**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                   |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       | **For the quarterly period ended   September 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  as Specified in Its Charter)                             |   |   |
|                                                                                |   |   |
| **Massachusetts**                                                                   |   | **04-2619298** |
| (State or Other  Jurisdiction of Incorporation or Organization)                     |   | (I.R.S.  Employer Identification No.) |
|                                                                                |   |   |
| **39 Brighton Avenue, Allston, Massachusetts**                                      |   | **02134** |
| (Address of Principal  Executive Offices)                                           |   | (Zip  Code) |
|                                                                                |   |   |
| Registrant’s  Telephone Number, Including Area Code                            |   | **(617) 783-0039** |
|                                                                                |   |   |
| **Not Applicable**                                                                  |   |   |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |   |   |

 

 

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

 

 

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INDEX

 

PART I - FINANCIAL INFORMATION

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

** **

**2**

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** **

**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                               |   | **September 30,  2003** |        | **December 31,  2002** |   |
|--------------------------------------------------------------------|--------|------------------------------|-------------|-----------------------------|--------|
|                                                               |   | **(Unaudited)**              |        |                        |   |
|                                                               |   |                         |        |                        |   |
| **Assets**                                                         |   |                         |        |                        |   |
| Rental Properties                                                  |   | $                            | 103,573,812 |                        | $      | 79,172,450 |   |
| Cash and Cash Equivalents                                          |   | 25,323,431                   |        | 18,974,446                  |   |
| Rents Receivable                                                   |   | 547,247                      |        | 475,906                     |   |
| Real Estate Tax Escrows                                            |   | 556,290                      |        | 391,253                     |   |
| Prepaid Expenses and Other Assets                                  |   | 2,816,293                    |        | 2,556,572                   |   |
| Investment  in Partnership                                         |   | 1,341,904                    |        | 1,430,269                   |   |
| Financing and Leasing Fees                                         |   | 751,450                      |        | 684,322                     |   |
| **Total Assets**                                                   |   | $                            | 134,910,427 |                        | $      | 103,685,218 |   |
|                                                               |   |                         |        |                        |   |
| **Liabilities and Partners’ Capital**                         |   |                         |        |                        |   |
| Mortgage Notes Payable                                             |   | $                            | 116,081,015 |                        | $      | 82,871,406 |   |
| Accounts Payable and Accrued Expenses                              |   | 1,517,113                    |        | 1,676,628                   |   |
| Advance Rental Payments and Security  Deposits                     |   | 3,334,161                    |        | 3,258,958                   |   |
| Total Liabilities                                                  |   | 120,932,289                  |        | 87,806,992                  |   |
|                                                               |   |                         |        |                        |   |
| Commitments and Contingent Liabilities  (Note 9)                   |   |                         |        |                        |   |
|                                                               |   |                         |        |                        |   |
| Partners’ Capital  173,252 units outstanding in 2003 and 2002 |   | 13,978,138                   |        | 15,878,226                  |   |
| **Total Liabilities and Partners’ Capital**                   |   | $                            | 134,910,427 |                        | $      | 103,685,218 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**NEW ENGLAND REALTYASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

 
|                                                    |   | **Three  Months Ended  September 30** |      | **Nine  Months Ended  September 30** |   |
|---------------------------------------------------------|--------|--------------------------------------------|-----------|-------------------------------------------|--------|
|                                                    |   | **2003**                                   |      | **2002**                                  |   | **2003** |   | **2002** |   |
| Revenue                                                 |   |                                       |      |                                      |   |   |   |   |   |
| Rental income                                           |   | $                                          | 7,802,000 |                                      | $      | 7,248,597 |   | $ | 23,036,610 |   | $ | 21,647,038 |   |
| Laundry and sundry income                               |   | 74,404                                     |      | 59,645                                    |   | 225,470 |   | 182,834 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
|                                                    |   | 7,876,404                                  |      | 7,308,242                                 |   | 23,262,080 |   | 21,829,872 |   |
| Expense                                                 |   |                                       |      |                                      |   |   |   |   |   |
| Administrative                                          |   | 354,565                                    |      | 359,631                                   |   | 1,075,120 |   | 1,031,564 |   |
| Depreciation and amortization                           |   | 1,509,915                                  |      | 1,193,630                                 |   | 3,884,258 |   | 3,384,302 |   |
| Interest                                                |   | 1,979,737                                  |      | 1,689,858                                 |   | 5,478,199 |   | 4,880,736 |   |
| Management fees                                         |   | 313,296                                    |      | 305,866                                   |   | 933,655 |   | 896,500 |   |
| Operating                                               |   | 611,553                                    |      | 511,620                                   |   | 2,230,580 |   | 1,754,367 |   |
| Renting                                                 |   | 264,570                                    |      | 136,468                                   |   | 469,892 |   | 281,498 |   |
| Repairs and maintenance                                 |   | 1,351,568                                  |      | 1,050,646                                 |   | 3,210,507 |   | 2,578,868 |   |
| Taxes  and insurance                                    |   | 830,970                                    |      | 733,986                                   |   | 2,485,090 |   | 2,200,585 |   |
|                                                    |   | 7,216,174                                  |      | 5,981,705                                 |   | 19,767,301 |   | 17,008,420 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Income before Other Income and Discontinued  Operations |   | 660,230                                    |      | 1,326,537                                 |   | 3,494,779 |   | 4,821,452 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Other Income (Loss)                                     |   |                                       |      |                                      |   |   |   |   |   |
| Interest  income                                        |   | 39,470                                     |      | 72,050                                    |   | 138,498 |   | 208,997 |   |
| (Loss) from investment in partnership                   |   | (47,328                                    | )         | (30,837                                   | )      | (93,366 | ) | (40,470 | ) |
| (Loss) on the write off of property assets              |   | (60,000                                    | )         | 0                                         |   | (60,000 | ) | 0 |   |
| (Loss) on the early extinguishments of debt             |   | (1,436,238                                 | )         | 0                                         |   | (1,436,238 | ) | 0 |   |
|                                                    |   | (1,504,096                                 | )         | 41,213                                    |   | (1,451,106 | ) | 168,527 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Income from Continuing Operations                       |   | (843,866                                   | )         | 1,367,750                                 |   | 2,043,673 |   | 4,989,979 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Discontinued Operations                                 |   |                                       |      |                                      |   |   |   |   |   |
| Income from discontinued operations                     |   | 0                                          |      | 32,514                                    |   | 0 |   | 88,986 |   |
| Gain on the sale of real estate                         |   | 0                                          |      | 0                                         |   | 0 |   | 92,778 |   |
| Total discontinued operations                           |   | 0                                          |      | 32,514                                    |   | 0 |   | 181,764 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Net Income (Loss)                                       |   | $                                          | (843,866  | )                                         | $      | 1,400,264 |   | $ | 2,043,673 |   | $ | 5,171,743 |   |
| Income (Loss) per Unit                                  |   |                                       |      |                                      |   |   |   |   |   |
| Income (Loss) before discontinued  operations           |   | $                                          | (4.87     | )                                         | $      | 7.89 |   | $ | 11.80 |   | $ | 28.80 |   |
| Income from discontinued operations                     |   | 0                                          |      | .19                                       |   | 0 |   | 1.05 |   |
| Net Income (Loss) per Unit                              |   | $                                          | (4.87     | )                                         | $      | 8.08 |   | $ | 11.80 |   | $ | 29.85 |   |
|                                                    |   |                                       |      |                                      |   |   |   |   |   |
| Weighted  Average Number of Units Outstanding           |   | 173,252                                    |      | 173,252                                   |   | 173,252 |   | 173,252 |   |

 

See notes toconsolidated financial statements.

