** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

 

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**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        June 30,  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 asSpecified 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

 

 

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INDEX

 

PART I - FINANCIALINFORMATION

 
| Item 1.                     | Financial Statements.                                                                                                                                                       |
|-----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |                                                                                                                                                                        |
|                        | Consolidated Balance Sheets  as of June 30, 2003  (unaudited) and December 31, 2002 (audited)                                                                               | 3 |
|                        |                                                                                                                                                                        |   |
|                        | Consolidated  Statements of Income for the  Three Months Ended June 30, 2003  and June 30, 2002, and the Six Months   Ended June 30, 2003 and June 30, 2002 (all unaudited) | 4 |
|                        |                                                                                                                                                                        |   |
|                        | Consolidated  Statement of Changes in Partners’  Capital for the Six Months Ended June 30, 2003  And June 30, 2002 (all unaudited)                                     | 5 |
|                        |                                                                                                                                                                        |   |
|                        | Consolidated  Statements of Cash Flows for the  Six Months Ended June 30, 2003 and  June 30, 2002 (all unaudited)                                                           | 6 |
|                        |                                                                                                                                                                        |   |
|                        | Notes to Financial  Statements                                                                                                                                              | 7 |
|                        |                                                                                                                                                                        |   |
|                        | Independent Accountant’s  Review Report                                                                                                                                | 17 |
|                        |                                                                                                                                                                        |   |
| Item 2.                     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                 | 18 |
|                        |                                                                                                                                                                        |   |
| Item 3.                     | Quantitative and Qualitative Disclosures About  Market Risk                                                                                                                 | 28 |
|                        |                                                                                                                                                                        |   |
| Item 4.                     | Controls and Procedures                                                                                                                                                     | 28 |
|                        |                                                                                                                                                                        |   |
| PART II - OTHER INFORMATION |
|                        |                                                                                                                                                                        |   |
| Item 1.                     | Legal Proceedings                                                                                                                                                           | 29 |
|                        |                                                                                                                                                                        |   |
| Item 2.                     | Changes  in Securities and Use of Proceeds                                                                                                                                  | 29 |
|                        |                                                                                                                                                                        |   |
| Item 3.                     | Defaults Upon Senior  Securities                                                                                                                                            | 29 |
|                        |                                                                                                                                                                        |   |
| Item  4.                    | Submission  of Matters to a Vote of Security Holders                                                                                                                        | 29 |
|                        |                                                                                                                                                                        |   |
| Item 5.                     | Other Information                                                                                                                                                           | 29 |
|                        |                                                                                                                                                                        |   |
| Item 6.                     | Exhibits and Reports  on Form 8-K                                                                                                                                           | 29 |
|                        |                                                                                                                                                                        |   |
| SIGNATURES                  |

 

2

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** **

**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                     |   | **June 30,  2003** |        | **December  31,  2002** |   |
|--------------------------------------------------------------------------|--------|--------------------|-------------|-------------------------|--------|
|                                                                     |   | **(Unaudited)**    |        |                    |   |
| **Assets**                                                               |   |               |        |                    |   |
| Rental  Properties                                                       |   | $                  | 103,806,017 |                    | $      | 79,172,450 |   |
| Cash  and Cash Equivalents                                               |   | 10,200,343         |        | 18,974,446              |   |
| Rents  Receivable                                                        |   | 631,094            |        | 475,906                 |   |
| Real  Estate Tax Escrows                                                 |   | 536,672            |        | 391,253                 |   |
| Prepaid  Expenses and Other Assets                                       |   | 3,200,039          |        | 2,556,572               |   |
| Investment  in Partnership                                               |   | 1,349,231          |        | 1,430,269               |   |
| Financing  and Leasing Fees                                              |   | 683,243            |        | 684,322                 |   |
|                                                                     |   |               |        |                    |   |
| **Total  Assets**                                                        |   | $                  | 120,406,639 |                    | $      | 103,685,218 |   |
|                                                                     |   |               |        |                    |   |
| **Liabilities  and Partners’ Capital**                              |   |               |        |                    |   |
| Mortgage  Notes Payable                                                  |   | $                  | 99,423,296  |                    | $      | 82,871,406 |   |
| Accounts  Payable and Accrued Expenses                                   |   | 1,414,222          |        | 1,676,628               |   |
| Advance  Rental Payments and Security Deposits                           |   | 3,605,503          |        | 3,258,958               |   |
|                                                                     |   |               |        |                    |   |
| Total  Liabilities                                                       |   | 104,443,021        |        | 87,806,992              |   |
|                                                                     |   |               |        |                    |   |
| Commitments  and Contingent Liabilities (Notes 9 and 16)                 |   |               |        |                    |   |
|                                                                     |   |               |        |                    |   |
| Partners’  Capital 173,252 units outstanding in 2003  and 2002 |   | 15,963,618         |        | 15,878,226              |   |
|                                                                     |   |               |        |                    |   |
| **Total  Liabilities and Partners’ Capital**                        |   | $                  | 120,406,639 |                    | $      | 103,685,218 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

 
|                                          |   | **Three  Months Ended  June 30** |      | **Six Months  Ended  June 30** |   |
|-----------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                                          |   | **2003**                         |      | **2002**                       |   | **2003** |   | **2002** |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Revenue                                       |   |                             |      |                           |   |   |   |   |   |
| Rental  income                                |   | $                                | 7,773,317 |                           | $      | 7,181,361 |   | $ | 15,234,609 |   | $ | 14,398,440 |   |
| Laundry  and sundry income                    |   | 80,266                           |      | 61,029                         |   | 151,066 |   | 123,189 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
|                                          |   | 7,853,583                        |      | 7,242,390                      |   | 15,385,675 |   | 14,521,629 |   |
| Expense                                       |   |                             |      |                           |   |   |   |   |   |
| Administrative                                |   | 356,740                          |      | 302,525                        |   | 720,556 |   | 671,934 |   |
| Depreciation  and amortization                |   | 1,261,480                        |      | 1,152,291                      |   | 2,374,343 |   | 2,190,672 |   |
| Interest                                      |   | 1,839,294                        |      | 1,606,222                      |   | 3,498,461 |   | 3,190,878 |   |
| Management  fees                              |   | 324,020                          |      | 294,719                        |   | 620,358 |   | 590,634 |   |
| Operating                                     |   | 628,211                          |      | 534,542                        |   | 1,619,027 |   | 1,242,747 |   |
| Renting                                       |   | 142,356                          |      | 80,065                         |   | 205,321 |   | 145,030 |   |
| Repairs  and maintenance                      |   | 1,045,828                        |      | 852,262                        |   | 1,858,939 |   | 1,528,222 |   |
| Taxes  and insurance                          |   | 858,913                          |      | 737,289                        |   | 1,654,122 |   | 1,466,599 |   |
|                                          |   | 6,456,842                        |      | 5,559,915                      |   | 12,551,127 |   | 11,026,716 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Income  from Operations                       |   | 1,396,741                        |      | 1,682,475                      |   | 2,834,548 |   | 3,494,913 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Other  Income (Loss)                          |   |                             |      |                           |   |   |   |   |   |
| Interest  income                              |   | 43,500                           |      | 70,884                         |   | 99,028 |   | 136,947 |   |
| (Loss)  from investment in partnership        |   | (25,361                          | )         | (3,825                         | )      | (46,038 | ) | (9,633 | ) |
|                                          |   | 18,139                           |      | 67,059                         |   | 52,990 |   | 127,314 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Income  from Continuing Operations            |   | 1,414,880                        |      | 1,749,534                      |   | 2,887,538 |   | 3,622,227 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Discontinued  Operations                      |   |                             |      |                           |   |   |   |   |   |
| Income  from discontinued operations          |   | —                           |      | 21,241                         |   | — |   | 56,475 |   |
| Gain  on the sale of real estate              |   | —                           |      | 92,778                         |   | — |   | 92,778 |   |
|                                          |   | —                           |      | 114,019                        |   | — |   | 149,253 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Net  Income                                   |   | $                                | 1,414,880 |                           | $      | 1,863,553 |   | $ | 2,887,538 |   | $ | 3,771,480 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Income  per Unit                              |   |                             |      |                           |   |   |   |   |   |
| Income  before discontinued operations        |   | $                                | 8.17      |                           | $      | 10.10 |   | $ | 16.67 |   | $ | 20.91 |   |
| Income  from discontinued operations          |   | —                           |      | .66                            |   | — |   | . 86 |   |
| Net  Income per Unit                          |   | $                                | 8.17      |                           | $      | 10.76 |   | $ | 16.67 |   | $ | 21.77 |   |
|                                          |   |                             |      |                           |   |   |   |   |   |
| Weighted  Average Number of Units Outstanding |   | 173,252                          |      | 173,252                        |   | 173,252 |   | 173,252 |   |

 

See notes to consolidatedfinancial statements.

