashEquivalents:*  ThePartnerships consider cash equivalents to be all highly liquid instrumentspurchased with a maturity of three months or less.

 

*SegmentReporting:*  Operatingsegments are revenue-producing components of the Partnership for which separatefinancial information is produced internally for management. Under thedefinition, NERA operated, for all periods presented, as one segment.

 

7

----

 

*Comprehensive Income:*  Comprehensive income is defined as changesin partners’ equity exclusive of transactions with owners (such as capitalcontributions and dividends).  NERA didnot have any comprehensive income items in 2003 and 2002, other than net incomeas reported.

 

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

 

*Concentration of Credit Risks and Financial Instruments:*  The Partnerships’ properties are located inNew England, and the Partnerships are subject to the general economic risksrelated thereto.  No single tenantaccounted for more than 5% of the Partnerships’ revenues in 2003 or 2002.  The Partnerships make their temporary cashinvestments with high-credit-quality financial institutions or purchase moneymarket accounts invested in U.S. Government securities or mutual funds investedin government bonds.  At March 31, 2003,substantially all of the Partnerships’ cash and cash equivalents were held ininterest-bearing accounts at financial institutions, earning interest at ratesfrom 0.88 % to 1.51%.  At March 31, 2003and December 31, 2002 approximately $17,000,000 and $19,000,000 of cash andcash equivalents exceeded federally insured amounts.

 

*Advertising Expense:*  Advertising is expensed as incurred.  Advertising expense was $28,673 and $17,399for the three months ended March 31, 2003 and 2002, respectively.

 

NOTE 2—RENTAL PROPERTIES

 

As of March 31, 2003, thePartnership and its Subsidiary Partnerships owned 2,192 residential apartmentunits in residential and mixed-use complexes (collectively, the “ApartmentComplexes”).  The Partnership also owns19 condominium units in a residential condominium complex, all of which areleased to residential tenants (collectively referred to as the “CondominiumUnits”).  The Apartment Complexes andCondominium Units are located primarily in the greater metropolitan Boston,Massachusetts area.

 

Additionally, as of March31, 2003, the Subsidiary Partnerships owned commercial shopping centers inFramingham, Massachusetts and mixed-use properties in Boston, Brockton andNewton, Massachusetts.  These propertiesare referred to collectively as the “Commercial Properties.”

 

On June 17, 2002, thePartnership purchased a 69-unit residential apartment complex located inNorwood, Massachusetts for $7,200,000. The Partnership assumed a first mortgage of approximately $3,650,000with an interest rate of 7.08%, amortizing over 25 years and maturing inJanuary 2008.  The seller financed$1,726,898 at an interest rate of 6% interest only, for five years.  This seller-financed note is collateralizedby a mortgage on the previously unencumbered 19 condominium units describedabove.  The balance of approximately$1,800,000 was funded from cash reserves.

 

On June 28, 2002, thePartnership sold a condominium unit located in Brockton, Massachusetts for$113,000.  The net gain on the sale was$92,778 after deducting basis, a 3% sales commission to the management company(see Note 3), and other closing costs. The net cash flow to the Partnership was $104,494.

 

On December 16, 2002, thePartnership sold the East Hampton Mall located in East Hampton, Connecticut for$3,025,000.  The net gain on the salewas $916,524 after deducting basis, mortgage prepayment penalties, 3% salescommission to the management company (see Note 3) and other closing costs.  The net cash flow to the Partnership was$1,414,661 after paying the mortgage of $1,268,510.  Rental income was approximately $471,000 and income fromoperations was approximately $60,000 for the year ended December 31, 2002.

 

8

----

 

Rental properties consistof the following:

 
|                                  |   | **MARCH 31,  2003** |       | **DECEMBER  31,  2002** |   | **USEFUL  LIFE** |   |
|---------------------------------------|--------|---------------------|------------|-------------------------|--------|------------------|--------|
| Land,  improvements, and parking lots |   | $                   | 17,294,322 |                    | $      | 17,294,322       |   | 10-31 years |   |
| Buildigs  and improvements            |   | 83,127,312          |       | 83,031,706              |   | 15-31 years      |   |
| Kitchen  cabinets                     |   | 1,946,473           |       | 1,849,895               |   | 5-10 years       |   |
| Carpets                               |   | 1,998,639           |       | 1,911,091               |   | 5-10 years       |   |
| Air  conditioning                     |   | 217,498             |       | 214,383                 |   | 7-10 years       |   |
| Laundry  equipment                    |   | 50,537              |       | 46,974                  |   | 5-7 years        |   |
| Elevators                             |   | 257,740             |       | 206,164                 |   | 20 years         |   |
| Swimming  pools                       |   | 86,340              |       | 86,340                  |   | 10 years         |   |
| Equipment                             |   | 1,340,628           |       | 1,286,596               |   | 5-7 years        |   |
| Motor  vehicles                       |   | 97,893              |       | 97,893                  |   | 5 years          |   |
| Fences                                |   | 57,469              |       | 57,469                  |   | 5-10 years       |   |
| Furniture  and fixtures               |   | 759,748             |       | 739,796                 |   | 5-7 years        |   |
| Smoke  alarms                         |   | 81,869              |       | 77,889                  |   | 5-7 years        |   |
| Construction  in progress             |   | 1,459,637           |       | 1,363,836               |   | —           |   |
|                                  |   | 108,776,106         |       | 108,264,354             |   |             |   |
| Less  accumulated depreciation        |   | 30,176,353          |       | 29,091,904              |   |             |   |
|                                  |   | $                   | 78,599,753 |                    | $      | 79,172,450       |   |   |   |

 

At March 31, 2003,construction in progress consists of $1,123,495 at Boylston Downtown LP for anew heating and air conditioning system to be completed in mid-2003 and$336,142 at Westgate Apartments LLC for design and approvals for 20 additionalresidential units.