 

4

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**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CHANGES****INPARTNERS’ CAPITAL**

 

**(UNAUDITED**)

 
|                                                                        |   | **Limited** |       | **General  Partnership** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|-------------|------------|--------------------------|--------|-----------|--------|
|                                                                        |   | **Class A** |       | **Class B**              |   |      |
| Balance, January 1, 2002                                               |   | $           | 9,982,006  |                     | $      | 2,374,180 |   | $ | 124,986 |   | $ | 12,481,172 |   |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Distribution to Partners                                                    |   | (2,657,464  | )          | (631,148                 | )      | (33,218   | )      | (3,321,830 | ) |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Net Income                                                                  |   | 4,137,394   |       | 982,631                  |   | 51,718    |   | 5,171,743 |   |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Balance, Sept. 30, 2002                                                     |   | $           | 11,461,936 |                     | $      | 2,725,663 |   | $ | 143,486 |   | $ | 14,331,085 |   |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Units authorized and Issued, net of 6,973  Treasury Units at Sept. 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                                                    |   | (3,155,009  | )          | (749,315                 | )      | (39,437   | )      | (3,943,761 | ) |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Net Income                                                                  |   | 1,634,938   |       | 388,298                  |   | 20,437    |   | 2,043,673 |   |
| Balance, Sept. 30, 2003                                                     |   | $           | 11,179,579 |                     | $      | 2,658,603 |   | $ | 139,956 |   | $ | 13,978,138 |   |
|                                                                        |   |        |       |                     |   |      |   |   |   |
| Units authorized and Issued, net of 6,973  Treasury Units at Sept. 30, 2003 |   | 138,602     |       | 32,918                   |   | 1,732     |   | 173,252 |   |

 

See notes to consolidatedfinancial statements

 

5

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**NEW ENGLAND REALTYASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

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

**(UNAUDITED)**

 
|                                                                                 |   | **Nine  Months Ended  September 30,** |       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                 |   | **2003**                                   |       | **2002** |   |
| Cash Flows from Operating Activities                                                 |   |                                       |       |   |   |
| Net  income                                                                          |   | $                                          | 2,043,673  |   | $ | 5,171,743 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities    |   |                                       |       |   |   |
| Depreciation and amortization                                                        |   | 3,884,258                                  |       | 3,463,913 |   |
| Gain on the sale of rental property                                                  |   | 0                                          |       | (92,778 | ) |
| Loss  from investment in partnership                                                 |   | 93,365                                     |       | 40,470 |   |
| Loss on the write off of rental property                                             |   | 60,000                                     |       | 0 |   |
| Loss from early extinguishments of debt                                              |   | 1,436,238                                  |       | 0 |   |
| Change in operating assets and liabilities                                           |   |                                       |       |   |   |
| (Increase) in rents receivable                                                       |   | (71,341                                    | )          | (68,926 | ) |
| (Increase) in financing and leasing fees                                             |   | (141,025                                   | )          | (62,793 | ) |
| (Decrease) in accounts payable                                                       |   | (159,514                                   | )          | (19,325 | ) |
| (Increase) in real estate tax escrow                                                 |   | (165,037                                   | )          | (33,117 | ) |
| (Increase) in prepaid expenses and other  assets                                     |   | (273,667                                   | )          | (419,572 | ) |
| Increase in advance rental payments and  security deposits                           |   | 75,203                                     |       | 87,317 |   |
| Total  Adjustments                                                                   |   | 4,738,480                                  |       | 2,895,189 |   |
| Net cash provided by operating activities                                            |   | 6,782,153                                  |       | 8,066,932 |   |
| Cash Flows from Investing Activities                                                 |   |                                       |       |   |   |
| Distribution from partnership                                                        |   | (5,000                                     | )          | 429,503 |   |
| Purchase and improvement of rental  properties                                       |   | (11,257,777                                | )          | (4,608,000 | ) |
| Net proceeds from the sale of rental  property                                       |   | 0                                          |       | 104,494 |   |
| Net cash (used in) investing activities                                              |   | (11,262,777                                | )          | (4,074,003 | ) |
| Cash Flows from Financing Activities                                                 |   |                                       |       |   |   |
| Proceeds  of mortgage notes payable                                                  |   | 16,824,376                                 |       | 0 |   |
| Payments of mortgage notes payable                                                   |   | (614,768                                   | )          | (625,380 | ) |
| Payment  of prepayment penalties in connection with the early extinguishment of debt |   | (1,436,238                                 | )          | 0 |   |
| Distributions  to partners                                                           |   | (3,943,761                                 | )          | (3,321,830 | ) |
| Net cash provided by (used in) financing  activities                                 |   | 10,829,609                                 |       | (3,947,210 | ) |
| Net Increase in Cash and Cash Equivalents                                            |   | 6,348,985                                  |       | 45,719 |   |
| Cash and Cash Equivalents, at beginning of  year                                     |   | 18,974,446                                 |       | 16,690,943 |   |
| Cash and Cash Equivalents, at end of year                                            |   | $                                          | 25,323,431 |   | $ | 16,736,662 |   |

 

See notes to consolidatedfinancial statements.

 

6

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**NEW ENGLAND REALTYASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**NOTES****TOCONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE 1 —SIGNIFICANT ACCOUNTINGPOLICIES

 

*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 whichthe Partnership 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 ofrecoverability is prepared.  Theestimated future undiscounted cash flows are compared to the asset’s carryingvalue to determine if a write-down to fair value or discounted cash flow valueis required.

 

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

 

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

 

*Cash Equivalents:*The Partnerships consider cash equivalents to be all highly liquid instrumentspurchased with a maturity of three months or 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, for allperiods presented, as one segment.

 

*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.

 

7

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*Income Per Unit:* Netincome per unit has been calculated based upon the weighted average number ofunits outstanding during each year presented. The Partnership has no dilutiveunits and, therefore, basic net income per unit is the same as diluted netincome per unit (see Note 7).

 

*Concentration of Credit Risks and FinancialInstruments:* The Partnerships’ properties are located in New England, and thePartnerships are subject to the general economic risks related thereto.  No single tenant accounted for more than 5%of the Partnerships’ revenues in 2003 or 2002. The Partnerships make their temporary cash investments withhigh-credit-quality financial institutions. At September 30, 2003, substantially all of the Partnerships’ cashand cash equivalents were held in interest-bearing accounts at financialinstitutions, earning interest at rates from .44% to 1.23%.  At September 30, 2003 andDecember 31, 2002 approximately $25,000,000 and $19,000,000 of cash andcash equivalents exceeded federally insured amounts.

 

*Advertising Expense:*  Advertising is expensed as incurred.  Advertising expense was $136,702 and $59,457for the nine months ended September 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 of management,the accompanying unaudited financial statements contain all adjustmentsnecessary for a fair presentation of the Partnership’s financial statements forthe interim periods presented.  Theresults of operations for the nine months ended September 30, 2003 and2002 are not necessarily indicative of the results to be expected for theentire year.

 

NOTE 2—RENTAL PROPERTIES

 

As of September 30, 2003, the Partnership and its SubsidiaryPartnerships owned 2,376 residential apartment units in residential andmixed-use complexes (collectively, the “Apartment Complexes”).  The Partnership also owns 24 condominiumunits in two residential condominium complexes, all of which are leased toresidential tenants (collectively referred to as the “Condominium Units”).  The Apartment Complexes and CondominiumUnits are located primarily in the greater metropolitan Boston, Massachusettsarea.