 

4

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

 

**CONSOLIDATED STATEMENT OF CHANGES INPARTNERS’ CAPITAL**

 

**(UNAUDITED**)

 
|                                                                       |   | **Limited** |       | **General  Partnership** |   |      |      |
|----------------------------------------------------------------------------|--------|-------------|------------|--------------------------|--------|-----------|-----------|
|                                                                       |   | **Class A** |       | **Class B**              |   |      | **Total** |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Balance,  January 1, 2002                                                  |   | $           | 9,982,006  |                     | $      | 2,374,180 |      | $ | 124,986 |   | $ | 12,481,172 |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Distribution  to Partners                                                  |   | (1,771,847  | )          | (420,814                 | )      | (22,148   | )         | (2,214,809 | ) |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Net  Income                                                                |   | 3,017,183   |       | 716,581                  |   | 37,715    |      | 3,771,479 |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Balance,  June 30, 2002                                                    |   | $           | 11,227,342 |                     | $      | 2,669,947 |      | $ | 140,553 |   | $ | 14,037,842 |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Units  authorized and Issued, net of 6,973 Treasury Units at June 30, 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                                                  |   | (2,241,717  | )          | (532,408                 | )      | (28,021   | )         | (2,802,146 | ) |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Net  Income                                                                |   | 2,310,030   |       | 548,632                  |   | 28,876    |      | 2,887,538 |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Balance,  June 30, 2003                                                    |   | $           | 12,767,963 |                     | $      | 3,035,844 |      | $ | 159,811 |   | $ | 15,963,618 |   |
|                                                                       |   |        |       |                     |   |      |      |   |   |
| Units  authorized and Issued, net of 6,973 Treasury Units at June 30, 2003 |   | 138,602     |       | 32,918                   |   | 1,732     |      | 173,252 |   |

 

See notes to consolidatedfinancial statements

 

5

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**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

##### **CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED**)

 
|                                                                              |   | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                              |   | **2003**                        |       | **2002** |   |
|                                                                              |   |                            |       |   |   |
| Cash  Flows from Operating Activities                                             |   |                            |       |   |   |
| Net  income                                                                       |   | $                               | 2,887,538  |   | $ | 3,771,479 |   |
|                                                                              |   |                            |       |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities |   |                            |       |   |   |
| Depreciation  and amortization                                                    |   | 2,374,343                       |       | 2,244,010 |   |
| Gain  on the sale of rental property                                              |   | —                          |       | (92,778 | ) |
| Loss  from investment in partnership                                              |   | 46,038                          |       | 9,633 |   |
| Change  in operating assets and liabilities                                       |   |                            |       |   |   |
| (Increase)  in rents receivable                                                   |   | (155,188                        | )          | (83,687 | ) |
| (Increase)  in financing and leasing fees                                         |   | (47,373                         | )          | (64,811 | ) |
| Increase  (decrease) in accounts payable                                          |   | (262,406                        | )          | 77,859 |   |
| (Increase)  in real estate tax escrow                                             |   | (145,419                        | )          | (4,278 | ) |
| (Increase)  in prepaid expenses and other assets                                  |   | (652,765                        | )          | (141,581 | ) |
| Increase  in advance rental payments and security deposits                        |   | 346,545                         |       | 182,785 |   |
|                                                                              |   |                            |       |   |   |
| Total  Adjustments                                                                |   | 1,503,775                       |       | 2,127,152 |   |
|                                                                              |   |                            |       |   |   |
| Net  cash provided by operating activities                                        |   | 4,391,313                       |       | 5,898,631 |   |
|                                                                              |   |                            |       |   |   |
| Cash  Flows from Investing Activities                                             |   |                            |       |   |   |
| Distribution  from partnership                                                    |   | 35,000                          |       | 429,503 |   |
| Purchase  and improvement of rental properties                                    |   | (9,950,160                      | )          | (3,713,855 | ) |
| Net  proceeds from the sale of rental property                                    |   | —                          |       | 104,494 |   |
|                                                                              |   |                            |       |   |   |
| Net  cash (used in) investing activities                                          |   | (9,915,160                      | )          | (3,179,858 | ) |
|                                                                              |   |                            |       |   |   |
| Cash  Flows from Financing Activities                                             |   |                            |       |   |   |
| Principal  payments of mortgage notes payable                                     |   | (448,110                        | )          | (405,025 | ) |
| Distributions  to partners                                                        |   | (2,802,146                      | )          | (2,214,809 | ) |
|                                                                              |   |                            |       |   |   |
| Net  cash (used in) financing activities                                          |   | (3,250,256                      | )          | (2,619,834 | ) |
|                                                                              |   |                            |       |   |   |
| Net  (Decrease) Increase in Cash and Cash Equivalents                             |   | (8,774,103                      | )          | 98,939 |   |
| Cash  and Cash Equivalents, at beginning of year                                  |   | 18,974,446                      |       | 16,690,943 |   |
|                                                                              |   |                            |       |   |   |
| Cash  and Cash Equivalents, at end of year                                        |   | $                               | 10,200,343 |   | $ | 16,789,882 |   |

 

See notes to consolidatedfinancial statements.

 

6

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**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

NOTE 1—SIGNIFICANTACCOUNTING POLICIES

 

*Line of Business:*  New England Realty Associates LimitedPartnership (“NERA” or the “Partnership”) was organized in Massachusetts during1977.  NERA and its subsidiaries own andoperate various residential apartment buildings, condominium units andcommercial properties located in Massachusetts and New Hampshire.  NERA has also made investments in other realestate partnerships and has participated in other real estate-relatedactivities, primarily located in Massachusetts.  In connection with the mortgages referred to in Note 5, asubstantial number of NERA’s properties are owned by separate subsidiarieswithout any change in the historical cost basis.

 

*Principles of Consolidation:*  The consolidated financial statementsinclude the accounts of NERA and its subsidiaries.  NERA has a 99.67% to 100% ownership interest in each subsidiaryexcept for the limited liability company formed in November 2001, in which thePartnership has a 50% interest.  Theconsolidated group is referred to as the “Partnerships.”  Minority interests are not recorded, sincethey are insignificant.  All significantintercompany accounts and transactions are eliminated in consolidation.  The Partnership accounts for its investmentin the above mentioned limited liability company using the equity method.

 

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

 

*Revenue Recognition:*  Rental income from residential andcommercial properties is recognized over the term of the related lease.  Amounts 60 days in arrears are chargedagainst income. Certain leases of the commercial properties provide forincreasing stepped minimum rents, which are accounted for on a straight-linebasis over the term of the lease.

 

*Rental Properties:*  Rental properties are stated at cost lessaccumulated depreciation.  Maintenanceand repairs are charged to expense as incurred; improvements and additions arecapitalized.  When assets are retired orotherwise disposed of, the cost of the asset and related accumulateddepreciation is eliminated from the accounts, and any gain or loss on suchdisposition is included in income. Rental properties are depreciated on a straight-line basis over theirestimated useful lives. In the event that facts and circumstances indicate thatthe carrying value of a rental property may be impaired, an analysis of recoverabilityis prepared.  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.

