** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

----

 

**FORM 10-Q**

 

 

**(Mark One)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterly periodended September 30, 2004**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transitionperiod  from                           to                          **

 

**Commission file number 0-12138**

 

**NewEngland Realty Associates Limited Partnership**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Massachusetts**                                                                   | ** ** | **04-2619298**                        |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or  Organization)                    |       | (I.R.S. Employer  Identification No.) |
|                                                                                |       |                                  |
| **39  Brighton Avenue, Allston, Massachusetts**                                     | ** ** | **02134**                             |
| (Address of Principal  Executive Offices)                                           |       | (Zip Code)                            |
|                                                                                |       |                                  |
| Registrant’s Telephone  Number, Including Area Code **(617) 783-0039**         |
|                                                                                |       |                                  |
| **Not  Applicable**                                                                 |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |

 

Indicate by check 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

 

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

 

 

----

 

INDEX

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

 

2

----

 

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

# **PART I – FINANCIALINFORMATION**

 

# **Item I. Financial Statements**

 

Theaccompanying unaudited consolidated balance sheets, statements of income,changes in partners’ capital, and cash flows and related notes thereto, havebeen prepared in accordance with generally accepted accounting principles inthe United States of America (“GAAP”) for interim financial information and inconjunction with the rules and regulations of the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all of the disclosuresrequired by GAAP for complete financial statements. The financial statementsreflect all adjustments consisting only of normal, recurring adjustments, whichare in the opinion of management, necessary for a fair presentation for theinterim periods.

 

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

 

The results of operationsfor the nine month periods ended September 30, 2004 are not necessarilyindicative of the results to be expected for the entire fiscal year or anyother period.

 

**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                         | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| ** **                                                         | ** ** | **(Unaudited)**         | ** **  | ** **             | ** ** |
| **Assets**                                                         | ** ** | ** **              | ** **  | ** **             | ** ** |
| Rental  Properties                                                 | ** ** | $                       | 106,692,314 |                   | $          | 104,192,876 | ** ** |
| Cash and Cash  Equivalents                                         |       | 6,679,544               |        | 24,362,328             |       |
| Rents Receivable                                                   |       | 594,270                 |        | 550,772                |       |
| Real Estate Tax  Escrows                                           |       | 718,355                 |        | 667,949                |       |
| Prepaid Expenses  and Other Assets                                 |       | 2,594,535               |        | 2,649,617              |       |
| Investment in  Partnerships                                        |       | 14,147,375              |        | 1,315,383              |       |
| Financing and  Leasing Fees                                        |       | 646,566                 |        | 725,371                |       |
|                                                               |       |                    |        |                   |       |
| **Total  Assets**                                                  | ** ** | $                       | 132,072,959 |                   | $          | 134,464,296 | ** ** |
|                                                               |       |                    |        |                   |       |
| **Liabilities  and Partners’ Capital**                        |       |                    |        |                   |       |
| Mortgage Notes  Payable                                            | ** ** | $                       | 115,375,571 |                   | $          | 115,911,209 | ** ** |
| Accounts Payable  and Accrued Expenses                             |       | 1,605,881               |        | 1,620,023              |       |
| Advance Rental  Payments and Security Deposits                     |       | 3,394,989               |        | 3,371,087              |       |
|                                                               |       |                    |        |                   |       |
| **Total  Liabilities**                                             |       | 120,376,441             |        | 120,902,319            |       |
|                                                               |       |                    |        |                   |       |
| Commitments and  Contingent Liabilities (Notes 2, 9, 14 and 15)    |       |                    |        |                   |       |
|                                                               |       |                    |        |                   |       |
| Partners’  Capital 173,252 units outstanding in 2004 and 2003 |       | 11,696,518              |        | 13,561,977             |       |
|                                                               |       |                    |        |                   |       |
| **Total  Liabilities and Partners’ Capital**                  | ** ** | $                       | 132,072,959 |                   | $          | 134,464,296 | ** ** |
|                                                                    |            |                         |             |                        |            |  |  |  |  |

 

See notes to consolidated financial statements.

 

3

----

 