 

NOTE 3—RELATED PARTYTRANSACTIONS

 

The Partnerships’ properties are managed by an entity that is owned bythe majority shareholder of the General Partner.  The management fee is equal to 4% of rental revenue and laundryincome.  Total fees paid were $296,329and $300,454 for the three months ended March 31, 2003 and 2002,respectively.  Security deposits areheld in escrow by the management company (see Note 6).  The management company also receives amortgage servicing fee equal to an annual rate of 1/2% of the monthlyoutstanding balance of mortgages receivable resulting from the sale ofPartnership properties.  There was nomortgage servicing fee paid in the year ended December 31, 2002 or the threemonths ended March 31, 2003.

 

The Partnership Agreementalso permits the General Partner or management company to charge the costs ofprofessional services (such as counsel, accountants and contractors) toNERA.  During the three months endedMarch 31, 2003 and 2002 approximately $165,000 and $162,000 was charged to NERAfor legal, construction, maintenance, rental and architectural services andsupervision of capital improvements.  Of the 2003 expenses referred to above, approximately $88,000 consistedof repairs and maintenance and $52,000 of administrative expense; approximately$25,000 of construction, architectural services and supervision of capitalprojects was capitalized in rental properties. Of the 2002 expenses referred to above, approximately $71,000 isrecorded in repairs and maintenance and $47,000 in administrative expense;approximately $44,000 of construction,

 

9

----

 

architectural servicesand supervision of  capital projects wascapitalized in rental properties. Additionally in each of the quarters ended March 31, 2003 and 2002 thePartnership paid to the management company $20,000, for in-house accountingservices, which were previously provided by an outside company.  Included in accounts payable and accruedexpenses at March 31, 2003 and December 31, 2002 is $144,602 and $248,360 dueto the management company.  ThePartnership Agreement entitles the General Partner or the management company toreceive certain commissions upon the sale of Partnership property, only to theextent that total commissions do not exceed 3%.  During the year ended December 31, 2002, the Partnership paidcommissions of $94,140 to the management company of which $3,390 represents thesale of the condominium in Brockton (see Note 2) and $90,750 represents thesale of East Hampton Mall.  Nocommissions were paid during the three months ended March 31, 2003.

 

In 1996, prior to becomingan employee and President of the management company, the current Presidentperformed asset management consulting services to the Partnership.  This individual continues to perform thisservice and to receive an asset management fee from the Partnership, receiving$12,500 for the three months ended March 31, 2003 and $50,000 for the yearended December 31, 2002.

 

Included in prepaidexpenses and other assets were amounts due from related parties of $1,055,000at March 31, 2003 and $1,075,000 at December 31, 2002, respectively,representing Massachusetts tenant security deposits which are held for thePartnerships by another entity also owned by one of the shareholders of theGeneral Partner (see Note 6).

 

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 ownership percentages are 50%, 471⁄2% and21⁄2%, respectively.  As part of thistransaction, the Partnership advanced funds in excess of its 50% percentinterest and received interest income on this excess, at 8%. A mortgage ofapproximately $8,000,000 was taken out on this property on December 27, 2001,and the funds in excess of the required equity were returned to the members inproportion to their ownership interest in the limited liability company sotheir respective capital contributions are currently proportionate to theirownership interest.  The interest incomepaid to the Partnership in 2001 in connection with this transaction was$30,003.

 

NOTE 4—OTHER ASSETS

 

Included in prepaidexpenses and other assets at March 31, 2003 and December 31, 2002 isapproximately $744,000 and $734,000, respectively, held in escrow to fundfuture capital improvements.

 

Financing and leasingfees of $660,557 and $684,322 are net of accumulated amortization of $599,276and $575,510 at March 31, 2003 and December 31, 2002, respectively.

 

10

----

 

NOTE 5—MORTGAGES NOTESPAYABLE

 

At March 31, 2003 andDecember 31, 2002, the mortgages payable consisted of various loans, all ofwhich were secured by first mortgages on properties referred to in Note 2.  At March 31, 2003, the interest rate on theseloans ranged from 6 % to 8.78 %, payable in monthly installments aggregatingapproximately $620,000, including interest, to various dates through 2016.  The majority of the mortgages are subject toprepayment penalties.  See Note 12 forfair value information.

 

The Partnerships havepledged tenant leases as additional collateral for certain of these mortgages.