 

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

 

*Income Taxes:*  The financial statements have been prepared under the basis thatNERA and its subsidiaries are entitled to tax treatment as partnerships.  Accordingly, no provision for income taxeson income has been recorded.

 

*Cash Equivalents:*  The Partnerships consider cash equivalentsto be all highly liquid instruments purchased with a maturity of three monthsor less.

 

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

 

7

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*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 diluted net income per unit(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 June 30, 2003,substantially all of the Partnerships’ cash and cash equivalents were held ininterest-bearing accounts at financial institutions, earning interest at ratesfrom .75% to 1.43%.  At June 30, 2003and December 31, 2002 approximately $10,000,000 and $19,000,000 of cash andcash equivalents exceeded federally insured amounts.

 

*Advertising Expense:*  Advertising is expensed as incurred.  Advertising expense was $69,194 and $38,684for the six months ended June 30, 2003 and 2002, respectively.

 

*Interim Financial Reporting*:  The accompanying consolidated interimfinancial statements of New England Realty Associates Limited Partnership areunaudited and certain information and footnote disclosures normally included infinancial statements have been omitted. While management believes that the disclosures presented are adequatefor interim reporting, these interim financial statements should be read inconjunction with the financial statements and notes included in thePartnership’s 2002 Form 10-K.

 

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary for a fair presentation of the Partnership’s financialstatements for the interim periods presented. The results of operations for the six months ended June 30, 2003 and2002 are not necessarily indicative of the results to be expected for theentire year.

 

NOTE 2—RENTAL PROPERTIES

 

As of June 30, 2003, thePartnership and its Subsidiary Partnerships owned 2,376 residential apartmentunits in residential and mixed-use complexes (collectively, the “ApartmentComplexes”).  The Partnership also owns24 condominium units in two residential condominium complexes, 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 June30, 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 30, 2003, thePartnership purchased five condominium units from a group of investors who arealso affiliated with the Partnership. The total purchase price for the five units was $2,421,286 includingclosing costs.  This acquisition wasfunded from cash reserves.  See Note 3for a discussion of certain related parties associated with this acquisitionand Note 16 for a description of a mortgage to be obtained subsequent to June30, 2003. Harold Brown has agreed to indemnify the Partnership for any lossesincurred from the sale of any of these units for a three year period sinceacquisition.

 

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

 

8

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reserves.  The mortgage has a ten-year term and isamortized over 30 years, with interest only payments for the first threeyears.  There is a significantprepayment penalty if the mortgage is paid prior to maturity.

 

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 previously unencumbered 19 condominium units.  The balance of approximately $1,800,000 wasfunded 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.

 

Rental properties consistof the following:

 
|                                  |   | **JUNE 30,  2003** |        | **DECEMBER  31  2002** |   | **USEFUL  LIFE** |   |
|---------------------------------------|--------|--------------------|-------------|------------------------|--------|------------------|--------|
| Land,  improvements, and parking lots |   | $                  | 22,472,256  |                   | $      | 17,294,322       |   | 10-31 years |   |
| Buildings  and improvements           |   | 103,952,260        |        | 83,031,706             |   | 15-31 years      |   |
| Kitchen  cabinets                     |   | 2,024,565          |        | 1,849,895              |   | 5-10 years       |   |
| Carpets                               |   | 2,130,764          |        | 1,911,091              |   | 5-10 years       |   |
| Air  conditioning                     |   | 255,625            |        | 214,383                |   | 7-10 years       |   |
| Laundry  equipment                    |   | 54,467             |        | 46,974                 |   | 5-7 years        |   |
| Elevators                             |   | 274,740            |        | 206,164                |   | 20 years         |   |
| Swimming  pools                       |   | 86,340             |        | 86,340                 |   | 10 years         |   |
| Equipment                             |   | 1,391,746          |        | 1,286,596              |   | 5-7 years        |   |
| Motor  vehicles                       |   | 97,893             |        | 97,893                 |   | 5 years          |   |
| Fences                                |   | 75,654             |        | 57,469                 |   | 5-10 years       |   |
| Furniture  and fixtures               |   | 797,763            |        | 739,796                |   | 5-7 years        |   |
| Smoke  alarms                         |   | 81,868             |        | 77,889                 |   | 5-7 years        |   |
| Construction  in progress             |   | 1,518,573          |        | 1,363,836              |   | —           |   |
|                                  |   | 135,214,514        |        | 108,264,354            |   |             |   |
| Less  accumulated depreciation        |   | 31,408,497         |        | 29,091,904             |   |             |   |
|                                  |   | $                  | 103,806,017 |                   | $      | 79,172,450       |   |   |   |

 

At June 30, 2003,construction in progress consists of $1,133,578 at Boylston Downtown LP for anew heating and air conditioning system to be completed in mid-2003 and$384,995 at Westgate Apartments LLC for design and approvals and site work for20 additional residential units.

 

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NOTE 3—RELATED PARTYTRANSACTIONS

 

The Partnership’sproperties are managed by The Hamilton Company (“Hamilton”) which is owned bythe majority owner and treasurer of New Real, Inc. (the “GeneralPartner”).  The management fee is equalto 4% of rental revenue and laundry income. Total fees paid were approximately $620,000 and $603,000 for the sixmonths ended June 30, 2003 and 2002, respectively.  Security deposits are held in escrow by Hamilton (see Note6).  Hamilton also receives a mortgageservicing fee equal to an annual rate of 1/2% of the monthly outstandingbalance of mortgages receivable resulting from the sale of Partnershipproperties.  There was no mortgageservicing fee paid in the year ended December 31, 2002 or the six months endedJune 30, 2003.

 

The Partnership Agreementalso permits the General Partner or its management company to charge the costsof professional services (such as counsel, accountants and contractors) toNERA.  During the six months ended June30, 2003 and 2002 approximately $316,000 and $369,000 was charged to NERA forlegal, construction, maintenance, rental and architectural services andsupervision of capital improvements.  Ofthe 2003 expenses referred to above, approximately $135,000 consisted ofrepairs and maintenance and $122,000 of administrative expense; approximately$59,000 of construction, architectural services and supervision of capitalprojects was capitalized in rental properties. Of the 2002 expenses referred to above, approximately $118,000 isrecorded in repairs and maintenance and $96,000 in administrative expense;approximately $155,000 of construction, architectural services and supervisionof capital projects was capitalized in rental properties.  Additionally in each of the six months endedJune 30, 2003 and 2002 the Partnership paid Hamilton $40,000, for in-houseaccounting services.  Included inaccounts payable and accrued expenses at June 30, 2003 and December 31, 2002 is$173,014 and $248,360 due to Hamilton. The Partnership Agreement entitles the General Partner or its managementcompany to receive certain commissions upon the sale of Partnership property,only to the extent that total commissions do not exceed 3%.  During the year ended December 31, 2002, thePartnership paid commissions of $94,140 to Hamilton of which $3,390 representsthe sale of the condominium in Brockton and $90,750 represents the sale of theEast Hampton Mall (see Note 2).  No commissionswere paid during the six months ended June 30, 2003.

 

In 1996, prior tobecoming an employee and President of Hamilton, the current President performedasset management consulting services to the Partnership.  This individual continues to perform thisservice and to receive an asset management fee from the Partnership, receiving$25,000 for the six months ended June 30, 2003 and $50,000 for the year endedDecember 31, 2002.

 

Included in prepaidexpenses and other assets were amounts due from related parties ofapproximately $1,266,000 at June 30, 2003 and $1,075,000 at December 31, 2002,respectively, representing Massachusetts tenant security deposits which areheld for the Partnerships by Hamilton (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.