 

Additionally, as ofSeptember 30, 2003, the Subsidiary Partnerships owned commercial shoppingcenters in Framingham, Massachusetts and mixed-use properties in Boston,Brockton and Newton, Massachusetts. These properties are referred to collectively as the “CommercialProperties.”

 

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 wasinitially funded from cash reserves.  In August 2003, the Partnership obtained a $1,600,000 mortgage onthese condominiums (See Note 5).  SeeNote 3 for a discussion of certain related parties associated with thisacquisition.  The majority owner of theGeneral Partner has agreed to indemnify the Partnership for any losses incurredfrom the sale of any of these units for a three-year period from acquisition.

 

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

 

8

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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, the Partnershipsold a condominium unit located in Brockton, Massachusetts for $113,000.  The net gain on the sale was $92,778 afterdeducting basis, a 3% sales commission to the management company (see Note 3),and other closing costs.  The net cashflow 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 consist ofthe following:

 
|                                 |   | **SEPTEMBER 30  2003** |        | **DECEMBER 31  2002** |   | **USEFUL  LIFE** |   |
|--------------------------------------|--------|-----------------------------|-------------|----------------------------|--------|------------------|--------|
| Land, improvements, and parking lots |   | $                           | 22,571,997  |                       | $      | 17,294,322       |   | 10-31 years |   |
| Buildings and improvements           |   | 104,685,063                 |        | 83,031,706                 |   | 15-31 years      |   |
| Kitchen cabinets                     |   | 2,249,276                   |        | 1,849,895                  |   | 5-10 years       |   |
| Carpets                              |   | 2,324,768                   |        | 1,911,091                  |   | 5-10 years       |   |
| Air conditioning                     |   | 776,238                     |        | 214,383                    |   | 7-10 years       |   |
| Laundry equipment                    |   | 61,034                      |        | 46,974                     |   | 5-7 years        |   |
| Elevators                            |   | 285,525                     |        | 206,164                    |   | 20 years         |   |
| Swimming pools                       |   | 98,105                      |        | 86,340                     |   | 10 years         |   |
| Equipment                            |   | 1,508,728                   |        | 1,286,596                  |   | 5-7 years        |   |
| Motor vehicles                       |   | 97,893                      |        | 97,893                     |   | 5 years          |   |
| Fences                               |   | 87,660                      |        | 57,469                     |   | 5-10 years       |   |
| Furniture and fixtures               |   | 831,420                     |        | 739,796                    |   | 5-7 years        |   |
| Smoke alarms                         |   | 87,957                      |        | 77,889                     |   | 5-7 years        |   |
| Construction in progress             |   | 856,467                     |        | 1,363,836                  |   | —           |   |
|                                 |   | 136,522,131                 |        | 108,264,354                |   |             |   |
| Less accumulated depreciation        |   | 32,948,319                  |        | 29,091,904                 |   |             |   |
|                                 |   | $                           | 103,573,812 |                       | $      | 79,172,450       |   |   |   |

 

At September 30, 2003,construction in progress consists of $856,467 at Westgate Apartments LLC fordesign, approvals, site work, and the commencement of construction of 20additional residential units.  Estimatedtotal costs will be $4,000,000 to be completed in the third quarter of 2004.

 

9

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NOTE 3—RELATED PARTYTRANSACTIONS

 

The Partnership’s propertiesare managed by The Hamilton Company (“Hamilton”), which is owned by themajority owner and treasurer of New Real, Inc. (the “General Partner”).  The management fee is equal to 4% of rentalrevenue and laundry income.  Total feespaid were approximately $934,000 and $913,000 for the nine months ended September 30,2003 and 2002, respectively.  Securitydeposits are held in escrow by Hamilton (see Note 6).  Hamilton also receives a mortgage servicing fee equal to anannual rate of 1/2% of the monthly outstanding balance of mortgages receivableresulting from the sale of Partnership properties.  There was no mortgage servicing fee paid in the year endedDecember 31, 2002 or the nine months ended September 30, 2003.

 

The Partnership Agreement alsopermits the General Partner or its management company to charge the costs ofprofessional services (such as counsel, accountants and contractors) toNERA.  During the nine months endedSeptember 30, 2003 and 2002 approximately $471,000 and $548,000 wascharged to NERA for legal, construction, maintenance, rental and architecturalservices and supervision of capital improvements.   Of the 2003 expenses referred to above, approximately $207,000consisted of repairs and maintenance and $168,000 of administrative expense;approximately $96,000 of construction, architectural services and supervisionof capital projects was capitalized in rental properties.  Of the 2002 expenses referred to above,approximately $181,000 is recorded in repairs and maintenance and $147,000 inadministrative expense; approximately $220,000 of architectural services andsupervision of capital projects was capitalized in rental properties.   Additionally in each of the nine monthsended September 30, 2003 and 2002 the Partnership paid Hamilton $60,000,for in-house accounting services.  Includedin accounts payable and accrued expenses at September 30, 2003 andDecember 31, 2002 is $169,506 and $248,360 due to Hamilton.  The Partnership Agreement entitles theGeneral Partner or its management company to receive certain commissions uponthe sale of Partnership property, only to the extent that total commissions donot exceed 3%.  During the year endedDecember 31, 2002, the Partnership paid commissions of $94,140 to Hamiltonof which $3,390 represents the sale of the condominium in Brockton and $90,750represents the sale of The East Hampton Mall (see Note 2).  No commissions were paid during the ninemonths ended September 30, 2003.

 

In 1996, prior to becoming anemployee and President of Hamilton, the current President performed assetmanagement consulting services to the Partnership.  This individual continues to perform this service and to receivean asset management fee from the Partnership, receiving $37,500 for the ninemonths ended September 30, 2003 and $50,000 for the year endedDecember 31, 2002.

 

Included in prepaid expensesand other assets were amounts due from related parties of approximately$1,167,000 at September 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 themembers in proportion to their ownership interest in the limited liabilitycompany so their respective capital contributions are currently proportionateto their ownership interest.  Theinterest income paid to the Partnership in 2001 in connection with thistransaction was $30,003.

 

###### On June 30, 2003, the Partnership purchased fivecondominium units in a 42-unit building located in Brookline,Massachusetts.  These were purchasedfrom Harvard 45 Associates LLC (“Harvard 45”) which is owned 70% by the 75%shareholder and treasurer of the General Partner, and 5% by the President ofHamilton.  The total purchase price forthese condominiums was approximately $2,416,000 and was approved both by thePartnership’s advisory committee and the audit committee of the GeneralPartner.  Harvard 45 realized a gain ofapproximately $648,000 from these sales. Harvard 45 also sold 16 units to unrelated parties and the prices forthe total 21 units sold are comparable. See Note 5 for a description of the guarantee given on a $1,600,000mortgage of these five units.

 

10

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The above 42-unit condominiumbuilding is managed by an entity wholly owned by the 25% shareholder andPresident of the General Partner.  Thatentity will receive annual management fees from the five units of approximately$1,500, and Hamilton will reduce its management fees to approximately 2%, sothat the total management fee will not exceed the 4% allowed by thePartnership’s Partnership Agreement.

 

NOTE 4—OTHER ASSETS

 

Included in prepaid expensesand other assets at September 30, 2003 and December 31, 2002 isapproximately $612,000 and $734,000, respectively, held in escrow to fundfuture capital improvements.