 

Approximate annualmaturities are as follows:

 

| 2004 - current maturities |   | $          | 918,000    |   |
|---------------------------|--------|------------|------------|--------|
| 2005                      |   | 994,000    |       |
| 2006                      |   | 11,879,000 |       |
| 2007                      |   | 853,000    |       |
| 2008                      |   | 2,630,000  |       |
| Thereafter                |   | 65,374,000 |       |
|                      |   | $          | 82,648,000 |   |

 

NOTE 6—ADVANCE RENTALPAYMENTS AND SECURITY DEPOSITS

 

The lease agreements forcertain properties require tenants to maintain a one-month advance rentalpayment plus security deposits. Security deposits are held by another entity owned by the majorityshareholder of the General Partner (see Note 3).

 

NOTE 7—PARTNERS’ CAPITAL

 

The Partnership has twocategories of Limited Partners (Class A and B) and one category of GeneralPartner (General Partner).  Under theterms of the Partnership Agreement, Class B units and General Partnership unitsmust represent 19% and 1%, respectively, of the total units outstanding.  All classes have equal profit sharing anddistribution rights, in proportion to their ownership interests.

 

In February 2002, thePartnership voted to change its policy from semi-annual to quarterlydistributions and declared quarterly distributions of $6.40 per unit, for atotal distribution of $25.60 in 2002.

 

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.

 

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 A units have theright to exchange each Class A unit for 10 depositary receipts.  The following is information on the netincome per depositary receipt:

 
|                                                              |   | **Three  months ended March 31,** |   |
|-------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                              |   | **2003**                          |   | **2002** |   |
| Net income per depositary receipt before  discontinued operations |   | $                                 | 0.85   |   | $ | 1.08 |   |
| Net  income per depositary receipt from discontinued operations   |   | 0.00                              |   | 0.02 |   |
| Net income per depositary receipt after discontinued  operations  |   | $                                 | 0.85   |   | $ | 1.10 |   |

 

11

----

 

NOTE 8—TREASURY UNITS

 

Treasury units at March31, 2003 are as follows:

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

 

NOTE 9—COMMITMENTS ANDCONTINGENCIES

 

From time to time, thePartnerships are involved in various ordinary routine litigation incidental totheir business.  The Partnership eitherhas insurance coverage or has provided for any uninsured claims which, in theaggregate, are not significant.  ThePartnerships are not involved in any material pending legal proceedings.

 

The Partnership madecommitments to construct 20 additional residential units at the WestgateApartments in Woburn, Massachusetts. The Partnership estimates the total cost of these units to beapproximately $3,500,000, which will initially be funded from cashreserves.  At September 30, 2002,management had decided to defer the project, due to vacancies at the Westgate Apartments.  The total costs incurred to date areapproximately $336,000 and are included in rental properties as construction inprogress.

 

NOTE 10—RENTAL INCOME

 

During the three monthsended March 31, 2003, approximately 93% of rental income was related toresidential apartments and condominium units with leases of one year orless.  The remaining 7% was related tocommercial properties which have minimum future rental income on noncancellableoperating leases as follows:

 
|       |   | **Commercial  Property Leases** |       |
|------------|--------|---------------------------------|------------|
|       |   |                            |       |
| 2004       |   | $                               | 1,719,000  |   |
| 2005       |   | 1,545,000                       |       |
| 2006       |   | 1,256,000                       |       |
| 2007       |   | 1,427,000                       |       |
| 2008       |   | 1,183,000                       |       |
| Thereafter |   | 6,844,000                       |       |
|       |   | $                               | 13,974,000 |   |

 

The aggregate minimum future rental income does not include contingentrentals that may be received under various leases in connection with percentagerents, common area charges and real estate taxes.  Aggregate contingent rentals were approximately $143,000 for thethree months ended March 31, 2003 and $325,000 for the year ended December 31,2002, respectively.

 

Rents receivable are netof allowances for doubtful accounts of $254,221 and $211,202 at March 31, 2003 and December 31, 2002,respectively.

 

12

----

 

NOTE 11—CASH FLOWINFORMATION

 

During the three monthsended March 31, 2003 and 2002, cash paid for interest was $1,636,700 and$1,589,271 respectively.

 

NOTE 12—FAIR VALUE OFFINANCIAL INSTRUMENTS

 

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

 

•                  Cash and cash equivalents, otherassets, investment in partnerships, accounts payable, and advance rents andsecurity deposits:  fair valueapproximates the carrying value of such assets and liabilities.

 

•                  Mortgage notes payable:  fair value is generally based on estimatedfuture cash flows which are discounted using the quoted market rate for anindependent source of similar obligations. Refer to the table below for the carrying amount and estimated fairvalue of such instruments.

 

|                   |   | **Carrying  Amount** |       | **Estimated  Fair Value** |   |
|------------------------|--------|----------------------|------------|---------------------------|--------|
|                   |   |                 |       |                      |   |
| Mortgage notes payable |   |                 |       |                      |   |
| At  March 31, 2003     |   | $                    | 82,647,820 |                      | $      | 91,801,948 |   |
| At  December 31, 2002  |   | 82,871,406           |       | 92,326,604                |   |
|                        |        |                      |            |                           |        |  |  |

 

NOTE 13—TAXABLE INCOMEAND TAX BASIS

 

Taxable income reportableby the Partnership is different than financial statement income because ofaccelerated depreciation, different tax lives, and timing differences relatedto prepaid rents and allowances. Taxable income is approximately $103,000 greater than statement incomefor the quarter ended March 31, 2003 and approximately $50,000 greater thanstatement income for the year ended December 31, 2002.  The cumulative tax basis of thePartnership’s real estate at March 31, 2003 is approximately $2,200,000 greaterthan the statement basis.