 

On June 30, 2003, thePartnership purchased five condominium units in a 42-unit building located inBrookline, Massachusetts.  These werepurchased from Harvard 45 Associates LLC (“Harvard 45”) which is owned 70% bythe 75% shareholder and treasurer of the General Partner, and 5% by thePresident of Hamilton.  The totalpurchase price for these condominiums was approximately $2,416,000 and wasapproved by both the Partnership’s advisory

 

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###### committee and the auditcommittee of the General Partner. Harvard 45 realized a gain of approximately $648,000 from thesesales.  Harvard 45 also sold 16 units tounrelated parties and the prices for the total 21 units sold arecomparable.  See Note 16 for adescription of a guarantee to be given on a proposed $1,600,000 mortgage ofthese five units.

 

The above 42-unit condominium building is managed by an entity whollyowned by the 25% shareholder and President of the General Partner.  That entity will receive annual managementfees from the five units of approximately $1,500, and Hamilton will reduce itsmanagement fees to approximately 2%, so that the total management fee will notexceed the 4% allowed by the Partnership’s Partnership Agreement.

 

NOTE 4—OTHER ASSETS

 

Included in prepaidexpenses and other assets at June 30, 2003 and December 31, 2002 isapproximately $813,000 and $734,000, respectively, held in escrow to fund futurecapital improvements.

 

Financing and leasingfees of $683,243 and $684,322 are net of accumulated amortization of $606,758and $575,510 at June 30, 2003 and December 31, 2002, respectively.

 

NOTE 5—MORTGAGES NOTESPAYABLE

 

At June 30, 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 June 30, 2003, the interest rate on theseloans ranged from 6 % to 8.78 %, payable in monthly installments aggregatingapproximately $697,000, 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:

(See Note 16 forinformation on mortgages refinanced on August 1, 2003 and reflected in thismaturity schedule.)

 
| 2004- current maturities |   | $          | 692,000    |   |
|--------------------------|--------|------------|------------|--------|
| 2005                     |   | 749,000    |       |
| 2006                     |   | 842,000    |       |
| 2007                     |   | 1,088,000  |       |
| 2008                     |   | 6,148,000  |       |
| Thereafter               |   | 89,904,000 |       |
|                     |   | $          | 99,423,000 |   |

 

NOTE 6—ADVANCE RENTALPAYMENTS AND SECURITY DEPOSITS

 

The lease agreements forcertain properties require tenants to maintain a one-month advance rental paymentplus security deposits.  Securitydeposits are held by Hamilton (see Note 3).

 

11

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NOTE 7—PARTNERS’ CAPITAL

 

The Partnership has twoclasses of Limited Partners (Class A and B) and one category of GeneralPartner.  Under the terms of thePartnership Agreement, Class B units and General Partnership units mustrepresent 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 paid a quarterlydistribution of $6.60 per unit on June 30, 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:

 
|                                                              |   | **Six months  ended June 30,** |   |
|-------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                              |   | **2003**                       |   | **2002** |   |
| Net  income per depositary receipt before discontinued operations |   | $                              | 1.67   |   | $ | 2.09 |   |
| Net  income per depositary receipt from discontinued operations   |   | —                         |   | .09 |   |
| Net  income per depositary receipt after discontinued operations  |   | $                              | 1.67   |   | $ | 2.18 |   |

 

NOTE 8—TREASURY UNITS

 

Treasury units at June30, 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 fully covering such claims or has provided for anyuninsured claims which, in the aggregate, are not significant.  The Partnerships are not involved in anymaterial pending legal proceedings.

 

The Partnership hascommitted to construct 20 additional residential units at the WestgateApartments in Woburn, Massachusetts, scheduled for completion in the Fall of2004.  The Partnership estimates thetotal cost of these units to be approximately $4,000,000, which will initiallybe funded from cash reserves.  The totalcosts incurred to date are approximately $385,000 and are included in rentalproperties as construction in progress.

 

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NOTE 10—RENTAL INCOME

 

During the six monthsended June 30, 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       |   | $                               | 1,724,000  |   |
| 2005       |   | 1,456,000                       |       |
| 2006       |   | 1,266,000                       |       |
| 2007       |   | 2,428,000                       |       |
| 2008       |   | 1,175,000                       |       |
| Thereafter |   | 6,544,000                       |       |
|       |   |                            |       |
|       |   | $                               | 14,593,000 |   |

 

The aggregate minimumfuture rental income does not include contingent rentals that may be receivedunder various leases in connection with percentage rents, common area chargesand real estate taxes.  Aggregatecontingent rentals were approximately $196,000 for the six months ended June30, 2003 and $325,000 for the year ended December 31, 2002, respectively.

 

Rents receivable are netof allowances for doubtful accounts of $293,129 and $211,202 at June 30, 2003and December 31, 2002, respectively.

 

NOTE 11—CASH FLOWINFORMATION

 

During the six monthsended June 30, 2003 and 2002, cash paid for interest was approximately$3,454,000 and

$3,199,500 respectively.

 

Non-cash investing andfinancing activities were as follows:

 
|                                             |   | **6 Months  Ended  June 30, 2003** |       |
|--------------------------------------------------|--------|------------------------------------|------------|
| 1st  Mortgage incurred on Framingham acquisition |   | $                                  | 17,000,000 |   |
| Total  Non-cash investing and financing activity |   | $                                  | 17,000,000 |   |

 
|                                             |   | **6 Months  Ended  June 30, 2002** |      |
|--------------------------------------------------|--------|------------------------------------|-----------|
| 1st  Mortgage assumed on Norwood acquisition     |   | $                                  | 3,643,128 |   |
| Mortgage  issued to seller of Norwood property   |   | 1,726,898                          |      |
| Total  Non-cash investing and financing activity |   | $                                  | 5,370,026 |   |

 

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NOTE 12—FAIR VALUE OFFINANCIAL INSTRUMENTS

 

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

 

•                  Cashand cash equivalents, other assets, investment in partnerships, accountspayable, and advance rents and security deposits:  fair value approximates the carrying value of such assets andliabilities.

 

•                  Mortgagenotes payable:  fair value is generallybased on estimated future cash flows which are discounted using the quotedmarket rate for an independent source of similar obligations.  Refer to the table below for the carryingamount and estimated fair value of such instruments.

 

 
|                    |   | **Carrying  Amount** |             | **Estimated  Fair Value** |   |
|-------------------------|--------|----------------------|------------------|---------------------------|--------|
|                    |   |                 |             |                      |   |
| Mortgage  notes payable |   |                 |             |                      |   |
| At  June 30, 2003       |   | $                    |  99,423,296 |                      | $      |  113,207,731 |   |
| 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 $ 200,000 greater than statement incomefor the six months ended June 30, 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 June 30, 2003 is approximately $2,200,000 greaterthan the statement basis.

 

NOTE 14— NEW ACCOUNTINGPRONOUNCEMENTS

 

The Partnership adoptedthe Financial Accounting Standards Board’s (FASB) Statement of FinancialAccounting Standard 144 (“FAS 144”), “Accounting for the Impairment or Disposalof Long-lived Assets” on January 1, 2002. FAS 144 supersedes FAS 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of.”  The primary objectives of FAS 144 are to develop one accountingmodel, based on the framework established in FAS 121, for long-lived assets tobe disposed of by sale, and to address significant implementation issuesregarding impairment of long-lived assets held for use.  FAS 144 requires separate presentation ofdiscontinued operations for an operating property sold or considered held forsale for years beginning on January 1, 2002. In accordance with FAS 144, the Partnership classifies real estateassets as held for sale in the period in which all of the following criteriaare met: (a) management, having the authority to approve the action, commits toa plan to sell the asset; (b) the asset is available for immediate sale in itspresent condition subject only to terms that are usual and customary for salesof such assets; (c) an active program to locate a buyer and other actions requiredto complete 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’s adoptionof FAS 144 resulted in: (i) the net operating results of properties sold during2002 being presented as income from discontinued operations for all periodspresented and (ii) the gain on the sale of operating

 

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properties sold, net ofsale costs, being presented as income from discontinued operations for the year2002.  Implementation of FAS 144 willimpact how information is classified on the income statement but will have noeffect on net income (see Note 15).