**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

##### **(UNAUDITED)**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                       | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental income                                 | ** ** | $                                     | 7,640,354  |                                 | $          | 7,802,000 |   | $ | 23,094,191 |   | $ | 23,036,610 |   |
| Laundry and  sundry income                    |       | 94,201                                |       | 74,404                               |       | 255,125 |   | 225,470 |   |
|                                          |       | 7,734,555                             |       | 7,876,404                            |       | 23,349,316 |   | 23,262,080 |   |
| Expense                                       |       |                                  |       |                                 |       |   |   |   |   |
| Administrative                                |       | 329,645                               |       | 354,565                              |       | 982,726 |   | 1,075,120 |   |
| Depreciation and  amortization                |       | 1,559,811                             |       | 1,509,915                            |       | 4,481,480 |   | 3,884,258 |   |
| Interest                                      |       | 1,993,616                             |       | 1,979,737                            |       | 5,970,652 |   | 5,478,199 |   |
| Management fees                               |       | 314,599                               |       | 313,296                              |       | 952,539 |   | 933,655 |   |
| Operating                                     |       | 675,262                               |       | 611,553                              |       | 2,467,742 |   | 2,230,580 |   |
| Renting                                       |       | 272,528                               |       | 264,570                              |       | 512,692 |   | 469,892 |   |
| Repairs and  maintenance                      |       | 1,454,709                             |       | 1,351,568                            |       | 3,727,362 |   | 3,210,507 |   |
| Taxes and  insurance                          |       | 815,808                               |       | 830,970                              |       | 2,578,191 |   | 2,485,090 |   |
|                                          |       | 7,415,978                             |       | 7,216,174                            |       | 21,673,384 |   | 19,767,301 |   |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income Before  Other Income                   |       | 318,577                               |       | 660,230                              |       | 1,675,932 |   | 3,494,779 |   |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Other Income  (Loss)                          |       |                                  |       |                                 |       |   |   |   |   |
| Interest income                               |       | 52,140                                |       | 39,470                               |       | 186,863 |   | 138,498 |   |
| (Loss) from  investment in partnerships       |       | (160,706                              | )          | (47,328                              | )          | (233,758 | ) | (93,366 | ) |
| (Loss) on the write off of property assets    |       | 0                                     |       | (60,000                              | )          | 0 |   | (60,000 | ) |
| (Loss) on early extinguishments of debt       |       | 0                                     |       | (1,436,238                           | )          | 0 |   | (1,436,238 | ) |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
|                                          |       | (108,566                              | )          | (1,504,096                           | )          | (46,895 | ) | (1,451,106 | ) |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Net Income  (Loss)                            | ** ** | $                                     | 210,011    |                                 | $          | (843,866 | ) | $ | 1,629,037 |   | $ | 2,043,673 |   |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Net Income  (Loss) per Unit                   | ** ** | $                                     | 1.21       |                                 | $          | (4.87 | ) | $ | 9.40 |   | $ | 11.80 |   |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Weighted Average  Number of Units Outstanding |       | 173,252                               |       | 173,252                              |       | 173,252 |   | 173,252 |   |
|                                               |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

4

----

 

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

**CONSOLIDATED STATEMENT OF CHANGESIN PARTNERS’ CAPITAL**

 

**(UNAUDITED**)

 
| ** **                                                                      | ** ** | **Limited** | ** ** | **General** | ** ** | ** **      | ** ** |
|---------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                                      | ** ** | **Class A** | ** ** | **Class B** | ** ** | **Partnership** | ** ** | **Total** | ** ** |
| 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,  September 30, 2003                                                    |       | $           | 11,179,579 |        | $          | 2,658,603       |       | $ | 139,956 |   | $ | 13,978,138 |   |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at September 30, 2003 |       | 138,602     |       | 32,918      |       | 1,732           |       | 173,252 |   |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Balance, January  1, 2004                                                       |       | $           | 10,846,650 |        | $          | 2,579,532       |       | $ | 135,795 |   | $ | 13,561,977 |   |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Distribution to  Partners                                                       |       | (2,795,597  | )          | (663,954    | )          | (34,945         | )          | (3,494,496 | ) |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Net Income                                                                      |       | 1,303,230   |       | 309,517     |       | 16,290          |       | 1,629,037 |   |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Balance,  September 30, 2004                                                    |       | $           | 9,354,283  |        | $          | 2,225,095       |       | $ | 117,140 |   | $ | 11,696,518 |   |
|                                                                            |       |        |       |        |       |            |       |   |   |
| Units authorized  and Issued, net of 6,973 Treasury Units at September 30, 2004 |       | 138,602     |       | 32,918      |       | 1,732           |       | 173,252 |   |
|                                                                                 |            |             |            |             |            |                 |            |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements

 

5

----

 

**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

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

**(UNAUDITED)**

 
| ** **                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Cash Flows from  Operating Activities                                                |       |                                 |       |   |   |
| Net income                                                                           | ** ** | $                                    | 1,629,037  |   | $ | 2,043,673 | ** ** |
|                                                                                 |       |                                 |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities    |       |                                 |       |   |   |
| Depreciation and  amortization                                                       |       | 4,481,480                            |       | 3,884,258 |   |
| Loss from  investment in partnership                                                 |       | 233,758                              |       | 93,365 |   |
| Loss on the  write off of rental property                                            |       | —                               |       | 60,000 |   |
| Loss from early  extinguishments of debt                                             |       | —                               |       | 1,436,238 |   |
| Change in  operating assets and liabilities                                          |       |                                 |       |   |   |
| (Increase) in  rents receivable                                                      |       | (43,498                              | )          | (71,341 | ) |
| (Increase) in  financing fees                                                        |       | —                               |       | (141,025 | ) |
| (Decrease) in  accounts payable                                                      |       | (14,142                              | )          | (159,514 | ) |
| (Increase) in  real estate tax escrow                                                |       | (50,406                              | )          | (165,037 | ) |
| (Increase)decrease  in prepaid expenses and other assets                             |       | 13,148                               |       | (273,667 | ) |
| Increase in  advance rental payments and security deposits                           |       | 23,902                               |       | 75,203 |   |
|                                                                                 |       |                                 |       |   |   |
| Total  Adjustments                                                                   |       | 4,644,241                            |       | 4,738,480 |   |
|                                                                                 |       |                                 |       |   |   |
| Net cash  provided by operating activities                                           |       | 6,273,278                            |       | 6,782,153 |   |
|                                                                                 |       |                                 |       |   |   |
| Cash Flows from  Investing Activities                                                |       |                                 |       |   |   |
| Distribution from  partnership                                                       |       | —                               |       | (5,000 | ) |
| Purchase and  improvement of rental properties                                       |       | (6,860,178                           | )          | (11,257,777 | ) |
| Investment in  Partnerships                                                          |       | (13,065,750                          | )          | — |   |
|                                                                                 |       |                                 |       |   |   |
| Net cash (used  in) investing activities                                             |       | (19,925,928                          | )          | (11,262,777 | ) |
|                                                                                 |       |                                 |       |   |   |
| Cash Flows from  Financing Activities                                                |       |                                 |       |   |   |
| Proceeds of  mortgage notes payable                                                  |       | —                               |       | 16,824,376 |   |
| Payments of  mortgage notes payable                                                  |       | (535,638                             | )          | (614,768 | ) |
| Payment of  prepayment penalties in connection with the early extinguishment of debt |       | —                               |       | (1,436,238 | ) |
| Distributions to  partners                                                           |       | (3,494,496                           | )          | (3,943,761 | ) |
|                                                                                 |       |                                 |       |   |   |
| Net cash  provided by (used in) financing activities                                 |       | (4,030,134                           | )          | 10,829,609 |   |
|                                                                                 |       |                                 |       |   |   |
| Net Increase in  Cash and Cash Equivalents                                           |       | (17,682,784                          | )          | 6,348,985 |   |
| Cash and Cash  Equivalents, at beginning of year                                     |       | 24,362,328                           |       | 18,974,446 |   |
|                                                                                 |       |                                 |       |   |   |
| Cash and Cash  Equivalents, at end of period                                         | ** ** | $                                    | 6,679,544  |   | $ | 25,323,431 | ** ** |