 

NOTE 14—SUBSEQUENT EVENT– NEW 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 amortgage of $17,000,000 with an interest rate of 5.47%.  The balance of the purchase was funded fromcash reserves.  The mortgage has aten-year term and is amortized over thirty years, with interest only paymentsfor the first three years.  There is a significantprepayment penalty if the mortgage is prepaid prior to maturity.

 

NOTE 15—NEW ACCOUNTING PRONOUNCEMENTS

 

The Partnership adopted the Financial Accounting Standards Board’s(FASB) Statement of Financial Accounting Standard 144 (“FAS 144”), “Accountingfor the Impairment or Disposal of Long-lived Assets” on January 1, 2002.  FAS 144 supersedes FAS 121, “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.”  The primary objectives of FAS 144are to develop one accounting model, based on the framework established in FAS121, for long-lived assets to be disposed of by sale, and to addresssignificant implementation issues regarding impairment of long-lived assetsheld for use.  FAS 144 requirespresentation of

 

13

----

 

discontinued operations for an operating property considered held forsale beginning on January 1, 2002.  Inaccordance with FAS 144, the Partnership classifies real estate assets as heldfor sale in the period in which all of the following criteria are met: (a)management, having the authority to approve the action, commits to a plan tosell the asset; (b) the asset is available for immediate sale in its presentcondition subject only to terms that are usual and customary for sales of suchassets; (c) an active program to locate a buyer and other actions required tocomplete the plan to sell the asset have been initiated; (d) the sale of theasset is probable and the transfer of the asset is expected to qualify forrecognition as a completed sale within one year; (e) the asset is beingactively marketed for sale at a price that is reasonable in relation to itscurrent fair value; and (f) actions required to complete the plan indicate thatit is unlikely that significant changes to the plan will be made or that theplan will be withdrawn.

 

The Partnership’sadoption of FAS 144 resulted in: (i) the net operating results of propertiessold during 2002 being presented as income from discontinued operations for allperiods presented and (ii) the gain on the sale of operating properties sold,net of sale costs, being presented as income from discontinued operations forthe year 2002.   Implementation of FAS144 will impact how information is classified on the income statement but willhave no effect on net income (see Note 17).

 

In June 2001, the FASBissued FAS 143, “Accounting for Asset Retirement Obligations.”  Under FAS 143, the fair value of a liabilityfor an asset retirement obligation must be recognized in the period in which itis incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  FAS 143 is effective for fiscal yearsbeginning after June 15, 2002.  ThePartnership does not believe that FAS 143 will have a material impact on thePartnership’s financial position or results of operations.

 

In April 2002, the FASBissued FAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFAS Statement No. 13, and Technical Corrections.”  FAS 145 eliminates extraordinary accounting treatment for or losson debt extinguishment, and amends other existing authoritative pronouncements;it makes various technical corrections, clarifies meanings, and describes theirapplicability under changed conditions. The provisions of FAS 145 are effective for the Partnership with thebeginning of fiscal year 2003. However, early application of FAS 145 isencouraged, and the Partnership adopted FAS 145 in 2002.  Debt extinguishments reported asextraordinary items prior to scheduled or early adoptions of FAS 145 would bereclassified in most cases following adoption. The Partnership does not anticipate a significant impact on its resultsof operations from adopting FAS 145 (see Note 16).

 

In July 2002, the FASBissued FAS 146, “Accounting For Costs Associated With Exit or DisposalActivities.”  FAS 146 addresses financial accounting and reporting for costs associated withexit or disposal activities.  Under FAS146, a commitment to an exit or disposal plan no longer will be a sufficientbasis for recording a liability for those activities.  The Partnership does not anticipate a significant impact on netincome from adopting FAS 146.

 

In November 2002, theFASB issued FASB Interpretation No. 45 (FIN No. 45), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  Thisinterpretation expands the disclosures made by a guarantor in its financialstatements about its obligations under certain guarantees and requires theguarantor to recognize a liability for the fair value of an obligation assumedunder a guarantee.  FIN No. 45 clarifiesthe requirements of SFAS No. 5, “Accounting for Contingencies,” relating toguarantees. In general, FIN No. 45 applies to contracts or indemnificationagreements that contingently require the guarantor to make payments to theguaranteed party based on changes in an underlying agreement that is related toan asset, liability or equity security of the guaranteed party.  The disclosure requirements of FIN No. 45are effective for the Partnership as of December 31, 2002 and requiredisclosure of the nature of the guarantee, the maximum potential amount offuture payments that the guarantor could be required to make under theguarantee, and the current amount of the liability, if any, for the guarantor’sobligations under the guarantee.  Therecognition requirements are to be applied prospectively to guarantees issuedor modified after December 31, 2002. The

 

14

----

 

Partnership does notexpect the requirements of FIN No. 45 to have a material impact on net income,financial position or liquidity.