 

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. (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 Partnership does not expect the requirements of FIN No. 45 to have amaterial impact on net income, financial position or liquidity.

 

NOTE 15 —DISCONTINUEDOPERATIONS and SALES of REAL ESTATE

 

The Partnership’sadoption of SFAS No. 144 (see Note 14) 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. 144 resulted in the gain from the sales ofthese qualifying properties in the second and fourth quarters of 2002 (totalingapproximately $1,000,000) to be reflected as a gain on sales of real estatefrom discontinued operations in the accompanying consolidated statements ofoperations. The adoption of SFAS No. 144 did not have an impact on net income;it only impacted the presentation of these properties within the consolidatedstatements of income.

 

15

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NOTE16 — SUBSEQUENT EVENTS — MORTGAGE REFINANCINGS AND LOSS ON EARLYEXTINGUISHIMENT OF DEBT

 

On August 1, 2003, thePartnership refinanced four mortgage loans with outstanding balances totalingapproximately $11,526,000, with interest rates from 8.38% to 8.75% that wouldmature in 2005 with final payments due in 2005 of approximately$11,000,000.  The total of the four newloans is $26,750,000 with interest rates from 4.84% to 5.30%.  These new loans require interest paymentsfor ten years, and then the entire $26,750,000 becomes due.  The total monthly payments on the old loanswere approximately $101,000 including principal of approximately $20,000.  The total monthly interest payments on thenew mortgages are approximately $109,000, resulting in an increased monthlypayment for these four properties of $8,000, or $96,000 per year. Annualinterest expenses will increase approximately $330,000 due to the increaseddebt.  The new mortgages also containsubstantial prepayment penalties if paid before maturity.  The Partnership’s cash reserves have beenincreased approximately $13,000,000 as a result of these refinancings.

 

The Partnership willrecord a loss on the early extinguishment of debt in the third quarter of 2003of approximately $1,435,000 because of prepayment penalties paid ofapproximately $1,355,000, and the write off of deferred financing fees ofapproximately $80,000.  Deferredfinancing fees on the new mortgages, of approximately $132,000 will beamortized over their ten-year term.

 

On July 31, 2003, thePartnership received a commitment letter from a bank, subject to due diligence,for a $1,600,000 mortgage loan for three years, with interest only payments at5.25% and no payment penalties, secured by the five condominium units acquiredby the Partnership in June 2003.  Totalorigination and closing costs will approximate $18,000.  The majority owner of the General Partnerwill guarantee to the bank 50% of the outstanding indebtedness at any timeduring the life of the mortgage.

 

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**IndependentAccountants’ Review Report**

 

The Partners

New England RealtyAssociates Limited Partnership

 

We have reviewed theaccompanying consolidated balance sheet of New England Realty AssociatesLimited Partnership and Subsidiary partnerships as of June 30, 2003, and therelated consolidated statements of income for the three month and six monthperiods ended June 30, 2003 and 2002, the consolidated statement of changes inpartners’ capital, and the consolidated statements of cash flows for the sixmonth periods ended June 30, 2003 and 2002. We conducted our reviews inaccordance with standards established by the American Institute of CertifiedPublic Accountants. All information in these financial statements is therepresentation of the management of New England Realty Associates LimitedPartnership.

 

A review of interimfinancial information consists principally of applying analytical proceduresand making inquires of persons responsible for financial and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with auditing standards generallyaccepted in the United States of America, the objective of which is theexpression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, weare not aware of any material modifications that should be made to theconsolidated financial statements referred to above for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

We have previouslyaudited, in accordance with auditing standards generally accepted in the UnitedStates of America, the consolidated balance sheet of New England RealtyAssociates Limited Partnership as of December 31, 2002, and relatedconsolidated statements of income, partners’ capital, and cash flows for theyear then ended (not presented herein); and in our report dated February 21, 2003,we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying consolidated balance sheet as ofDecember 31, 2002 is fairly stated, in all material respects.

 
| /s/ Miller Wachman            |   |
|-------------------------------|--------|
| Certified Public  Accountants |
| Boston, Massachusetts         |
|                          |
| August 6, 2003                |

 

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Item2.             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussionshould be read in conjunction with the financial statements and notes thereofappearing elsewhere in this report. This Report, on Form 10-Q, contains forward-looking statements withinthe meaning of the securities laws. Actual results or developments could differ materially from thoseprojected in such statements as a result of certain factors set forth in thesection below entitled “Factors That May Affect Future Results” and elsewherein this Report.

 

New England RealtyAssociates Limited Partnership and Subsidiaries (the “Partnership) has retainedThe Hamilton Company (“Hamilton”) to manage and administer the Partnership’sproperties except for the five condominium units purchased by the Partnershipin June 2003 (See Note 3 to the Consolidated Financial Statements).  Hamilton is a full-service real estatemanagement company, which has legal, construction, maintenance, architecturaland administrative departments.  ThePartnership’s properties represent approximately 33% of the total propertiesand 67% of the residential properties managed by Hamilton.  Substantially all of the other propertiesmanaged by Hamilton are owned, wholly or partially, directly or indirectly, byHarold Brown, Hamilton’s owner.  ThePartnership’s Second Amended and Restated Contract of Limited Partnership (the“Partnership Agreement”) expressly provides that the general partner may employa management company to manage the properties, and that such management companymay be paid a fee of 4% of rental receipts for administrative and managementservices (the “Management Fee”).  ThePartnership annually pays Hamilton the full Management Fee, in monthlyinstallments.

 

Mr. Brown, his brotherRonald Brown and the President of Hamilton, Carl Valeri, collectively ownapproximately 17.7% of the depositary receipts representing the PartnershipClass A Units (including depositary receipts held by trusts for the benefit forsuch persons’ family members). Harold Brown also owns 75% of the Partnership’sClass B Units, 75% of the capital stock of NewReal, Inc. (“NewReal”), thePartnership’s sole general partner, and all of the outstanding stock ofHamilton.  Ronald Brown also owns 25% ofthe Partnership’s Class B Units and 25% of NewReal’s capital stock.  In addition, Ronald Brown is the Presidentand director of NewReal and Harold Brown is NewReal’s Treasurer and also adirector.  Three of NewReal’s otherdirectors, Thomas Raffoul, Conrad DiGregorio, and Edward Sarkisian also ownimmaterial amounts of depository receipts representing the Partnership’s ClassA Units.

 

Beyond the ManagementFee, the Partnership Agreement further provides for the employment of outsideprofessionals to provide services to the Partnership and allows NewReal tocharge the Partnership for the cost of employing professionals to assist withthe administration of the Partnership’s properties.  In addition to the Management Fee, from time to time thePartnership pays Hamilton for repairs and maintenance services, legal services,architectural and construction services and accounting services.  The costs charged by Hamilton for theseservices are at the same hourly rate charged to all entities managed byHamilton, and management believes such rates are competitive in themarketplace.

 

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Hamilton accounted forapproximately 13% and 7% of the repair and maintenance expense paid by thePartnership during the six months ended June 30, 2003 and the year endedDecember 31, 2002, respectively.  Of thefunds paid to Hamilton for this purpose, the great majority was to cover thecost of services provided by the Hamilton maintenance department, includingplumbing, electrical, and carpentry services, snow removal and the use ofequipment such as fork lifts.   However,several of the larger Partnership properties have their own maintenancestaff.  Further, those properties thatdo not have their own maintenance staff but are located more than a reasonabledistance from Hamilton’s headquarters in Allston, Massachusetts are generallyserviced by local, independent companies.

 

Hamilton’s legaldepartment handles most of the Partnership’s eviction and collectionmatters.  Additionally, it prepares mostlong-term commercial lease agreements and represents the Partnership inselected purchase and sale transactions. Overall, Hamilton provided approximately 76% of the legal services paidfor by the Partnership during the six months ended June 30, 2003 andapproximately 62% during the year ended December 31, 2002.