 

Financing and leasing fees of$751,450 and $684,322 are net of accumulated amortization of $238,480 and$575,510 at September 30, 2003 and December 31, 2002, respectively.

 

NOTE 5—MORTGAGES NOTES PAYABLE

 

At September 30, 2003 andDecember 31, 2002, the mortgages payable consisted of various loans, allof which were secured by first mortgages on properties referred to in Note2.  At September 30, 2003, theinterest rate on these loans ranged from 4.84% to 8.46%, payable in monthly installmentsaggregating approximately $732,000, including interest, to various datesthrough 2016.  The majority of themortgages are subject to prepayment penalties. See Note 12 for fair value information.

 

The Partnerships have pledgedtenant leases as additional collateral for certain of these mortgages.

 

Approximate annual maturitiesare as follows:

 
| 2004- current maturities |   | $           | 705,000     |   |
|--------------------------|--------|-------------|-------------|--------|
| 2005                     |   | 763,000     |        |
| 2006                     |   | 2,509,000   |        |
| 2007                     |   | 2,834,000   |        |
| 2008                     |   | 4,413,000   |        |
| Thereafter               |   | 104,856,000 |        |
|                     |   | $           | 116,080,000 |   |

 

On August 1, 2003, thePartnership refinanced four mortgages 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 new mortgage loans is$26,750,000 with interest rates from 4.84% to 5.30%.  These new loans require interest payments for ten years, and thenthe entire $26,750,000 becomes due.  Thetotal monthly payments on the old loans were approximately $101,000 includingprincipal of approximately $20,000.  Thetotal monthly interest payments on the new mortgages are approximately$109,000, resulting in an increased monthly payment for these four propertiesof $8,000 or $96,000 per year.  Annualinterest expenses will increase approximately $340,000 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 has recorded aloss on the early extinguishment of debt of approximately $1,436,000 because ofprepayment penalties of approximately $1,355,000, and the write off of deferredfinancing fees of approximately $81,000. Deferred financing fees on the new mortgages, of approximately $132,000will be amortized over their ten-year term.

 

11

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In August 2003, thePartnership obtained a $1,600,000 mortgage loan for three years, with interestonly payments at 5.25% and no prepayment penalties, secured by the fivecondominium units acquired by the Partnership in June 2003. Totalorigination and closing costs approximate $18,000 to be amortized over 3 years.  The majority owner of the General Partnerwill guarantee to the bank 50% of the outstanding indebtedness at any timeduring the life of the mortgage.

 

NOTE 6—ADVANCE RENTAL PAYMENTSAND SECURITY DEPOSITS

 

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

 

NOTE 7—PARTNERS’ CAPITAL

 

The Partnership has two classesof Limited Partners (Class A and B) and one category of General Partner.  Under the terms of the PartnershipAgreement, Class B units and General Partnership units must represent 19% and1%, respectively, of the total units outstanding.  All classes have equal profit sharing and distribution rights, inproportion 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, and on September 30,2003.

 

The Partnership has enteredinto a deposit agreement with an agent to facilitate public trading of limitedpartners’ 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 per depositaryreceipt:

 
|                                                              |   | **Nine  Months ended Sept 30,** |   |
|-------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                              |   | **2003**                        |   | **2002** |   |
| Net income per depositary receipt before  discontinued operations |   | $                               | 1.18   |   | $ | 2.88 |   |
| Net income per depositary receipt from  discontinued operations   |   | —                          |   | .11 |   |
| Net income per depositary receipt after  discontinued operations  |   | $                               | 1.18   |   | $ | 2.99 |   |
|                                                              |   |                            |   |   |   |
| Distributions per depositary receipt                              |   | $                               | 2.28   |   | $ | 1.92 |   |

 

NOTE 8—TREASURY UNITS

 

Treasury units atSeptember 30, 2003 are as follows:

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

 

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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.

 

NOTE 10—RENTAL INCOME

 

During the nine months endedSeptember 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       |   | $                               | 1,689,000  |   |
| 2005       |   | 1,399,000                       |       |
| 2006       |   | 1,182,000                       |       |
| 2007       |   | 1,960,000                       |       |
| 2008       |   | 1,161,000                       |       |
| Thereafter |   | 6,328,000                       |       |
|       |   | $                               | 13,719,000 |   |

 

The aggregate minimum futurerental income does not include contingent rentals that may be received undervarious leases in connection with percentage rents, common area charges and realestate taxes.  Aggregate contingentrentals were approximately $289,000 for the nine months endedSeptember 30, 2003 and $325,000 for the year ended December 31, 2002,respectively.

 

Rents receivable are net ofallowances for doubtful accounts of $382,018 and $211,202 at September 30, 2003 and December 31,2002, respectively.  Included in rentsreceivable is approximately $300,000 resulting from recognizing rental incomefrom non-cancelable commercial leases with future rental increases on astraight-line basis.  The majority ofthis amount is for a long-term lease with Staples at Staples Plaza inFramingham, Massachusetts.

 

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NOTE 11—CASH FLOW INFORMATION

 

During the nine months endedSeptember 30, 2003 and 2002, cash paid for interest was approximately$5,413,959 and $4,894,000 respectively.

 

Non-cash investing andfinancing activities were as follows:

 
|                                                    |   | **Nine  Months Ended  September 30, 2003** |       |
|---------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                    |   | **Investing  Activities**                       |       | **Financing  Activities** |   | **Total** |   |
|                                                    |   |                                            |       |   |   |   |   |
| New Mortgage Debt                                       |   | $                                               | —     |   | $ | 45,350,000 |   | $ | 45,350,000 |   |
| (Purchase) of rental property                           |   | (25,415,900                                     | )          | — |   | (25,415,900 | ) |
|                                                    |   | (25,415,900                                     | )          | 45,350,000 |   | 19,934,100 |   |
|                                                    |   |                                            |       |   |   |   |   |
| Non cash investing and financing                        |   |                                            |       |   |   |   |   |
| Mortgage on Framingham acquisition                      |   | 17,000,000                                      |       | (17,000,000 | ) | — |   |
| Mortgage debt paid from refinancings                    |   | —                                          |       | (11,525,624 | ) | (11,525,624 | ) |
| Total non- cash investing and financing  activity       |   | 17,000,000                                      |       | (28,525,624 | ) | (11,525,624 | ) |
|                                                    |   |                                            |       |   |   |   |   |
| Cash received (used) before other transaction  expenses |   | $                                               | (8,415,900 | ) | $ | 16,824,376 |   | $ | 8,408,476 |   |

 
|                                                  |   | **Nine Months Ended  September 30, 2002** |       |
|-------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                  |   | **Investing  Activities**                      |       | **Financing  Activities** |   | **Total** |   |
|                                                  |   |                                           |       |   |   |   |   |
| (Purchase) of Rental properties                       |   | $                                              | (7,200,000 | ) | $ | — |   | $ | (7,200,000 | ) |
| New Mortgage Debt                                     |   | —                                         |       | 5,370,026 |   | 5,370,026 |   |
|                                                  |   | (7,200,000                                     | )          | 5,370,026 |   | (1,829,974 | ) |
|                                                  |   |                                           |       |   |   |   |   |
| Non-cash investing and Financing                      |   |                                           |       |   |   |   |   |
| Mortgage debt on Norwood acquisition                  |   | 5,370,026                                      |       | (5,370,026 | ) | — |   |
|                                                  |   | 5,370,026                                      |       | (5,370,026 | ) | — |   |
|                                                  |   |                                           |       |   |   |   |   |
| Cash   (used) before other transactions expenses |   | $                                              | (1,829,974 | ) | $ | — |   | $ | (1,829,974 | ) |