 

NOTE 16—DISCONTINUED OPERATIONSand SALES of REAL ESTATE

 

The Partnership’sadoption of SFAS No. 144 (see Note 15) resulted in the presentation of the netoperating results of qualifying properties sold during 2002 as income fromdiscontinued operations for all periods presented. In addition, SFAS No. 144resulted in the gain from the sales of these qualifying properties in thesecond and fourth quarters of 2002 (totaling approximately $1,000,000) to bereflected as a gain on sales of real estate from discontinued operations in theaccompanying consolidated statements of operations. The adoption of SFAS No.144 did not have an impact on net income; it only impacted the presentation ofthese properties within the consolidated statements of income.

 

15

----

 

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 certain factorsset 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 estate management company, whichhas legal, construction, maintenance, architectural and administrativedepartments.  The Partnership’sproperties represent approximately 33% of the total properties and 67% of theresidential properties managed by Hamilton. Substantially all of the other properties managed by Hamilton are owned,wholly or partially, directly or indirectly, by Harold Brown.  The Partnership’s Second Amended andRestated 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.

 

Mr. Brown, his brother Ronald Brown and the President of Hamilton, CarlValeri, collectively own approximately 17.7% of the depositary receiptsrepresenting the Partnership Class A Units (including depositary receipts heldby trusts for the benefit for such persons’ family members). Harold Brown alsoowns 75% of the Partnership’s Class B Units, 75% of the capital stock ofNewReal, Inc. (“NewReal”), the Partnership’s sole general partner and all ofthe outstanding stock of Hamilton. Ronald Brown also owns 25% of the Partnership’s Class B Units and 25% ofNewReal’s capital stock.  In addition,Ronald Brown is the President and director of NewReal and Harold Brown isNewReal’s Treasurer and also a director. Three of NewReal’s other directors, Thomas Raffoul, Conrad DiGregorioand Edward Sarkisian, also own immaterial amounts of the Partnership’s Class AUnits.

 

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 at or below competitors inthe marketplace.

 

Hamilton received approximately 10% and 7% of the total repair andmaintenance expenses paid for by the Partnership in the first quarter of 2003and the year ended December 31, 2002, respectively.  Of the funds paid to Hamilton for this purpose, the greatmajority related to services provided by the Hamilton maintenance department,including plumbing, electrical,

 

16

----

 

and carpentry services and snow removal.  However, several of the larger Partnership properties have theirown maintenance 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,it prepares most long-term commercial lease agreements and represents thePartnership in selected purchase and sale transactions.  Overall, Hamilton provided approximately 66%of the legal services paid for by the Partnership for the first quarter of 2003and approximately 62% for the year ended December 31, 2002.

 

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 timely and successfully complete theproject are deemed appropriate.  Forcontracts that are not awarded to Hamilton, Hamilton charges the Partnership aconstruction supervision fee equal to 5% of the contract amount.  Hamilton’s architectural department alsoprovides services to the Partnership on an as-needed basis.  In 2003 and 2002, 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 per year for bookkeeping and accounting 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 continually evaluates itsestimates, including those related to acquiring, developing and assessing thecarrying values of its real estate properties and its investments in and advancesto joint ventures.  The Partnershipbases its estimates on historical experience, current market conditions, and onvarious other assumptions that are believed to be reasonable under thecircumstances.  See Note 1 to theConsolidated Financial Statements, Principles of Consolidation.

 

Revenue Recognition: Revenues from rental property are recognized whendue from tenants. Residential leases are generally for terms of one year, andcommercial leases are generally for five to ten years, with renewal options atincreased rents.  Significant commercialleases with

 

17

----

 

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:

 

•                                          Depreciationis computed on a straight-line basis over the estimated useful lives of therelated assets.  In assessing estimateduseful lives, the Partnership makes assumptions based on historical experienceacquired from both within and outside the Partnership.  These assumptions have a direct impact onthe Partnership’s net income.

 

•                                          Ordinaryrepairs and maintenance, such as unit cleaning and painting and appliancerepairs, 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 operating cashflows of the property over its remaining useful life, on an undiscounted basis,to the carrying amount of the property. If the carrying value is in excess of the estimated projected operatingcash flows of the property, the Partnership would recognize an impairment lossequivalent to the amount required to adjust the carrying amount to itsestimated fair value.  The Partnershiphas not recognized an 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 amountof the loss and the point at which its occurrence is considered likely can bedifficult to determine.

 

18

----

 

Results of Operations

 

Three months ended March 31, 2003 and March 31, 2002

 

The Partnership and its Subsidiary Partnerships earned income fromoperations of  $1,437,807 during thethree months ended March 31, 2003 compared to $1,807,918 for the three monthsended March 31, 2002, a decrease of $370,111(20%).  This decrease in operating income is largely due to an increasein operating expenses offset by a slight increase in rental income. Due to asoftening residential rental market, rental rates at many of the propertiesremained unchanged in the three months ended March 31, 2003 while expensescontinued to increase. Management believes that for the remainder of 2003 thehigher cost of utilities and snow removal to be nonrecurring as well as manyone time repair and maintenance expenses. Management is also very active in thereal estate tax abatement process and competitive bidding of its insurancecoverage, each of which account for the increase in expenses.