 

The Partnership requiresthat three bids be obtained for construction contracts in excess of$5,000.  Hamilton may be one of thethree bidders on a particular project and may be awarded the contract if itsbid and its ability to successfully complete the project are deemedappropriate.  For contracts that are notawarded to Hamilton, Hamilton charges the Partnership a constructionsupervision fee equal to 5% of the contract amount.  Hamilton’s architectural department also provides services to thePartnership on an as-needed basis.  In2003 and 2002, Hamilton provided the majority of the construction services andarchitectural services paid for by the Partnership.

 

Since 1991, thePartnership has employed Hamilton to perform its bookkeeping and accountingfunctions.  Hamilton’s accounting staffconsists of approximately ten people and Hamilton currently charges thePartnership $80,000 per year for bookkeeping and accounting services.

 

For more information onrelated party transactions, see Note 3 to the Consolidated FinancialStatements.

 

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

 

The preparation ofconsolidated financial statements, in accordance with accounting principlesgenerally accepted in the United States of America, requires the Partnership tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses and related disclosures of contingent assetsand liabilities.  The Partnershipregularly and continually evaluates its estimates, including those related to acquiring,developing and assessing the carrying values of its real estate properties andits investments in and advances to joint ventures.  The Partnership bases its estimates on historical experience,current market conditions, and on various other assumptions that are believedto be reasonable under the circumstances. See Note 1 to the Consolidated Financial Statements, Principles ofConsolidation.

 

Revenue Recognition:Revenues from rental property are recognized when due from tenants.  Residential leases are generally for termsof one year, and commercial leases are generally for five to ten years, withrenewal options at increased rents. Significant commercial leases with stepped increases over the term ofthe lease are recorded on the straight-line basis.

 

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Real Estate andDepreciation: Real estate assets are stated at the lower of cost or fair value,as appropriate, less accumulated depreciation. Costs related to the acquisition, development, construction and improvementof properties are capitalized including interest, internal wages and benefits,real estate taxes and insurance. Capitalization usually begins with commencement of development activityand ends when the property is ready for leasing.  Replacements and improvements- such as HVAC equipment, structuralreplacements, windows, appliances, flooring, carpeting and kitchen/bathreplacements and renovations are capitalized and depreciated over theirestimated 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 orchange in circumstances that indicates an impairment in the value of aproperty, the Partnership’s policy is to assess the impairment by making acomparison of the current and projected operating cash flows of the propertyover its remaining useful life, on an undiscounted basis, to the carryingamount of the property.  If the carryingvalue is in excess of the estimated projected operating cash flows of theproperty, we would recognize an impairment loss equivalent to the amountrequired to adjust the carrying amount to its estimated fair value.  The Partnership has not recognized an impairmentloss since 1995.

 

With respect toinvestments in and advances to joint ventures, the Partnership looks to theunderlying properties to assess performance and the recoverability of carryingamounts for those investments in a manner similar to direct investments in realestate properties.  An impairment chargeis recorded if the carrying value of the investment exceeds its fair value.

 

Legal Contingencies

 

The Partnership issubject to various legal proceedings and claims that arise, from time to time,in the ordinary course of business. These matters are frequently covered by insurance.  If it is determined that a loss is likely tooccur, the estimated amount of the loss is recorded in the financialstatements.  Both the amount of the lossand the point at which its occurrence is considered likely can be difficult todetermine.

 

20

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Results of Operations

 

Comparison of the threemonths ended June 30, 2003 to the three months ended June 30, 2002

 

The Partnership and itssubsidiary partnerships and limited liability companies (the “SubsidiaryPartnerships”) earned income from continuing operations of $1,396,741 duringthe three months ended June 30, 2003 compared to $1,682,475 for the threemonths ended June 30, 2002, a decrease of $285,734 (17%).  This decrease in operating income is largelydue to an increase in operating expenses of approximately $900,000 (16%) offsetby an increase in rental income of approximately $600,000 (8%).  Due to a softening residential rentalmarket, rental rates at many of the properties declined slightly in the threemonths ended June 30, 2003 and expenses continue to increase.

 

The rental activity issummarized as follows:

 
|               |   | **Occupancy  Date**  |   |
|--------------------|--------|----------------------|--------|
|               |   | **August 11,  2003** |   | **December  31,  2002** |   | **July 31,  2002** |   |
|               |   |                 |   |   |   |   |   |
| Residential        |   |                 |   |   |   |   |   |
| Units              |   | 2,400                |   | 2,211 |   | 2,211 |   |
| Vacancies          |   | 70                   |   | 53 |   | 42 |   |
| Vacancy  rate      |   | 2.9                  | %      | 2.4 | % | 1.9 | % |
| 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 June 30,**  |      |
|                    |   | **2003**                          |      | **2002** |   |
|                    |   | **Total  Operations**             |      | **Continuing  Operations** |   | **Total  Operations** |   | **Continuing  Operations** |   |
| **Total rents**         |   | **$**                             | **7,773** | ** ** | **$** | **7,773** | ** ** | **$** | **7,307** | ** ** | **$** | **7,181** | ** ** |
| Residential  percentage |   | 93                                | %         | 93 | % | 91 | % | 93 | % |
| Commercial  percentage  |   | 7                                 | %         | 7 | % | 9 | % | 7 | % |
| Contingent  rentals     |   | $                                 | 90        |   | $ | 90 |   | $ | 115 |   | $ | 77 |   |

 

Rental income fromcontinuing operations for the three months ended June 30, 2003 wasapproximately $7,773,000 compared to approximately $7,181,000 for the threemonths ended June 30, 2002, an increase of approximately $592,000 (8%).  The increase is due in large part to twosignificant acquisitions made by the Partnership.  In April 2003, the Partnership acquired a

 

21

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184 unit residentialproperty located at 9 School Street in Framingham, Massachusetts (referred toas “School Street”).  Rental income fromSchool Street from the date of acquisition through June 30, 2003 was approximately$412,000.  In June 2002, the Partnershipacquired a 69 unit residential apartment complex located on Dean Street inNorwood, Massachusetts (referred to as “Dean Street”).   Rental income from Dean Street for thethree months ended June 30, 2003 was approximately $222,000.  These increases are offset by a decrease inrental income at one of the larger properties. Rental income at 62 Boylston Street decreased approximately $66,000 (6%)during the three months ended June 30, 2003 due to increased vacancies at theproperty.  Rental income at the otherPartnership properties remained relatively unchanged.

 

Total expenses fromcontinuing operations for the three months ended June 30, 2003 were $6,456,842compared to $5,559,915 for the three months ended June 30, 2002, an increase of$896,927 (16%). Expenses related to the two new acquisitions representapproximately $654,000 of this increase. Unrelated to these acquisitions, there was an increase in expenses ofapproximately $286,000.  The mostsignificant increases, excluding the acquired properties, were operatingexpenses of $52,700 (10%) primarily due to increases in utility and snowremoval costs due to the long, cold and snowy winter and spring;  repairs and maintenance expenses of $127,368(15%) due to ongoing repairs to Partnership properties; taxes and insurance of$67,845 (9%) due to an increase in insurance premiums and valuations andrenting expenses of $59,641 primarily for rental commissions paid by thePartnership which in the past were paid by tenants.  These increases were offset by minor reductions in otherexpenses.   Of the approximately$654,000 of expenses related to the two new acquisitions, approximately$264,000 is for interest expense and approximately $195,000 was fordepreciation expense.

 

The Partnership has a 50%ownership interest in a limited liability partnership that owns a 40 unitresidential property in Cambridge, Massachusetts (the “CambridgeInvestment”).  For the three monthsended June 30, 2003, the Partnership’s share of loss on this investment is$25,361 attributable to an increase in repairs and maintenance expenses as wellas rental commissions due to tenant turnover. There were no vacancies as of August 11, 2003.

 

Interest income decreased$27,384 (39%) primarily due to a decline in interest rates.