 

See notes to consolidated financial statements.

 

6

----

 

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2004**

 

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES

 

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

 

*Principlesof Consolidation:*  The consolidated financial statementsinclude the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100%ownership interest in each subsidiary except for three limited liabilitycompanies in which the Partnership has a 50% ownership interest. Theconsolidated group is referred to as the “Partnerships.” Minority interests arenot recorded, since they are insignificant. All significant intercompanyaccounts and transactions are eliminated in consolidation. The Partnershipaccounts for its investment in the above-mentioned three limited liabilitycompanies using the equity method.

 

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

 

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

 

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

In the event that facts and circumstances indicatethat the carrying value of a rental property may be impaired, an analysis ofrecoverability is prepared. The estimated future undiscounted cash flows arecompared to the asset’s carrying value to determine if a write-down to fairvalue is required.

 

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

 

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

 

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

 

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

 

7

----

 

*ComprehensiveIncome:*  Comprehensive income is defined as changes inpartners’ equity, exclusive of transactions with owners (such as capitalcontributions and dividends). NERA did not have any comprehensive income items in2004 or 2003 other than net income as reported.

 

*IncomePer Unit:*  Net income per unit has been calculated basedon the weighted average number of units outstanding during each year presented.The Partnership has no dilutive units and, therefore, basic net income is thesame as diluted net income per unit (see Note 7).

 

*Concentrationof Credit Risks and Financial Instruments:*  ThePartnerships’ properties are located in New England, and the Partnerships aresubject to the general economic risks related thereto.  No single tenantaccounted for more than 5% of the Partnerships’ revenues in 2004 or 2003. The Partnerships make their temporary cash investments with high-credit-qualityfinancial institutions.  At September 30, 2004, substantially all of thePartnerships’ cash and cash equivalents were held in interest-bearing accountsat financial institutions, earning interest at rates from .59% to 1.97%. At September 30, 2004 and December 31, 2003, approximately $7,000,000 and$24,000,000 of cash and cash equivalents exceeded federally insured amounts.

 

*Advertising Expense:* Advertising is expensed as incurred. Advertising expense was $162,288 and$136,702 for the nine months ended September 30, 2004 and 2003, respectively.

 

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

 

NOTE 2—RENTAL PROPERTIES

 

**As of September 30, 2004, thePartnership and its Subsidiary Partnerships owned 2,396 residential apartmentunits in residential and mixed-use complexes (collectively, the “ApartmentComplexes”).  The Partnership also owns 24 condominium units in tworesidential condominium complexes, all of which are leased to residentialtenants (collectively referred to as the “Condominium Units”).  TheApartment Complexes and Condominium Units are located primarily in the greatermetropolitan Boston, Massachusetts area.**

 

**Additionally, as of September 30,2004, the Subsidiary Partnerships owned commercial shopping centers inFramingham, Massachusetts and mixed-use properties in Boston, Brockton andNewton, Massachusetts.  These properties are referred to collectively asthe “Commercial Properties.”**

 

**Additionally on September 30, 2004,the Partnership owned a 50% ownership interest in three residential complexeswith a total of 362 units.  See Note 14for summary information on these investments.**

 

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

 

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

 

8

----

 

Rental properties consist of the following:

 
| ** **                            | ** ** | **SEPTEMBER  30,  2004** | ** **  | **DECEMBER  31,  2003** | ** ** | **USEFUL  LIFE** | ** ** |
|---------------------------------------|------------|--------------------------|-------------|-------------------------|------------|------------------|------------|
| Land, improvements, and  parking lots |       | $                        | 23,058,989  |                    | $          | 22,992,176       |       | 10-31 years |   |
| Buildings and  improvements           |       | 104,602,201              |        | 101,538,576             |       | 15-31 years      |       |
| Kitchen cabinets                      |       | 3,544,205                |        | 2,403,447               |       | 5-10 years       |       |
| Carpets                               |       | 2,964,745                |        | 2,292,225               |       | 5-10 years       |       |
| Air conditioning                      |       | 725,535                  |        | 691,408                 |       | 7-10 years       |       |
| Laundry  equipment                    |       | 176,413                  |        | 79,580                  |       | 5-7 years        |       |
| Elevators                             |       | 474,964                  |        | 328,097                 |       | 20 years         |       |
| Swimming pools                        |       | 143,353                  |        | 98,105                  |       | 10 years         |       |
| Equipment                             |       | 1,594,917                |        | 1,348,725               |       | 5-7 years        |       |
| Motor vehicles                        |       | 126,236                  |        | 126,236                 |       | 5 years          |       |
| Fences                                |       | 249,842                  |        | 127,276                 |       | 5-10 years       |       |
| Furniture and  fixtures               |       | 3,898,784                |        | 3,566,543               |       | 5-7 years        |       |
| Smoke alarms                          |       | 103,648                  |        | 88,157                  |       | 5-7 years        |       |
| Construction in  progress             |       | 2,432,857                |        | 1,555,960               |       | —           |       |
|                                  |       | 144,096,689              |        | 137,236,511             |       |             |       |
| Less accumulated  depreciation        |       | 37,404,375               |        | 33,043,635              |       |             |       |
|                                  |       | $                        | 106,692,314 |                    | $          | 104,192,876      |       |   |   |

 

**During the quarter ended September30, 2004, the Partnership completed the construction of ten residential unitsat the Westgate Apartments in Woburn, Massachusetts. The total cost of these tenunits was approximately $2,400,000 and is included in buildings andimprovements above. An additional ten units were completed in October 2004 fora total additional cost of approximately $2,400,000 and are included inconstruction in progress at September 30, 2004.**

 

NOTE 3—RELATED PARTY TRANSACTIONS

 

The Partnerships’properties are managed by an entity that is owned by the majority shareholderof the General Partner. The management fee is equal to 4% of rental revenue andlaundry income. Total fees paid were approximately $953,000 and $934,000 forthe nine months ended September 30, 2004 and 2003, respectively.

 

The Partnership Agreement permits the General Partner or managementcompany to charge the costs of professional services (such as counsel,accountants and contractors) to NERA. During the nine months ended September 30, 2004 and 2003, approximately$3,980,000 and $471,000 was charged to NERA for legal, construction,maintenance,  rental and architecturalservices and supervision of capital improvements. Of the 2004 expenses referredto above, approximately $160,000 consisted of repairs and maintenance and $128,000of administrative expense; approximately $3,674,000 of construction,architectural services and supervision of capital projects was capitalized inrental properties and $18,000 for rental commissions.  Of the 2003 expenses referred to above,approximately $207,000 consisted of repairs and maintenance and $168,000 ofadministrative expense; approximately $96,000 of construction, architecturalservices and supervision of capital projects was capitalized in rentalproperties. Additionally in each of the nine months ended September 30, 2004and 2003 the Partnership paid to the management company $60,000, for in-houseaccounting services, which were previously provided by an outside company.Included in accounts payable and accrued expenses at September 30, 2004 andDecember 31, 2003 is $263,216 and $455,299 due to the management company.  The Partnership Agreement entitles theGeneral Partner or the management company to receive certain commissions uponthe sale of Partnership property only to the extent that total commissions donot exceed 3%.

 

9

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

 

On January 1, 2004, NERA’S employees were transferred to the managementcompany’s payroll.  The Partnershipreimburses the management company for the payroll and related expenses of theemployees working directly on NERA properties. Total reimbursement was approximately $1,230,000 for the nine monthsended September 30, 2004.

 

In 1996, prior tobecoming an employee and President of the management company, the currentPresident performed asset management consulting services to the Partnership.This individual continues to perform this service and to receive an asset managementfee from the Partnership, receiving $37,500 for the nine months ended September30, 2004 and $50,000 for the year ended December 31, 2003.

 

The Partnership has invested in three limited liability companies topurchase three residential apartment complexes. The Partnership owns 50% of each entity and the Treasurer of the GeneralPartner owns 471⁄2% and the President of Hamilton owns 21⁄2% respectively.  See Note 14 for a description of theproperties and their operations.

 

On June 30, 2003,the Partnership purchased five condominium units in a 42-unit building locatedin Brookline, Massachusetts.  These were purchased from Harvard 45Associates LLC (“Harvard 45”) which is owned 70% by the 75% shareholder andtreasurer of the General Partner, and 5% by the President of Hamilton. The total purchase price for these condominiums was approximately $2,416,000and was approved both by the Partnership’s Advisory Committee and the AuditCommittee of the General Partner.  Harvard 45 realized a gain of approximately$648,000 from these sales.  Harvard 45 also sold 16 units to unrelatedparties; the prices for all of the 21 units sold are comparable.  See Note5 for a description of the guarantee given on a $1,600,000 mortgage on thesefive units.