 

The rental activity is summarized as follows:

 
|              |   | **Occupancy  Date** |   |
|-------------------|--------|---------------------|--------|
|              |   | **May 5,  2003**    |   | **March 6,  2003** |   | **May 1,  2002** |   |
|              |   |                |   |   |   |   |   |
| Residential       |   |                |   |   |   |   |   |
| Units             |   | 2,395               |   | 2,211 |   | 2,143 |   |
| Vacancies         |   | 58                  |   | 53 |   | 45 |   |
| Vacancy rate      |   | 2.4                 | %      | 2.4 | % | 2.1 | % |
| Commercial        |   |                |   |   |   |   |   |
| Total square feet |   | 85,275              |   | 85,275 |   | 137,775 |   |
| Vacancy           |   | 0                   |   | 0 |   | 0 |   |
| Vacancy rate      |   | 0                   | %      | 0 | % | 0 | % |

 
|                    |   | **Rental  Income (in thousands)  Three Months Ended March 31,** |   |
|-------------------------|--------|-----------------------------------------------------------------|--------|
|                    |   | **2003**                                                        |   | **2002** |   |
|                    |   | **Total  Operations**                                           |   | **Continuing  Operations** |   | **Total  Operations** |   | **Continuing  Operations** |   |
| Total rents             |   | $                                                               | 7,461  |   | $ | 7,461 |   | $ | 7,356 |   | $ | 7,218 |   |
| Residential  percentage |   | 93                                                              | %      | 93 | % | 91 | % | 93 | % |
| Commercial  percentage  |   | 7                                                               | %      | 7 | % | 9 | % | 7 | % |
| Contingent  rentals     |   | $                                                               | 143    |   | $ | 143 |   | $ | 122 |   | $ | 73 |   |

 

Rental income from continuing operations for the three months endedMarch 31, 2003 was approximately $7,461,000 compared to approximately$7,218,000 for the three months ended

 

 

19

----

 

March 31, 2002, an increase of approximately $243,000(3%).  The increase is due in large part to theacquisition of a 69 unit residential apartment complex located on Dean Streetin Norwood, Massachusetts (referred to as “Dean Street”) in June 2002.  Rental income from Dean Street for the threemonths ended March 31, 2003 was approximately $222,000.  In addition, rental income at some of thePartnership's other properties increased slightly, although some of thePartnership's larger properties suffered decreases in rental income at some ofthe larger properties. Rental income at the Westgate Apartments in Woburndecreased approximately $61,000 (7%) due to rental credits of one to threemonths given to new tenants during the first quarter of 2003 in the ongoingeffort to stay competitive in a relatively soft rental market.  There were no rental credits given atWestgate during the same period in 2002. Rental income at 62 Boylston Street decreased approximately $63,000(6%)due to increased vacancies at the property. Management believes that due to the continued weakness in theMassachusetts economy, such concessions may be necessary in the short term.Long term, management believes its diversified portfolio and its ongoingimprovement plan, both in type and location, will continue to provide stabilityin the income stream.

 

Total expenses for the three months ended March 31, 2003 were$6,094,285 compared to $5,466,801 for the three months ended March 31 2002, anincrease of $627,484 (11%). Expenses related to the Dean Street acquisitionrepresent approximately $234,000 of this increase. Unrelated to the acquisitionof Dean Street, there was an increase in expenses of approximately$393,000.  Operating expenses excludingthe Dean Street acquisition and sold properties increased $243,065(37%)substantially due to increases in utility and snow removal costs due to a long,cold and snowy winter.  Also excludingDean Street and sold properties, repairs and maintenance expense increased$124,570(18%) due to ongoing repairs to Partnership properties, and taxes andinsurance increased $46,713(6%) due to an increase in insurance premiums andvaluations.

 

The Partnership has a 50% ownership interest in a limited liabilitycompany that owns a 40 unit residential property in Cambridge,Massachusetts.  For the three monthsended March 31, 2003, the Partnership’s share of loss on this investment is$20,677 due to an increase in operating expenses and a decrease in rentalrates.  Real estate taxes increasedapproximately $7,000 and rental rates decreased during the three months ended March31, 2003.  There are no vacancies atMarch 31, 2003.

 

Interest income decreased $10,534 (16%) primarily due to a decline ininterest rates.

 

During the three months ended March 31, 2002, the Partnership hadincome from discontinued operations of approximately $35,000 which representsthe net income from the East Hampton Mall, sold in December 2002 as well as thecondominium sold in June 2002.

 

As a result of the changes discussed above, net income for the threemonths ended March 31, 2003 was $1,472,658 compared to $1,903,405 for the threemonths ended March 31, 2002, a decrease of $430,747 (23%).

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Partnership’s principal source of cash during 2003 and 2002 was thecollection of rents as well as the sale of two Partnership properties during 2002.

 

20

----

 

The majority of cash and cash equivalents of $17,893,433 at March 31,2003 and $18,974,446 at December 31, 2002 was held in interest bearing accountsat credit worthy financial institutions.