 

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NOTE 12—FAIR VALUE OF FINANCIALINSTRUMENTS

 

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

 

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

 

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

 
|                       |   | **Carrying  Amount** |        | **Estimated  Fair Value** |   |
|----------------------------|--------|----------------------|-------------|---------------------------|--------|
|                       |   |                 |        |                      |   |
| Mortgage  notes payable    |   |                 |        |                      |   |
| At September 30, 2003 |   | $                    | 116,081,015 |                      | $      | 123,919,153 |   |
| At December 31, 2002  |   | 82,871,406           |        | 92,326,604                |   |
|                            |        |                      |             |                           |        |  |  |

 

 

NOTE 13—TAXABLE INCOME AND TAX BASIS

 

Taxable income reportable bythe 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 $160,000 greater than statement incomefor the nine months ended September 30, 2003 and approximately $50,000greater than statement income for the year ended December 31, 2002.  The cumulative tax basis of thePartnership’s real estate at September 30, 2003 is approximately $2,200,000greater than the statement basis.

 

NOTE 14— NEW ACCOUNTINGPRONOUNCEMENTS

 

The Partnership adopted the Financial AccountingStandards Board’s (FASB) Statement of Financial Accounting Standard 144 (“FAS144”), “Accounting for the Impairment or Disposal of Long-lived Assets” onJanuary 1, 2002.  FAS 144supersedes FAS 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of.” The primary objectives of FAS 144 are to develop one accounting model,based on the framework established in FAS 121, for long-lived assets to bedisposed of by sale, and to address significant implementation issues regardingimpairment of long-lived assets held for use. FAS 144 requires separate presentation of discontinued operations for anoperating property sold or considered held for sale for years beginning onJanuary 1, 2002.  In accordancewith FAS 144, the Partnership classifies real estate assets as held for sale inthe period in which all of the following criteria are met: (a) management,having the authority to approve the action, commits to a plan to sell theasset; (b) the asset is available for immediate sale in its present conditionsubject only to terms that are usual and customary for sales of such assets;(c) an active program to locate a buyer and other actions required to completethe plan to sell the asset have been initiated; (d) the sale of the asset isprobable and the transfer of the asset is expected to qualify for recognitionas a completed sale within one year; (e) the asset is being actively marketedfor sale at a price that is reasonable in relation to its current fair value;and (f) actions required to complete the plan indicate that it is unlikely thatsignificant changes to the plan will be made or that the plan will bewithdrawn.

 

The Partnership’s adoption ofFAS 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 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).

 

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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 costsassociated with exit or disposal activities. Under FAS 146, a commitment to an exit or disposal plan no longer willbe a sufficient basis for recording a liability for those activities.  The Partnership does not anticipate asignificant impact on net income from adopting FAS 146.

 

In November 2002, the FASBissued FASB Interpretation No. 45 (FIN No. 45), “Guarantor’s Accounting andDisclosure 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’s adoption of SFAS No. 144 (see Note14) resulted in the presentation of the net operating results of qualifyingproperties sold during 2002 as income from discontinued operations for allperiods presented.  In addition, SFASNo. 144 resulted in the gain from the sales of these qualifying properties inthe second and fourth quarters of 2002 (totaling approximately $1,000,000) tobe reflected as a gain on sales of real estate from discontinued operations inthe accompanying consolidated statements of operations. The adoption of SFASNo. 144 did not have an impact on net income; it only impacted the presentationof these properties within the consolidated statements of income.

 

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**IndependentAccountants**’ Review Report

** **

The Partners

New England Realty AssociatesLimited Partnership

 

We have reviewed the accompanying consolidated balance sheet of NewEngland Realty Associates Limited Partnership and Subsidiary partnerships as ofSeptember 2003, and the related consolidated statements of income for the threemonth and nine month periods ended September 30, the consolidated statement ofchanges in partners’ capital, and the consolidated statements of cash flows forthe nine month periods ended September 30. 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 interim financialinformation consists principally of applying analytical procedures and makinginquires of persons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with auditing standards generally accepted in theUnited States of America, the objective of which is the expression of an opinionregarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we arenot aware of any material modifications that should be made to the consolidatedfinancial statements referred to above for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

We have previously audited, inaccordance with auditing standards generally accepted in the United States ofAmerica, the consolidated balance sheet of New England Realty AssociatesLimited Partnership as of December 31, 2002, and related consolidatedstatements of income, partners’ capital, and cash flows for the year then ended(not presented herein); and in our report dated February 21, 2003, we expressedan unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying consolidated balance sheet as of December 31 is fairly stated,in all material respects.

 
| /s/ Miller  Wachman LLP       |   |
|-------------------------------|--------|
| Certified  Public Accountants |
| Boston,  Massachusetts        |

 

November 5, 2003

 

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MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

 

The following discussion shouldbe 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” andelsewhere in this Report. 

 

New England Realty AssociatesLimited Partnership and its subsidiary limited liability companies and limitedpartnerships (the “Partnership) have retained The Hamilton Company (“Hamilton”)to manage and administer their properties (See Note 3 to the ConsolidatedFinancial Statements).  Hamilton is afull-service real estate management company, which has legal, construction,maintenance, architectural and administrative departments.  The properties represent approximately 33%of the total properties and 67% of the residential properties managed byHamilton.  Substantially all of theother properties managed by Hamilton are owned, wholly or partially, directlyor indirectly, by Harold Brown, who owns all of Hamilton's capital stock.  The Partnership’s Second Amended andRestated Contract of Limited Partnership (the “Partnership Agreement”)expressly provides that the general partner may employ a management company tomanage the properties, and that such management company may be paid a fee of upto 4% of rental receipts for administrative and management services (the“Management Fee”).  The Partnershipannually pays Hamilton the full Management Fee, in monthly installments. 

 

Mr. Brown, his brother RonaldBrown 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”), the Partnership’ssole general partner, and, as noted above, 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 the Partnership’s Class A Receipts.

 

Beyond the Management Fee, the PartnershipAgreement further provides for the employment of outside professionals toprovide services to the Partnership and allows NewReal to charge thePartnership for the cost of employing professionals to assist with theadministration 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.

 

Hamilton accounted forapproximately 6% and 7% of the repair and maintenance expense paid by thePartnership during the nine months ended September 30, 2003 and the yearended December 31, 2002, respectively. Of the funds paid to Hamilton for this purpose, the

 

18

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majority was to cover the costof 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 maintenance staff.  Further, those properties that do not havetheir own maintenance staff but are located more than a reasonable distancefrom Hamilton’s headquarters in Allston, Massachusetts are generally servicedby local, independent companies.

 

Hamilton’s legal departmenthandles most of the Partnership’s eviction and collection matters.  Additionally, it prepares most long-termcommercial lease agreements and represents the Partnership in selected purchaseand sale transactions.  Overall,Hamilton provided approximately 75% of the legal services paid for by thePartnership during the nine months ended September 30, 2003 andapproximately 62% during the year ended December 31, 2002.

 

The Partnership requires thatthree bids be obtained for construction contracts in excess of $5,000.  Hamilton may be one of the three bidders ona particular project and may be awarded the contract if its bid and its abilityto successfully complete the project are deemed appropriate.  For contracts that are not awarded toHamilton, Hamilton charges the Partnership a construction supervision fee equalto 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, the Partnership hasemployed Hamilton to perform its bookkeeping and accounting functions.  Hamilton’s accounting staff consists ofapproximately ten people and Hamilton currently charges the Partnership $80,000per year for bookkeeping and accounting services.