 

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

 

NOTE 4—OTHER ASSETS

 

**Included in prepaid expenses andother assets at September 30, 2004 and December 31, 2003 is approximately$499,000 and $653,000, respectively, held in escrow to fund future capitalimprovements.**

 

**Financing and leasing fees of$646,566 and $725,371 are net of accumulated amortization of $364,909 and$286,104 at September 30, 2004 and December 31, 2003, respectively.**

** **

NOTE 5—MORTGAGES NOTES PAYABLE

 

**At September 30, 2004 andDecember 31, 2003, the mortgages payable consisted of various loans, allof which were secured by first mortgages on properties referred to in Note2.  At September 30, 2004, the fixed interest rates on these loans rangedfrom 4.84% to 8.46%, payable in monthly installments aggregating approximately$732,000, including interest, to various dates through 2016.  The majorityof the mortgages are subject to prepayment penalties.  At December 31,2003, the weighted average effective interest rate on the above mortgages was6.86%.  The effective rate includes theamortization expense of deferred financing costs.  The weighted average of the fixed debtinterest rate was 6.78%.  See Note 12 forfair value information.**

 

10

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

 
| 2005- current  maturities |   | $          | 763,000     |   |
|---------------------------|--------|------------|-------------|--------|
| 2006                      |   | 2,490,000  |        |
| 2007                      |   | 2,853,000  |        |
| 2008                      |   | 4,413,000  |        |
| 2009                      |   | 5,631,000  |        |
| Thereafter                |   | 99,225,000 |        |
|                      |   | $          | 115,375,000 |   |
|                           |        |            |             |        |  |

 

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

 

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

** **

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

** **

NOTE 6—ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

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

 

NOTE 7—PARTNERS’ CAPITAL

 

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

** **

**11**

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

** **

**The Partnership paid a quarterlydistribution $6.60 per unit ($.66 per receipt) on March 31, 2004, and June 30,2004.  On September 30, 2004, thePartnership paid a quarterly distribution of $7.00 ($0.70 per receipt).**

** **

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

 
| ** **                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                               |       |                                |       |   |   |
| Net income per  depositary receipt |       | $                                   | .94        |   | $ | 1.18 |   |
|                                    |            |                                     |            |  |  |  |  |

 

NOTE 8—TREASURY UNITS

 

Treasury units at September 30, 2004 are as follows:

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

 

NOTE 9—COMMITMENTS AND CONTINGENCIES

 

**From time to time, the Partnershipsare involved in various ordinary routine litigation incidental to theirbusiness. The Partnership either has insurance coverage or has provided for anyuninsured claims, which, in the aggregate, are not significant. ThePartnerships are not involved in any material pending legal proceedings.**

** **

NOTE 10—RENTAL INCOME

 

**During the nine months endedSeptember 30, 2004, approximately 93% of rental income was related toresidential apartments and condominium units with leases of one year orless.  The remaining 7% was related to commercial properties, which haveminimum future rental income on non-cancelable operating leases as follows:**

** **

**12**

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| ** ** | ** ** | **Commercial  Property Leases** | ** ** |
|------------|------------|---------------------------------|------------|
|       |       |                            |       |
| 2005       |       | $                               | 1,515,000  |   |
| 2006       |       | 1,307,000                       |       |
| 2007       |       | 1,335,000                       |       |
| 2008       |       | 1,284,000                       |       |
| 2009       |       | 1,170,000                       |       |
| Thereafter |       | 4,749,000                       |       |
|       |       |                            |       |
|       |       | $                               | 11,360,000 |   |
|            |            |                                 |            |  |  |

 

**The aggregate minimum future rentalincome does not include contingent rentals that may be received under variousleases in connection with percentage rents, common area charges and real estatetaxes.  Aggregate contingent rentals wereapproximately $275,000 for the nine months ended September 30, 2004 and$382,000 for the year ended December 31, 2003, respectively.**

 

Rents receivable are netof allowances for doubtful accounts of $466,096 and $221,942 at September 30,2004 and December 31, 2003, respectively. Included in rents receivable is approximately $386,000 resulting fromrecognizing rental income from non-cancelable commercial leases with futurerental increases on a straight-line basis.  The majority of this amount isfor a long-term lease with Staples at Staples Plaza in Framingham,Massachusetts.

 

NOTE 11—CASH FLOW INFORMATION

 

During the nine monthsended September 30, 2004 and 2003, cash paid for interest was approximately$5,940,982 and $5,413,959 respectively.

 

NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

•                  Cash and cashequivalents, other assets, investment in partnerships, accounts payable, andadvance rents and security deposits: fair value approximates the carrying value of such assets 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,  2004  |       | $                    | 115,375,571 |                      | $          | 123,147,006 |   |
| At December 31,  2003   |       | 115,911,209          |        | 121,997,197               |       |
|                         |            |                      |             |                           |            |  |  |

 

13

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

** **

NOTE 13—TAXABLE INCOME AND TAX BASIS

 

**Taxable income reportable by thePartnership and includable in its partner’s tax returns is different thanfinancial statement income because of accelerated depreciation, different taxlives, and timing differences related to prepaid rents and allowances. Taxable income is approximately $900,000 less than statement income for thenine months  ended September 30, 2004 andapproximately $700,000 less than statement income for the year ended December31, 2003.  The cumulative tax basis ofthe Partnership’s real estate at September 30, 2004 is approximately $400,000greater than the statement basis.**

** **

**14**

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NOTE 14—INVESTMENT IN PARTNERSHIPS

 

In August 2004, the Partnership invested approximately$13,000,000 in two joint ventures for which the Partnership has a 50% ownershipinterest.  The first joint venturepurchased a 280 unit apartment complex in Watertown, Massachusetts for$56,000,000.  Each investor investedapproximately $8,000,000, and a mortgage of approximately $43,000,000 wasobtained to finance the acquisition and improvements to the property.  This investment is referred to as HamiltonPlace.

 

The second joint venture purchased a 42 unit apartmentcomplex in Lexington, Massachusetts for $10,100,000. The Partnership invested$5,050,000 in this joint venture.  InOctober 2004, the Partnership refinanced the investment and obtained a mortgageon the property.  This investment isreferred to as Hamilton Minuteman.