 

This decrease of $1,081,013 at March 31, 2003 is summarized as follows:

 

|                                                  |   | **Three  Months Ended March 31,** |       |
|-------------------------------------------------------|--------|-----------------------------------|------------|
|                                                  |   | **2003**                          |       | **2002** |   |
|                                                  |   |                              |       |   |   |
| Cash provided by  operating activities                |   | $                                 | 1,799,856  |   | $ | 2,882,664 |   |
| Cash (used in)  provided by investing activities      |   | (996,752                          | )          | 35,320 |   |
| Cash (used in)  other financing activities            |   | (223,586                          | )          | (202,252 | ) |
| Dividends paid                                        |   | (1,660,531                        | )          | (1,107,789 | ) |
| Net (decrease)  increase in cash and cash equivalents |   | $                                 | (1,081,013 | ) | $ | 1,607,943 |   |

 

The decrease in cash provided by operating activities is primarily dueto the decrease in operating income before depreciation expense.  The increase in cash used in investingactivities is due to capital improvements to certain of the Partnership’sproperties and a $500,000 deposit on a future acquisition.  The increase in cash used in financingactivities was due to principal payments on mortgages.

 

On June 17, 2002, the Partnership purchased a 69-unit residentialapartment complex located in Norwood, Massachusetts for $7,200,000.  The Partnership assumed a first mortgage ofapproximately $3,650,000 with payments of $25,271 per month, including interestat 7.08%, and a final payment of approximately $3,300,000 in February2008.  The seller financed $1,726,898 atan interest rate of 6%, with interest-only payments for 5 years, whichfinancing is collateralized by a mortgage on 19 condominium units owned by thePartnership.  The balance ofapproximately $1,800,000 was funded from cash reserves.

 

In June 2002, the Partnership sold a condominium unit located inBrockton, Massachusetts for $113,000. The net gain on the sale was $92,778 after deducting basis, a 3%commission to the management company (see Note 3 to the Consolidated FinancialStatements) and other expenses of the sale. The net cash flow to the Partnership was $104,494.

 

In December 2002, the Partnership sold the East Hampton Mall located inEast Hampton, Connecticut for $3,025,000. The net gain on the sale was $916,524 after deducting basis, mortgageprepayment penalties, a 3% commission to the management company (see Note 3 tothe Consolidated Financial Statements) and other expenses of the sale.  The net cash to the Partnership was$1,414,661 after payment of the existing mortgage and selling expenses.  For the years ended

 

21

----

 

December 31, 2002 this property contributed less than 2% of rentalincome and less than 1% of cash flow from operations.

 

In February 2002, the Partnership voted to change its dividend policyfrom semi-annual to a quarterly distribution and declared a quarterly dividendof $6.40 per unit ($0.64 per depositary receipt).  The distribution was payable on March 31, June 30, September 30,and December 31, 2002 and totaled $25.60 ($2.56 per depositary receipt) for2002.

 

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 per unit ($0.30 per depositaryreceipt) for a total distribution of $9.60 per unit ($0.96 per depositaryreceipt) payable on March 31, 2003.  Thetotal distribution paid to the partners on March 31, 2003 was $1,660,531.

 

During the three months ended March 31, 2003, the Partnership and itsSubsidiary Partnerships completed certain improvements to their properties at atotal cost of approximately $511,000. The most significant improvements weremade at the following properties: $94,645 at 1144 Commonwealth Avenue inAllston, Massachusetts; $80,162 at Avon Street Apartments in Malden,Massachusetts; $46,218 at 62 Boylston Street Boston, Massachusetts; and $34,814at Olde English Apartments in Lowell, Massachusetts.  All such improvements were funded from the Partnership’s cashreserves and escrow accounts established in connection with the refinancing ofapplicable properties.

 

In addition to the improvements made to date in 2003, the Partnershipand its Subsidiary Partnerships plan to invest an additional $2,000,000 incapital improvements during 2003, the majority of which will be spent at 62Boylston Street, Hamilton Oaks, 1144 Commonwealth Avenue, Redwood Hills andWestside Colonial.  These improvementswill be funded from escrow accounts established in connection with therefinancing of applicable properties, as well as from the Partnership’s cashreserves. Management believes these focused capital improvements will continueto improve marketing; lower vacancies and improve net operating income longterm.

 

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 netincome and cash flow may fluctuate dramatically from year to year as a resultof the sale of properties, unanticipated increases in expenses, or the loss ofsignificant tenants.

 

The Partnership had plans to construct 20 additional residential unitsat the Westgate Apartments in Woburn, Massachusetts.  As of March 31, 2003, the Partnership has put the project on holddue to the general softening of the residential rental market, resulting in adecrease in occupancy rates at Westgate. The pre-construction costs incurred to date of approximately $336,000have been capitalized and included in rental properties.  Management reviews the status of the developmentperiodically to consider the optimum time in which to start construction.

 

22

----

 

On April 25, 2003, the Partnership acquired a 184-unit residentialproperty located at 9 School Street in Framingham, Massachusetts for a totalpurchase price of approximately $23,368,000. The Partnership obtained amortgage of $17,000,000 with an interest rate of 5.47%.  The balance of the purchase was funded fromcash reserves.  The mortgage has aten-year term and is amortized over thirty years, with interest only paymentsfor the first three years.  There is asignificant prepayment penalty if the mortgage is prepaid prior to its 10 yearmaturity.

 

 

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-looking statements,and other factors which may be beyond the Partnership’s control and which canmaterially affect the Partnership’s actual results, performance or achievementsfor 2003 and beyond.