 

For more information on relatedparty transactions, see Note 3 to the Consolidated Financial Statements.

 

CRITICAL ACCOUNTING POLICIESAND ESTIMATES

 

The preparation of consolidatedfinancial statements, in accordance with accounting principles generallyaccepted in the United States of America, requires the Partnership to makeestimates 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 toacquiring, developing and assessing the carrying values of its real estateproperties and its investments in and advances to joint ventures.  The Partnership bases its estimates onhistorical experience, current market conditions, and on various otherassumptions that are believed to be reasonable under the circumstances.  See Note 1 to the Consolidated FinancialStatements, Principles of Consolidation. 

 

Revenue Recognition: Revenuesfrom rental property are recognized when due from tenants. Residential leasesare generally for terms of one year, and commercial leases are generally forfive to ten years, with renewal options at increased rents.  Significant commercial leases with steppedincreases over the term of the lease are recorded on the straight-line basis.

 

Real Estate and Depreciation:Real estate assets are stated at the lower of cost or fair value, as

 

19

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

 

•                  Depreciation iscomputed 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.

 

•                  Ordinary repairsand maintenance, such as unit cleaning and painting and appliance repairs, areexpensed.

 

If there is an event or changein circumstances that indicates an impairment in the value of a property, thePartnership’s policy is to assess the impairment by making a comparison of thecurrent and projected operating cash flows of the property over its remaininguseful life, on an undiscounted basis, to the carrying amount of theproperty.  If the carrying value is inexcess of the estimated projected operating cash flows of the property, wewould recognize an impairment loss equivalent to the amount required to adjustthe carrying amount to its estimated fair value.  The Partnership has not recognized an impairment loss since 1995.

 

With respect to investments inand advances to joint ventures, the Partnership looks to the underlyingproperties to assess performance and the recoverability of carrying amounts forthose investments in a manner similar to direct investments in real estateproperties.  An impairment charge isrecorded if the carrying value of the investment exceeds its fair value. 

 

Legal Contingencies

 

The Partnership is subject tovarious legal proceedings and claims that arise, from time to time, in theordinary course of business.  Thesematters are frequently covered by insurance. If it is determined that a loss is likely to occur, the estimated amountof the loss is recorded in the financial statements.  Both the amount of the expected loss and the point at which itsoccurrence is considered likely can be difficult to determine. 

 

20

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Results of Operations

 

Comparison of the three monthsended September 30, 2003 to the three months ended September 30, 2002

 

The Partnership and its SubsidiaryPartnerships, on a consolidated basis, earned income before other income anddiscontinued operations of $660,230 during the three months endedSeptember 30, 2003 compared to $1,326,537 for the three months endedSeptember 30, 2002, a decrease of $666,307 (50%).  This decrease in operating income beforeother income and discontinued operations is largely due to an increase inoperating expenses of approximately $1,200,000 (20%) offset by an increase inrental income of approximately $554,000 (8%). As more fully described below, both increases are substantially due toacquisitions in 2003.  Due to asoftening residential rental market, rental income at many of the propertiesdeclined in the three months ended September 30, 2003 and expensescontinue to increase.

 

The rental activity issummarized as follows:

 
|              |   | **Occupancy  Date**        |   |
|-------------------|--------|----------------------------|--------|
|              |   | **October 31,  2003** |   | **August 11,  2003** |   | **December 31,  2002** |   | **November 11,  2002** |   |
|              |   |                       |   |   |   |   |   |   |   |
| Residential       |   |                       |   |   |   |   |   |   |   |
| Units             |   | 2,400                      |   | 2,400 |   | 2,211 |   | 2,211 |   |
| Vacancies         |   | 95                         |   | 70 |   | 53 |   | 71 |   |
| Vacancy rate      |   | 4.0                        | %      | 2.9 | % | 2.4 | % | 3.2 | % |
|              |   |                       |   |   |   |   |   |   |   |
| Commercial        |   |                       |   |   |   |   |   |   |   |
| Total square feet |   | 85,275                     |   | 85,275 |   | 85,275 |   | 137,775 |   |
| Vacancy           |   | 0                          |   | 0 |   | 0 |   | 0 |   |
| Vacancy rate      |   | 0                          | %      | 0 | % | 0 | % | 0 | % |

 
|                   |   | **Rental  Income (in thousands)  Three Months Ended September30,** |   |
|------------------------|--------|--------------------------------------------------------------------|--------|
|                   |   | **2003**                                                           |   | **2002** |   |
|                   |   | **Total  Operations**                                              |   | **Continuing  Operations** |   | **Total  Operations** |   | **Continuing  Operations** |   |   |
| Total rents            |   | $                                                                  | 7,876  |   | $ | 7,876 |   | $ | 7,435 |   | $ | 7,308 |   |   |
| Residential percentage |   | 93                                                                 | %      | 93 | % | 93 | % | 93 | % |   |
| Commercial percentage  |   | 7                                                                  | %      | 7 | % | 7 | % | 7 | % |   |
| Contingent rentals     |   | $                                                                  | 93     |   | $ | 93 |   | $ | 126 |   | $ | 44 |   |   |
|                        |        |                                                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Rental income from continuingoperations for the three months ended September 30, 2003 was approximately$7,876,000 compared to approximately $7,308,000 for the three months ended

 

21

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September 30, 2002, anincrease of approximately $568,000 (8%). The increase is due to two acquisitions made by the Partnership.  In April 2003, the Partnership acquireda 184 unit residential property located at 9 School Street in Framingham,Massachusetts (referred to as “School Street”).  On June 30, 2003, the Partnership acquired five condominiumunits in Brookline, Massachussets. Rental income from School Street for the three months endedSeptember 30, 2003 was approximately $576,000 and rental income from thefive condos purchased in June was approximately $33,000. Total rentalincome at the other Partnership properties decreased approximately$55,000.  This decrease is due to an increasein vacancies and decreases in rental rates.

 

Total expenses from continuingoperations for the three months ended September 30, 2003 were $7,216,174compared to $5,981,705 for the three months ended September 30, 2002, anincrease of approximately $1,234,000 (21%). Expenses related to these acquisitions represent approximately $668,000of this increase.  Unrelated to theseacquisitions, there was an increase in expenses of approximately $566,000.  The most significant increases, excludingthe acquired properties, was repairs and maintenance expenses of approximately$247,000 (24%) including cleaning and repainting of vacant apartments;  renting expenses of approximately $114,000(84%) due to increased advertising expenses as well as rental commissions paidby the Partnership; other operating expenses of approximately $36,000 (7%)  due to increases in utility costs; taxes andinsurance of approximately $45,000 (6%) due to increases in the real estatetaxes based upon higher property valuations and increased insurancepremiums.  Additionally, interestexpense increased approximately $290,000 which includes $238,000 of interestexpense from the financing of School Street. Depreciation increased approximately $316,000(26%) of whichapproximately $250,000 relates to the acquired properties and the balance isfrom continuing capital improvements at other properties.

 

The Partnership has a 50%ownership interest in a limited liability company that owns a 40 unitresidential property in Cambridge, Massachusetts (the “CambridgeInvestment”).  For the three monthsended September 30, 2003, the Partnership’s share of loss on thisinvestment is $47,328 due to rental concessions, a decrease in rental rates, anincrease in rental commissions and an increase in repairs and maintenanceexpenses due to tenant turnover.  Therewere two vacancies as of November 5, 2003.