 

During the three monthsended June 30, 2002, the Partnership had income from discontinued operations ofapproximately $114,000 which represents the net income from the East HamptonMall, sold in December 2002 as well as the sale of a condominium sold in June2002 for a gain of approximately $93,000.

 

As a result of thechanges discussed above, net income for the three months ended June 30, 2003was $1,414,880 compared to $1,863,553 for the three months ended June 30, 2002,a decrease of $448,672 (24%).

 

Comparison of the sixmonths ended June 30, 2003 and the six months ended June 30, 2002

 

The Partnership and itsSubsidiary Partnerships earned income from continuing operations of $2,834,548for the six months ended June 30, 2003 compared to $3,494,913 for the sixmonths ended June 30, 2002, a decrease of $660,365 (19%).  For the six months ended June 30, 2003,rental income was $15,234,609 compared to $14,398,440 for the six months endedJune 30, 2002, an increase of $836,169 (6%).

 

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The following is asummary of the Partnership’s rental income for the six months ended June 30,2003 and 2002:

 
|                    |   | **Rental  Income (In thousands)** |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | **Six Months  Ended June 30,**    |   |
|                    |   | **2003**                          |   | **2002** |   |
|                    |   | **Total  Operations**             |   | **Continuing  Operations** |   | **Total  Operations** |   | **Continuing  Operations** |   |
|                    |   |                              |   |   |   |   |   |   |   |
| Total  rents            |   | $                                 | 15,235 |   | $ | 15,235 |   | $ | 14,663 |   | $ | 14,398 |   |
| Residential  percentage |   | 93                                | %      | 93 | % | 91 | % | 92 | % |
| Commercial  percentage  |   | 7                                 | %      | 7 | % | 9 | % | 8 | % |
| Contingent  rentals     |   | $                                 | 196    |   | $ | 196 |   | $ | 237 |   | $ | 150 |   |

 

Rental income fromcontinuing operations for the six months ended June 30, 2003 was approximately$15,235,000 compared to approximately $14,398,000 for the six months ended June30, 2002, an increase of approximately $837,000 (6%).  The acquisitions of Dean Street and School Street representsapproximately $856,000 of this increase. As discussed above, this increase is offset by a decrease in rentalincome at two of the Partnership’s properties. Rental income at 62 Boylston Street decreased approximately $129,000during the six months ended June 30, 2003, due to increased vacancies at theproperty, and rental income at Westgate Woburn decreased approximately $70,000due to vacancies and rental credits given to tenants during 2003. Rental incomeat the majority of other Partnership properties have remained relativelystable.

 

Total expenses fromcontinuing operations for the six months ended June 30, 2003 were $12,551,127compared to $11,026,716 for the six months ended June 30, 2002 an increase of$1,524,411 (14%).  Expenses related tothe two acquisitions were approximately $888,000. Unrelated to the twoacquisitions, expenses increased approximately $679,000.  The most significant increases unrelated tothe acquisitions were operating expenses of approximately $296,000 (24%);repairs and maintenance expenses of approximately $271,000 (18%); taxes andinsurance of approximately $115,000 (8%). The reasons for these increases are discussed above. Of the approximately$888,000 increase related to the two new acquisitions, approximately $354,000was for interest expense and approximately $250,000 was for depreciationexpense. 

 

For the six months endedJune 30, 2003, the Partnership’s share of loss on the Cambridge Investment was$46,038, compared to a loss of $9,633 for the six months ended June 30, 2002,an increase of $36,405.  A softening ofthe rental market has resulted in higher tenant turnover, vacancies (althoughthere are no vacancies as of August 11, 2003) and increases in repairs and maintenanceexpenses and rental commissions.

 

Interest income decreased$37,919 due to a decline in the interest rates.

 

23

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During the six monthsended June 30, 2002, the Partnership had income from discontinued operations ofapproximately $149,000 which represents the approximate net income of $57,000from the East Hampton Mall, sold in December 2002 as well as the gain from thesale of a condominium sold in June 2002 of approximately $93,000.  As a result of the changes discussed above,net income for the six months ended June 30, 2003 was $2,887,538 compared to$3,771,480 for the six months ended June 30, 2002, a decrease of $883,942(23%).

 

LIQUIDITY AND CAPITALRESOURCES

 

The Partnership’sprincipal source of cash during 2003 and 2002 was the collection of rents aswell as the sale of two Partnership properties during 2002.

 

The majority of cash andcash equivalents of $10,200,343 at June 30, 2003 and $18,974,446 at December31, 2002 was held in interest bearing accounts at credit worthy financialinstitutions.

 

This decrease of$8,774,103 at June 30, 2003 is summarized as follows:

 
|                                                  |   | **Six Months  Ended June 30,** |       |
|-------------------------------------------------------|--------|--------------------------------|------------|
|                                                  |   | **2003**                       |       | **2002** |   |
|                                                  |   |                           |       |   |   |
| Cash  provided by operating activities                |   | $                              | 4,391,313  |   | $ | 5,898,631 |   |
| Cash  (used in) investing activities                  |   | (9,915,160                     | )          | (3,179,858 | ) |
| Cash  (used in) other financing activities            |   | (448,110                       | )          | (405,025 | ) |
| Dividends  paid                                       |   | (2,802,146                     | )          | (2,214,809 | ) |
| Net  (decrease) increase in cash and cash equivalents |   | $                              | (8,774,103 | ) | $ | 98,939 |   |

 

The decrease in cashprovided by operating activities is primarily due to the decrease in operatingincome before depreciation expense.  Theincrease in cash used in investing activities is due to the acquisition of thetwo properties in 2003 utilizing cash reserves in excess of $8,000,000.   The increase in cash used in financingactivities was due to the increase in the principal payments on the mortgagesand increases in Partnership distributions.

 

On August 1, 2003, thePartnership refinanced four mortgage loans with a total outstanding balance ofapproximately $11,526,000, earning interest at rates ranging from 8.38% to8.75%.  All of these loans matured in2005 at approximately $11,000,000.  ThePartnership borrowed a total of $26,750,000, pursuant to these four mortgages,with interest rates from 4.84% to 5.30%. The new loans are represented by ten year notes with interest onlypayments during their entire terms.  Thetotal monthly payment on the old loans was $101,000 including principal ofapproximately $20,000.  The totalmonthly payment on the new loans are approximately $109,000, resulting in anincrease in annual payments of approximately $96,000.  Annual interest expense will increase approximately $330,000 dueto the increased debt.  ThePartnership’s cash reserves have been increased approximately $13,000,000 as aresult of these financings.  See Note 5to the Consolidated Financial Statements for a schedule of the mortgage debtmaturities.

 

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On June 30, 2003, thePartnership purchased five condominium units from a group of investors who areaffiliated with the Partnership.  Thetotal purchase price for the five units was $2,421,286 including closing costs.  This acquisition was funded from cash reserves.In the event any of these units are sold during the three year periodcommencing on the date of acquisition and the sale price is less than the pricepaid by the Partnership for such units, Harold Brown has agreed to indemnifythe Partnership for the difference. On July 31, 2003 the Partnership received acommitment, subject to due diligence and inspections, for a three year$1,600,000 mortgage on these five units. At August 11, 2003, the inspections and due diligence has not beencompleted.  If and when the mortgage isobtained, the $1,600,000 will be added to cash reserves.  

 

On April 25, 2003, thePartnership acquired a 184 unit residential property located at 9 School Streetin Framingham, Massachusetts for a total purchase price of $23,368,000.  The Partnership obtained a mortgage of$17,000,000 with an interest rate of 5.47%. The balance of approximately $6,368,000 was funded from cashreserves.  The mortgage has a ten-yearterm and is amortized over 30 years, with interest only payments for the firstthree years.  There is a significantprepayment penalty if the mortgage is prepaid prior to its ten year maturity.

 

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$3,650,000 with payments of $25,271 per month, including interest at 7.08%, anda final payment of approximately $3,300,000 in February 2008.  The seller financed $1,726,898 at aninterest rate of 6%, with interest-only payments for five years.  This loan is collateralized by a mortgage on19 condominium units owned by the Partnership. The balance of approximately $1,800,000 was funded from cash reserves.