 

In November 2001, the Partnership formed a limitedliability company to purchase a 40 unit apartment building in Cambridge,Massachusetts. The Partnership is a 50% owner in this investment and isreferred to as Franklin Street.

 
| ** **                       | ** ** | **Franklin  Street** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Minuteman** | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------|------------|---------------------|------------|-------------------------|------------|------------|------------|
| **Acquisition  date**            | ** ** | **November 2001**    | ** ** | **August 2004**     | ** ** | **September 2004**      | ** ** | **Total**  | ** ** |
| ** **                       | ** ** | ** **           | ** ** | ** **          | ** ** | ** **              | ** ** | ** ** | ** ** |
| Property assets –  net      |       | $                    | 10,329,093 |                | $          | 55,832,256              |       | $          | 10,160,313 |   | $ | 76,321,662 |   |
| Mortgages  payable               |       | 7,950,704            |       | 40,211,506          |       | 0                       | *     | 48,162,210 |       |
| Partnership  equity              |       | 2,387,590            |       | 15,797,932          |       | 10,109,228              | *     | 28,294,750 |       |
| NERA - 50%  ownership            |       | 1,193,795            |       | 7,898,966           |       | 5,054,614               | *     | 14,147,375 |       |
|                             |       |                 |       |                |       |                    |       |       |       |
| Summary income  statement        |       |                 |       |                |       |                    |       |       |       |
| Rental income                    |       | $                    | 707,594    |                | $          | 443,756                 |       | $          | 41,717     |   | $ | 1,193,067 |   |
| Operating  expenses              |       | 227,994              |       | 176,381             |       | 9,974                   |       | 414,349    |       |
| Management fees                  |       | 29,535               |       | 17,659              |       | 1,611                   |       | 48,805     |       |
| Interest expense                 |       | 416,045              |       | 159,464             |       | —                  |       | 575,509    |       |
| Miscellaneous  expense           |       | 5,549                |       | —              |       | —                  |       | 5,549      |       |
| Depreciation  & amortization |       | 271,645              |       | 323,819             |       | 20,906                  |       | 616,370    |       |
|                             |       |                 |       |                |       |                    |       |       |       |
| Net profit  (loss)               |       | (243,174             | )          | (233,567            | )          | 9,226                   |       | (467,515   | )          |
| NERA - 50%  ownership            |       | $                    | (121,587   | )                   | $          | (116,784                | )          | $          | 4,613      |   | $ | (233,758 | ) |
|                             |       |                 |       |                |       |                    |       |       |       |
| Total rental  units              |       | 40                   |       | 280                 |       | 42                      |       |       |       |
| Vacancies -  November 8, 2004    |       | 0                    |       | 17                  |       | 5                       |       |       |       |
|                                  |            |                      |            |                     |            |                         |            |            |            |  |  |  |  |  |  |

 

Hamilton Place is planning to sell, over time, threebuildings with a total of 136 units as condominiums commencing in January2005.  Hamilton Minuteman may also, fromtime to time, sell units.   Minuteman isnot being marketed at this time.  Themajority of the proceeds from these sales will be used to reduce theirmortgages.  Commencing in 2005, thesemortgages require minimum principal payments (“Curtailment Payments”) andadditional investment by the Partnership will be required if the proceeds fromsales cannot provide for these payments. An entity partially owned by themajority shareholder of the General Partner and the President of the managementcompany, 31% and 5% respectively, is the sales agent and will receive a variablecommission on each sale of between 3% and 5%.

 

15

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As required by the lender for the 2004 acquisitions,the Treasurer of the General Partner has provided a limited repayment guaranteeequal to twenty percent (20%) of the outstanding balance, reducing to zeropercent (0%) upon the completion of the Curtailment Payments.  In the event that he is obligated to makepayments to the lender as a result of this guaranty, the Partnership in turnhas agreed to indemnify him for one-half of any such payments.

 

*On October 21, 2004, Hamilton Minuteman obtained amortgage of $8,025,000 and $3,775,000 was paid to the Partnership.

 

NOTE 15—NEW ACCOUNTING PRONOUNCEMENTS

 

**The Partnership adopted theFinancial Accounting Standards Board’s (FASB) Statement of Financial AccountingStandard 144 (“FAS 144”), “Accounting for the Impairment or Disposal ofLong-lived Assets,” on January 1, 2002. FAS 144 supersedesFAS 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of.” The primary objectives of FAS 144are to develop one accounting model, based on the framework established inFAS 121, for long-lived assets to be disposed of by sale, and to addresssignificant implementation issues regarding impairment of long-lived assetsheld for use. FAS 144 requires separate presentation of discontinuedoperations for an operating property sold or considered held for sale for yearsbeginning on January 1, 2002. In accordance with FAS 144, thePartnership classifies real estate assets as held for sale in the period inwhich all of the following criteria are met: (a) management, having theauthority to approve the action, commits to a plan to sell the asset;(b) the asset is available for immediate sale in its present condition,subject 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 tocomplete the plan to sell the asset have been initiated; (d) the sale of theasset is probable and the transfer of the asset is expected to qualify forrecognition as a completed sale within one year; (e) the asset is beingactively marketed for sale at a price that is reasonable in relation to itscurrent fair value; and (f) actions required to complete the plan indicatethat it is unlikely that significant changes to the plan will be made or thatthe plan will be withdrawn.**