 

Interest income decreased$32,580 (45%) primarily due to a decline in interest rates.

 

On August 1, 2003, thePartnership refinanced four mortgages with outstanding balances totalingapproximately $11,526,000.  ThePartnership recorded a loss on the early extinguishment of debt of $1,436,238due to prepayment penalties of approximately $1,355,000 and deferred financingfees of approximately $81,000 on the mortgages paid.

 

During the three months endedSeptember 30, 2002, the Partnership had income from discontinuedoperations of approximately $33,000 which represents the net income from theEast Hampton Mall, sold in December 2002. Rental income at this property was approximately $127,000.

 

During the three months endedSeptember 30, 2003, the Partnership recorded a non-cash charge of $60,000due to the write-off of air conditioning and heating equipment replaced at 62Boylston Street.

 

22

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As a result of the changesdiscussed above, net loss for the three months ended September 30, 2003was $843,866 compared to net income of $1,400,264 for the three months endedSeptember 30, 2002, a change of $2,244,130 (160%).

 

Comparison of the nine monthsended September 30, 2003 to the nine months ended September 30, 2002

 

The Partnership and itsSubsidiary Partnerships earned income before other income and discontinuedoperations of $3,494,779 for the nine months ended September 30, 2003compared to $4,821,452 for the nine months ended September 30, 2002, adecrease of $1,326,623 (28%).  Thisdecrease is due to an increase in operating expenses of approximately$2,759,000 offset by increased rental income of approximately $1,433,000.  As more fully described below, theseincreases are primarily the result of acquisitions in 2003, and decreases inrental income and increases in operating expenses at other properties.

 

The following is a summary ofthe Partnership’s rental income for the nine months ended September 30,2003 and 2002:

 
|                   |   | **Rental  Income (In thousands)  Nine Months Ended September 30,** |   |
|------------------------|--------|-------------------------------------------------------------------------|--------|
|                   |   | **2003**                                                                |   | **2002** |   |
|                   |   | **Total  Operations**                                                   |   | **Continuing  Operations** |   | **Total  Operations** |   | **Continuing  Operations** |   |
|                   |   |                                                                    |   |   |   |   |   |   |   |
| Total rents            |   | $                                                                       | 23,262 |   | $ | 23,262 |   | $ | 22,221 |   | $ | 21,830 |   |
| Residential percentage |   | 93                                                                      | %      | 93 | % | 91 | % | 92 | % |
| Commercial percentage  |   | 7                                                                       | %      | 7 | % | 9 | % | 8 | % |
| Contingent rentals     |   | $                                                                       | 289    |   | $ | 289 |   | $ | 363 |   | $ | 130 |   |
|                        |        |                                                                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

Rental income from continuingoperations for the nine months ended September 30, 2003 was approximately$23,262,000 compared to approximately $21,830,000 for the nine months endedSeptember 30, 2002, an increase of approximately $1,432,000 (7%).  The two acquisitions in 2003 and Dean Streetin June 2002 represents approximately $1,416,000 of this increase.  The increase for the nine months endedSeptember 30, 2003 is offset by a decrease in rental income at two of thePartnership’s properties.  Rental incomeat 62 Boylston Street decreased approximately $112,000 during the nine monthsended September 30, 2003, due to increased vacancies at the property, andrental income at Westgate Woburn decreased approximately $67,000 due tovacancies and rental credits given to tenants during 2003.  Rental income at the majority of otherPartnership properties has remained relatively stable.

 

Total expenses from continuingoperations for the nine months ended September 30, 2003 were $19,767,301compared to $17,008,420 for the nine months ended September 30, 2002 anincrease of $2,758,881 (16%).  Expensesrelated to the acquisitions were approximately $1,566,000. Unrelated to theacquisitions, expenses increased approximately $1,193,000.  The most significant increases unrelated tothe acquisitions were operating expenses of approximately

 

23

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$332,000 (19%); repairs andmaintenance expenses of approximately $518,000 (20%); taxes and insurance ofapproximately $159,000 (7%) and renting expenses of approximately $169,000(60%).  The reasons for these increasesare discussed above.  Of the approximately$1,566,000 increase related to the acquisitions, approximately $588,000 was forinterest expense and approximately $483,000 was for depreciation expense.

 

For the nine months endedSeptember 30, 2003, the Partnership’s share of loss on the CambridgeInvestment was $93,366, compared to a loss of $40,470 for the nine months endedSeptember 30, 2002, an increase of $52,896.  A softening of the rental market has resulted in higher tenantturnover, rental concessions, increased vacancies and increases in repairs andmaintenance expenses and rental commissions.

 

Interest income decreased$70,499 due to a decline in interest rates.

 

As discussed above, thePartnership incurred a loss of $1,436,236 on the early extinguishment of debt.

 

During the nine months endedSeptember 30, 2002, the Partnership had income from discontinuedoperations of approximately $89,000 which represents the approximate net incomefrom the East Hampton Mall, sold in December 2002, as well as the gain ofapproximately $93,000 from the sale of a condominium in June 2002.

 

As a result of the changesdiscussed above, net income for the nine months ended September 30, 2003was $2,043,673 compared to $5,171,743 for the nine months endedSeptember 30, 2002, a decrease of $3,128,070 (60%).

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Partnership’s principalsource of cash during 2003 and 2002 was the collection of rents, refinancing ofPartnership properties and the sales of two Partnership properties during 2002.

 

The majority of cash and cashequivalents of $25,323,431 at September 30, 2003 and $18,974,446 atDecember 31, 2002 was held in interest bearing accounts at credit worthyfinancial institutions.

 

This increase of $6,348,985 atSeptember 30, 2003 is summarized as follows:

 
|                                             |   | **Nine  Months Ended September 30,** |      |
|--------------------------------------------------|--------|--------------------------------------|-----------|
|                                             |   | **2003**                             |      | **2002** |   |
| Cash provided by operating activities            |   | $                                    | 6,782,153 |   | $ | 8,066,932 |   |
| Cash (used in) investing activities              |   | (11,262,777                          | )         | (4,074,003 | ) |
| Cash provided by (used in) financing  activities |   | 14,773,370                           |      | (625,380 | ) |
| Dividends paid                                   |   | (3,943,761                           | )         | (3,321,830 | ) |
| Net increase in cash and cash equivalents        |   | $                                    | 6,348,985 |   | $ | 45,719 |   |

 

24

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The decrease in cash providedby operating activities is primarily due to the decrease in operating incomebefore depreciation expense.  Theincrease in cash used in investing activities is primarily due to theacquisition of the two properties in 2003 utilizing cash reserves in excess of$8,000,000 plus additional improvements to rental properties.   The increase in cash provided by financingactivities is due to the refinancing of four of the Partnership properties inAugust 2003.

 

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.  The Partnership borrowed a totalof  $26,750,000, with interest ratesranging from 4.84% to 5.30%.  The newloans are represented by ten-year notes with interest only payments duringtheir entire terms.  The total monthlypayment on the old loans was $101,000 including principal of approximately$20,000.  The total monthly payment on thenew loans is approximately $109,000, resulting in an increase in annual paymentsof approximately $96,000. Annual interest expense will increase approximately$340,000 due to the increased debt.  ThePartnership’s cash reserves have increased approximately $13,000,000 as aresult of these financings.  See Note 5to the Consolidated Financial Statements for a schedule of the mortgagedebt maturities.