 

In June 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% commission to the management company (seeNote 3 to the Consolidated Financial Statements) and other expenses of thesale.  The net cash flow to thePartnership was $104,494.

 

In December 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, a 3%commission to the management company (see Note 3 to the Consolidated FinancialStatements) and other expenses of the sale. The net cash to the Partnership was $1,414,661 after payment of theexisting mortgage and selling expenses. For the years ended December 31, 2002 this property contributed lessthan 2% of rental income and less than 1% of cash flow from operations.

 

In February 2002, thePartnership voted to change its distribution policy from semi-annual to aquarterly distribution and declared a quarterly distribution of $6.40 per Unit($0.64 per depositary receipt).  Thedistribution was payable on March 31, June 30, September 30, and December 31,2002 and totaled $25.60 ($2.56 per depositary receipt) for 2002.

 

In February 2003, thePartnership voted to increase the quarterly distribution to $6.60 per unit($0.66 per depositary receipt) and pay an additional one-time distribution of$3.00 per unit for a total distribution of $9.60 per unit payable on March 31,2003.   The Partnership paid a quarterlydistribution of $6.60 ($0.66 per depository receipt) per unit on June 30, 2003.

 

25

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During the six monthsended June 30, 2003, the Partnership and its Subsidiary Partnerships completedcertain improvements to their properties at a total cost of approximately$1,023,000.  The most significantimprovements were made at the following properties: $227,902 at 62 BoylstonStreet in Boston, Massachusetts; $121,391 at 1144 Commonwealth Avenue inAllston, Massachusetts; $109,000 at 9 School Street in Framingham,Massachusetts; $84,875 at Avon Street Apartments in Malden, Massachusetts;$71,333 at Hamilton Oaks Apartments in Brockton, Massachusetts; and $70,834 atWestgate Woburn Apartments in Woburn, 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 theimprovements made to date in 2003, the Partnership and its SubsidiaryPartnerships plan to invest an additional $1,500,000 in capital improvementsduring 2003, the majority of which will be spent at 62 Boylston Street,Hamilton Oaks, 1144 Commonwealth Avenue, Redwood Hills, Westside Colonial andHamilton Oaks.  These improvements willbe funded from escrow accounts established in connection with the refinancingof applicable properties, as well as from the Partnership’s cash reserves.

 

The Partnershipanticipates that cash from operations and interest-bearing investments will besufficient to fund its current operations and to finance current improvementsto its properties. The Partnership’s net income and cash flow may fluctuatedramatically from year to year as a result of the sale of properties,unanticipated increases in expenses, or the loss of significant tenants.

 

The Partnership has plansto construct 20 additional residential units at a cost of approximately$4,000,000 at the Westgate Apartments in Woburn, Massachusetts available foroccupancy in the fall of 2004.  Thepre-construction costs incurred to date of approximately $385,000 have beencapitalized. This construction will be funded from cash reserves.

 

Factors That May AffectFuture Results

 

Certain informationcontained herein includes forward-looking statements, which are made pursuantto the safe harbor provisions of the Private Securities Liquidation Reform Actof 1995 (the “Act”).  While forwardlooking statements reflect management’s good faith beliefs when those statementsare made, caution should be exercised in interpreting and relying on suchforward looking statements, the realization of which may be impacted by knownand unknown risks and uncertainties, events that may occur subsequent to theforward-looking statements, and other factors which may be beyond thePartnership’s control and which can materially affect the Partnership’s actualresults, performance or achievements for 2003 and beyond.

 

Along with risks detailedfrom time to time in the Partnership’s filings with the Securities and ExchangeCommission, some factors that could cause the Partnership’s actual results,performance or achievements to differ materially from those expressed orimplied by forward-looking statements include but are not limited to thefollowing:

 

26

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•                                          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 may 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.

 

•                                          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 factorsshould not be construed as exhaustive or as an admission regarding the adequacyof disclosures made by the Partnership prior to the date hereof or theeffectiveness of said Act.  ThePartnership expressly disclaims any obligation to publicly update or revise any

 

27

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forward-lookingstatement, whether as a result of new information, future events or otherwise. 

 

The residential realestate market in the Greater Boston area has softened and the Partnershipanticipates the climate will remain the same in the foreseeable future.  This has resulted in increases in vacancyrates and or/a reduction in some rents. The Partnership believes its presentcash reserves as well as anticipated rental revenue will be sufficient to fundits current operations, and to finance current planned improvements to itsproperties and continue dividend payments in the foreseeable future.

 

Since the Partnership’slong-term goals include the acquisition of additional properties, a portion ofthe proceeds from the refinancing and sale of properties is reserved for thispurpose.  The Partnership will considerrefinancing existing properties if the Partnership’s cash reserves areinsufficient to repay existing mortgages or if the Partnership needs additionalfunds for future acquisitions.

 

Item3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of June 30, 2003, thePartnership and its Subsidiary Partnerships collectively have approximately$99,423,000 in long-term debt (increased by $15,224,000 on August 1, 2003), allof which pays interest at fixed rates. Accordingly, the fair value of these debt instruments is affected by changesin market interest rates.  Forinformation regarding the fair value and maturity dates of these debtobligations, see Notes 5, 12 and 16 to the Consolidated Financial Statements.

 

For additionaldisclosures about market risk, see “Item 2 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Factors that MayAffect Future Results.”

 

Item4—CONTROLS AND PROCEDURES

 

Our principal executiveofficer and principal financial officer have within 90 days of the filing dateof this quarterly report, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-14( c) and 15d-14( c) under theSecurities and Exchange Act of 1934, as amended) and have determined that suchdisclosure controls and procedures are adequate.  There have been no significant changes in internal controls or inother factors that could significantly affect our internal controls since thedate of evaluation.  We do not believeany significant deficiencies or material weaknesses exist in our internalcontrols.  Accordingly, no correctiveactions have been taken.

 

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PART II - OTHER INFORMATION

 

 
| Item 1. |   | Legal Proceedings                                   |
|---------|--------|-----------------------------------------------------|
|    |   |                                                |
| None.   |   |                                                |
|    |   |                                                |
| Item 2. |   | Changes in Securities                               |
|    |   |                                                |
| None.   |   |                                                |
|    |   |                                                |
| Item 3. |   | Defaults Upon Senior Securities                     |
|    |   |                                                |
| None.   |   |                                                |
|    |   |                                                |
| Item 4. |   | Submission of Matters to a Vote of Security Holders |
|    |   |                                                |
| None.   |   |                                                |
|    |   |                                                |
| Item 5. |   | Other Information                                   |
|    |   |                                                |
| None.   |   |                                                |
|    |   |                                                |
| Item 6. |   | Exhibits and Reports on Form 8-K                    |

 

(a)                                  Seethe exhibit index below.

 

(b)                                 AForm 8-K was filed with the Securities and Exchange Commission on Registrant’sbehalf on May 8, 2003 reporting, under items 2 and 7, the acquisition by theRegistrant of an apartment complex in Framingham, Massachusetts.  An amendment to this Form 8-K was filed onJuly 7, 2003, which included audited financial statements relating to theFramingham, Massachusetts property.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
| Date:           August  14, 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 |
|                                                                                    |
|                                                                                    |
|                                                                                    |
|                                                                                         |                                |                                                                                                                    |  |  |  |

 

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**EXHIBITINDEX**

** **

 
| **Exhibit  No.****** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                   |
|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (99.1)               |   | Certification  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  of Harold Brown, Principal Financial Officer of the Company (Treasurer and a  Director of NewReal, Inc., sole General Partner of the Partnership).                                                                                                                       |
|                 |   |                                                                                                                                                                                                                                                                                         |
| (99.3)               |   | 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). |
|                 |   |                                                                                                                                                                                                                                                                                         |
| (99.4)               |   | 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). |

 

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