 

Along with risks detailed from time to time in the Partnership’s filingswith the Securities and Exchange Commission, some factors that could cause thePartnership’s actual results, performance or achievements to differ materiallyfrom those expressed or implied by forward-looking statements include but arenot limited to the following:

 

•                                          ThePartnership depends on the real estate markets where its properties are locatedand these markets may be adversely affected by local economic marketconditions, which are beyond the Partnership’s control.

 

•                                          ThePartnership is subject to the general economic risks affecting the real estateindustry, such as dependence on tenant’s financial condition and the need toenter into new leases or renew leases on terms favorable to tenants in order togenerate rental revenues.  ThePartnership is also impacted by changing economic conditions making alternativehousing arrangements more or less attractive to the Partnership’s tenants, suchas the interest rates on single family home mortgages and the availability andpurchase price of single-family homes in the greater Boston metropolitan area.

 

•                                          ThePartnership is subject to increases in heating and utility costs that my ariseas a result of economic and market conditions.

 

•                                          ThePartnership may fail to identify, acquire, construct, or develop additionalproperties; may develop properties that do not produce a desired yield oninvested capital; may be unable to sell poorly-performing or otherwiseundesirable properties quickly; or may fail to effectively integrateacquisitions of properties or portfolios of properties.

 

23

----

 

•                                          Financingor refinancing of Partnership properties may not be available to the extentnecessary or desirable, or may not be available on favorable terms.

 

•                                          Insurancecoverage for and relating to commercial properties is increasingly costly anddifficult to obtain.  In addition,insurance carriers have excluded certain specific items from standard insurancepolicies, which have resulted in increased risk exposure for the Partnership.  These include insurance coverage for acts ofterrorism and war, and coverage for mold and other environmentalconditions.  Coverage for these items iseither unavailable or prohibitively expensive.

 

•                                          Giventhe nature of the real estate business, the Partnership is subject to potentialenvironmental liabilities.  Theseinclude environmental contamination in the soil at the Partnership’s orneighboring real estate, whether caused by the Partnership, previous owners ofthe subject property or neighbors of the subject property, and the presence ofhazardous materials in the Partnership’s buildings, such as asbestos, mold andradon gas.   Management is not aware ofany material environmental liabilities at this time.

 

•                                          Marketinterest rates could adversely affect the market prices for Class A PartnershipUnits and depositary receipts as well as performance 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 any obligation to publiclyupdate or revise any forward-looking statement, whether as a result of newinformation, 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 or a reduction in some 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.

 

Item 3–QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 31, 2003, the Partnership and its subsidiary Partnershipscollectively have approximately $82,648,000 in long-term debt, all of whichpays interest at fixed rates. Accordingly, the fair value of these debtinstruments is affected by changes in market interest rates.  For information regarding the fair value andmaturity dates of these debt obligations, see Notes 5 and 12 to theConsolidated Financial Statements.

 

24

----

 

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–CONTROLSAND PROCEDURES

 

The Partnership's principal executive officer and principal financialofficer have within 90 days of the filing date of this quarterly report,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-14(c) and 15d-14(c) under the Securities and Exchange Actof 1934, as amended) and have determined that such disclosure controls and proceduresare adequate.  There have been nosignificant changes in internal controls or in other factors that couldsignificantly affect 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.

 

25

----

 

 

PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

None.

 

Item 2.    Changes inSecurities

 

None.

 

Item 3.    DefaultsUpon Senior Securities

 

None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

None.

 

Item 5.    Other Information

 

None.

 

Item 6.    Exhibitsand Reports on Form 8-K

 

(a)           See the exhibitindex below.

 

(b)           None.

 

26

----

 

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| Date:     May 15, 2003 |                                               |                                                                                                            |
|-------------------------------------------------|----------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                                            |                                               |                                                                                                            |
|                                            | 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 |
|                                                 |                                                    |                                                                                                                 |  |  |  |

 

27

----

 

I, Ronald Brown, certifythat:

 

1.                                    Ihave reviewed this quarterly report on Form 10-Q of New England RealtyAssociates Limited Partnership;

 

2.                                    Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport; and

 

3.                                    Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                   designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                   presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                    Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
|   | /s/  RONALD BROWN                                                                                           |   |
|--------|-----------------------------------------------------------------------------------------------------------------------|--------|
|   | Principal Executive Officer  (President and Director of the  Partnership’s General Partner,  NewReal, Inc.) |

 

28

----

 

I, Harold Brown, certify that:

 

1.                                    Ihave reviewed this quarterly report on Form 10-Q of New England RealtyAssociates Limited Partnership;

 

2.                                    Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport; and

 

3.                                    Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                   designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                   presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’sf ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                    Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | /s/  HAROLD BROWN                                                                                           |   |
|--------|-----------------------------------------------------------------------------------------------------------------------|--------|
|   | Principal Financial Officer  (Treasurer and Director of the  Partnership’s General Partner,  NewReal, Inc.) |

 

29

----

 

**EXHIBITINDEX**

 
| **Exhibit  No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                         |
| (99.1)           |   | Certification Pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Ronald Brown, Principal Executive Officer of  the Company (President and a Director of NewReal, Inc., sole General  Partner of the Partnership). |
|             |   |                                                                                                                                                                                                                                                                                         |
| (99.2)           |   | Certification Pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Harold Brown, Principal Financial Officer of  the Company (Treasurer and a Director of NewReal, Inc., sole General  Partner of the Partnership). |

 

30

----