** **

**The Partnership’s adoption ofFAS 144 resulted in: (i) the net operating results of properties soldduring 2002 being presented as income from discontinued operations for allperiods presented and (ii) the gain on the sale of operating propertiessold, net of sale costs, being presented as income from discontinued operationsfor the year 2002. Implementation of FAS 144 will impact how informationis classified on the income statement but will have no effect on net income(see Note 17).**

** **

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

** **

**In April 2003, the FASB issued SFASNo. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.” SFAS No. 149 amends and clarifies the accounting guidance on (1)derivative instruments (including certain derivative instruments embedded inother contracts) and (2) hedging activities that fall within the scope of SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFASNo. 149 also amends certain other existing pronouncements, which will result inmore consistent reporting of contracts that are derivatives in their entiretyor that contain embedded derivatives that warrant separate accounting. SFAS No.149 is**

** **

**16**

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** **

effective (1) for contracts entered into or modified after June 30,2003, with certain exceptions, and (2) for hedging relationships designatedafter June 30, 2003. The guidance is to be applied prospectively. ThePartnership does not expect the adoption of SFAS No. 149, if required, to havea material impact on the Partnership’s financial position or results ofoperations or cash flows.

** **

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

 

In January 2003, the FASB issued FIN No. 46, which provides guidance onhow to identify a variable interest entity (VIE) and determine when the assets,liabilities, noncontrolling interests, and results of operations of a VIE areto be included in an entity’s consolidated financial statements. A VIE existswhen either the total equity investment at risk is not sufficient to permit theentity to finance its activities by itself, or the equity investors lack one ofthree characteristics associated with owning a controlling financial interest.In December 2003, the FASB reissued FIN No. 46 with certain modifications andclarifications. Application of this guidance was effective for interests incertain VIEs commonly referred to as special-purpose entities (SPEs) as ofDecember 31, 2003. Application for all other types of entities is required forperiods ending after March 15, 2004, unless previously applied. The Partnershipdoes not believe that the application of FIN No. 46, if required, will have amaterial impact on its financial position, results of operations, or liquidity.

 

**NOTE 16—PARTNERSHIP TERMINATIONDATE**

** **

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

** **

**NOTE 17—SUBSEQUENT EVENTS**

** **

**As of November 11, 2004, thePartnership has committed to obtain two new mortgages. The first is for therefinancing of the Dean Street apartments in Norwood, Massachusetts for$5,650,000 at 5.25% interest only for two years. The existing mortgage to berepaid is approximately $3,600,000. It is anticipated that this transactionwill occur in December 2004. The second mortgage is for $2,000,000 at 5.25%,interest only, on the unencumbered 20 unit addition in Woburn, Massachusettswhich is anticipated to occur in January 2005.**

** **

**Additionally, in 2005, thePartnership is planning to sell the 18 apartment units of the MiddlesexApartments in Newton, Massachusetts.**

 

17

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Item 2 – MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL

CONDITION AND RESULTS OF OPERATION

 

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

 

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

 

Harold Brown, his brother Ronald Brown and the President of Hamilton,Carl Valeri, collectively own approximately 20% of the depositary receiptsrepresenting the Partnership Class A Units (including depositary receipts heldby trusts for the benefit of such persons’ family members).  Harold Brown also owns 75% of the Partnership’sClass B Units, 75% of the capital stock of NewReal, Inc. (“NewReal”), thePartnership’s sole general partner, and all of the outstanding stock ofHamilton.  Ronald Brown also owns 25% ofthe Partnership’s Class B Units and 25% of NewReal’s capital stock.  In addition, Ronald Brown is the Presidentand director of NewReal and Harold Brown is NewReal’s Treasurer and also adirector.  Three of NewReal’s otherdirectors, Thomas Raffoul, Conrad DiGregorio, and Edward Sarkesian, also ownimmaterial amounts of the Partnership’s Class A Units.

 

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

 

Hamilton accounted for approximately 4% and 6% of the repair andmaintenance expense paid for by the Partnership in the nine months endedSeptember 30, 2004 and the year ended December 31, 2003, respectively.  Of the funds paid to Hamilton for thispurpose, the great majority was to cover the cost of services provided by theHamilton maintenance department, including plumbing, electrical, and carpentryservices, snow removal and the use of equipment such as fork lifts.   However, several of the

 

18

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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 department handles most of the Partnership’s evictionand collection matters.  Additionally, itprepares most long-term commercial lease agreements and represents thePartnership in selected purchase and sale transactions.  Overall, Hamilton provided approximately 82%of the legal services paid for by the Partnership during the nine months endedSeptember 30, 2004 and approximately 66% for the year ended December 31, 2003.

 

The Partnership requires that three bids be obtained for constructioncontracts in excess of $5,000.  Hamiltonmay be one of the three bidders on a particular project and may be awarded thecontract if its bid and its ability to successfully complete the project aredeemed appropriate.  For contracts thatare not awarded to Hamilton, Hamilton charges the Partnership a construction supervisionfee equal to 5% of the contract amount. The architectural department at Hamilton also provides services to thePartnership on an as-needed basis.  In2004 and 2003, Hamilton provided the majority of the construction services andarchitectural services paid for by the Partnership including approximately$3,500,000 for the construction of 20 additional residential units at WestgateApartments in Woburn, Massachusetts.

 

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

 

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

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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

 

Revenue Recognition: Revenues from rental property are recognized whendue from tenants. Residential leases are generally for terms of one year orless, and commercial leases are generally for five to ten years, with renewaloptions at increased rents.  Significantcommercial leases with stepped increases over the term of the lease arerecorded on the straight-line basis.