 

On June 30, 2003, thePartnership purchased five condominium units from a group of investors who areaffiliated with the Partnership.  In theevent any of these units are sold during the three year period commencing onthe date of acquisition and the sale price is less than the price paid by thePartnership for such units, Harold Brown has agreed to indemnify thePartnership for the difference.  Thetotal purchase price for the five units was $2,421,286 including closing costs.This acquisition was funded from cash reserves.  In August 2003, the Partnership obtained a $1,600,000mortgage loan for three years, with interest only payments at 5.25% and noprepayment penalties, secured by these five condominium units.

 

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 $3,650,000with payments of $25,271 per month, including interest at 7.08%, and a finalpayment 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.

 

25

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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 contributedless than 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, andDecember 31, 2002 and totaled $25.60 ($2.56 per depositary receipt) for2002.

 

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 ($0.30 per depositary receipt) for a total distribution of $9.60per unit ($0.96 per depositary receipt) payable on March 31, 2003.   The Partnership paid a quarterlydistribution of $6.60 per unit ($0.66 per depositary receipt) on June 30,and September 30, 2003.

 

During the nine months endedSeptember 30, 2003, the Partnership and its Subsidiary Partnershipscompleted certain improvements to their properties at a total cost ofapproximately $1,918,000. The most significant approximate improvements weremade at the following properties: $356,000 at 62 Boylston Street in Boston,Massachusetts; $149,000 at 1144 Commonwealth Avenue in Allston, Massachusetts;$247,000 at 9 School Street in Framingham, Massachusetts; $94,000 at AvonStreet Apartments in Malden, Massachusetts; $138,000 at Hamilton OaksApartments in Brockton, Massachusetts; and $165,000 at Westgate WoburnApartments in Woburn, Massachusetts. All such improvements were funded from the Partnership’s cash reservesand escrow accounts established in connection with the refinancing ofapplicable properties.

 

In addition to the improvementsmade to date in 2003, the Partnership and its Subsidiary Partnerships plan toinvest an additional $600,000 in capital improvements during 2003, the majorityof which will be spent at 62 Boylston Street, Hamilton Oaks, 1144 CommonwealthAvenue, Redwood Hills, Westside Colonial and Hamilton Oaks.  These improvements will be funded fromescrow accounts established in connection with the refinancing of applicableproperties, as well as from the Partnership’s cash reserves.

 

The Partnership has plans toconstruct 20 additional residential units at a cost of approximately $4,000,000at the Westgate Apartments in Woburn, Massachusetts available for occupancy inthe fall of 2004.  The pre-constructioncosts incurred to date of approximately $856,000 have been capitalized. Thisconstruction will initially be funded from cash reserves.

 

The Partnership anticipatesthat cash from operations and interest-bearing investments will be sufficientto fund its current operations and to finance current improvements to itsproperties. The Partnership’s net income and cash flow may fluctuatedramatically from year to year as a result of the sale of properties, increasesor decreases in rental income or expenses, or the loss of significant tenants.

 

26

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Factors That May AffectFuture Results

 

Certain information containedherein includes forward-looking statements, which are made pursuant to the safeharbor provisions of the Private Securities Liquidation Reform Act of 1995 (the“Act”).  While forward lookingstatements reflect management’s good faith beliefs when those statements aremade, caution should be exercised in interpreting and relying on such forwardlooking statements, the realization of which may be impacted by known and unknownrisks 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 detailed fromtime 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:

 

•                  The Partnershipdepends on the real estate markets where its properties are located and thesemarkets may be adversely affected by local economic market conditions, whichare beyond the Partnership’s control.

 

•                  The Partnershipis subject to the general economic risks affecting the real estate industry,such as dependence on tenant’s financial condition and the need to enter intonew leases or renew leases on terms favorable to tenants in order to generaterental revenues.  The Partnership isalso impacted by changing economic conditions making alternative housingarrangements more or less attractive to the Partnership’s tenants, such as theinterest rates on single family home mortgages and the availability andpurchase price of single-family homes in the greater Boston metropolitan area.

 

•                  The Partnershipis subject to increases in heating and utility costs that may arise as a resultof economic and market conditions.

 

•                  The Partnershipmay fail to identify, acquire, construct, or develop additional properties; maydevelop properties that do not produce a desired yield on invested capital; maybe unable to sell poorly-performing or otherwise undesirable propertiesquickly; or may fail to effectively integrate acquisitions of properties orportfolios of properties.

 

•                  Financing orrefinancing 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 thePartnership.  These include insurancecoverage for acts of

 

27

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terrorism andwar, and coverage for mold and other environmental conditions.  Coverage for these items is either unavailableor prohibitively expensive.

 

•                  Given the natureof 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, neighbors of the subject property or others, and thepresence of hazardous materials in the Partnership’s buildings, such asasbestos, mold and radon gas.  Management is not aware of any material environmental liabilities atthis time.

 

•                  Market interestrates could adversely affect the market prices for Class A Partnership Unitsand depositary receipts as well as performance and cash flow.

 

The foregoing factors shouldnot be construed as exhaustive or as an admission regarding the adequacy ofdisclosures made by the Partnership prior to the date hereof or theeffectiveness of said Act.  ThePartnership expressly disclaims any obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

 

The residential real estatemarket in the Greater Boston area has softened and the Partnership anticipatesthe 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.

 

Item 3 –QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

As of September 30, 2003,the Partnership and its Subsidiary Partnerships collectively have approximately$116,081,000 in long-term debt, all of which pays interest at fixed rates.Accordingly, the fair value of these debt instruments is affected by changes inmarket interest rates.  For informationregarding the fair value and maturity dates of these debt obligations, seeNotes 5, and 12 to the Consolidated Financial Statements.

 

For additional disclosures aboutmarket risk, see “Item 2 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Factors that May Affect FutureResults.”

 

28

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Item 4—CONTROLS AND PROCEDURES

 

Our principal executive officerand principal financial officer have within 90 days of the filing date of thisquarterly report, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-14( c) and 15d-14( c) under the Securities andExchange Act of 1934, as amended) and have determined that such disclosurecontrols and procedures are adequate. There have been no significant changes in internal controls or in otherfactors that could significantly affect our internal controls since the date ofevaluation.  We do not believe anysignificant deficiencies or material weaknesses exist in our internalcontrols.  Accordingly, no correctiveactions have been taken.

 

29

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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)     |   | See the  exhibit index below.                                                                           |
|    |   |                                                                                                    |
| (b)     |   | No Form 8-Ks  were filed on behalf of the registrant during the three months ended  September 30, 2003. |
|    |   |                                                                                                    |
|         |        |                                                                                                         |  |  |

 

30

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SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date:       November 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 |
|--------|---|-----------------------------------------------------------------------------------------------------------------------|

 

31

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**EXHIBIT INDEX**

 
| **Exhibit  No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                         |
| (31.1)           |   | Certification  of Ronald Brown, Principal Executive Officer of the Company (President and a  Director of NewReal, Inc., sole General Partner of the Partnership)  pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of  1934, as amended.                        |
| (31.2)           |   | Certification  of Harold Brown, Principal Financial Officer of the Company (Treasurer and a  Director of NewReal, Inc., sole General Partner of the Partnership)  pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of  1934, as amended.                        |
|             |   |                                                                                                                                                                                                                                                                                         |
| (32.1)           |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, of Ronald Brown,  Principal Executive Officer of the Company (President and a Director of  NewReal, Inc., sole General Partner of the Partnership). |
|             |   |                                                                                                                                                                                                                                                                                         |
| (32.3)           |   | 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). |

 

32

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