 

19

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

 

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

 

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

 

If there is an event or change in circumstances that indicates animpairment in the value of a property, the Partnership’s policy is to assessthe impairment by making a comparison of the current and projected operatingcash flows of the property over its remaining useful life, on an undiscountedbasis, to the carrying amount of the property. If the carrying value is in excess of the estimated projected operatingcash flows of the property, we would recognize an impairment loss equivalent tothe amount required to adjust the carrying amount to its estimated fairvalue.  The Partnership has notrecognized an impairment loss since 1995.

 

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

 

Legal Contingencies

 

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

 

20

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## RESULTS OF OPERATIONS

##  

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

 

The Partnership and its Subsidiary Partnerships earned income beforeother income of $318,568 during the three months ended September 30, 2004compared to $660,230 for the three months ended September 30, 2003, a decreaseof $341,662 (52%).  As more fullydescribed in the schedules below, this decrease in operating income is due to bothdecreases in rental income and increases in operating expenses.  Due to the softening residential rentalmarket, rental income at many of the properties decreased in the three monthsended September 30, 2004 and expenses continued to increase.

 

The rental activity is summarized as follows:

 
| ** **         | ** ** | **Occupancy Date**     | ** ** |
|--------------------|------------|------------------------|------------|
| ** **         | ** ** | **November  8,  2004** | ** ** | **August  4,  2004** | ** ** | **May 3,  2004** | ** ** | **October  31,  2003** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential        |       |                   |       |   |   |   |   |   |   |
| Units              |       | 2,420                  |       | 2,400 |   | 2,400 |   | 2,400 |   |
| Vacancies          |       | 95                     |       | 99 |   | 72 |   | 95 |   |
| Vacancy rate       |       | 3.9                    | %          | 4.1 | % | 3.0 | % | 4.0 | % |
|               |       |                   |       |   |   |   |   |   |   |
| Commercial         |       |                   |       |   |   |   |   |   |   |
| Total square  feet |       | 85,275                 |       | 85,275 |   | 85,275 |   | 85,275 |   |
| Vacancy            |       | 850                    |       | 4,700 |   | 4,700 |   | 0 |   |
| Vacancy rate       |       | 1                      | %          | 5.5 | % | 5.5 | % | 0 | % |

 
| ** **              | ** ** | **Rental Income (in thousands)  Three Months Ended September** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **2004**                                                       | ** ** | **2003** | ** ** |
| ** **              | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Total rents             |       | $                                                              | 7,640      |   | $ | 7,802 |   |
| Residential  percentage |       | 93                                                             | %          | 93 | % |
| Commercial  percentage  |       | 7                                                              | %          | 7 | % |
| Contingent  rentals     |       | $                                                              | 90         |   | $ | 89 |   |

 

21

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***Three Months Ended September 30, 2004 Compared to Three Months EndedSeptember 30, 2003***

 
| ** **                                 | ** ** | **September 30,  2004** | ** ** | **2003**   | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| ** **                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** **         | ** ** | ** **          | ** ** |
| Revenues:                                  |       |                    |       |       |       |               |       |                |       |
| Rental income                              |       | $                       | 7,640,354  |       | $          | 7,802,000          |       | $                   | (161,646   | ) | -2.1 | % |
| Laundry and sundry income                  |       | 94,201                  |       | 74,404     |       | 19,797             |       | 26.6                | %          |
|                                       |       | 7,734,555               |       | 7,876,404  |       | (141,849           | )          | -1.8                | %          |
|                                       |       |                    |       |       |       |               |       |                |       |
| Expenses:                                  |       |                    |       |       |       |               |       |                |       |
| Administrative                             |       | 329,645                 |       | 354,565    |       | (24,920            | )          | -7.0                | %          |
| Depreciation and amortization              |       | 1,559,811               |       | 1,509,915  |       | 49,896             |       | 3.3                 | %          |
| Interest                                   |       | 1,993,616               |       | 1,979,737  |       | 13,879             |       | 0.7                 | %          |
| Management fees                            |       | 314,599                 |       | 313,296    |       | 1,303              |       | 0.4                 | %          |
| Operating                                  |       | 675,262                 |       | 611,553    |       | 63,709             |       | 10.4                | %          |
| Renting                                    |       | 272,528                 |       | 264,570    |       | 7,958              |       | 3.0                 | %          |
| Repairs and maintenance                    |       | 1,454,709               |       | 1,351,568  |       | 103,141            |       | 7.6                 | %          |
| Taxes and insurance                        |       | 815,808                 |       | 830,970    |       | (15,162            | )          | -1.8                | %          |
|                                       |       | 7,415,978               |       | 7,216,174  |       | 199,804            |       | 2.8                 | %          |
|                                       |       |                    |       |       |       |               |       |                |       |
| Income before other income                 |       | 318,577                 |       | 660,230    |       | (341,653           | )          | -51.7               | %          |
|                                       |       |                    |       |       |       |               |       |                |       |
| Other Income                               |       |                    |       |       |       |               |       |                |       |
| Interest income                            |       | 52,140                  |       | 39,470     |       | 12,670             |       | 32.1                | %          |
| (Loss) from investment in partnerships     |       | (160,706                | )          | (47,328    | )          | (113,378           | )          | 239.6               | %          |
| (Loss) on the write off of property assets |       | —                  |       | (60,000    | )          | 60,000             |       | -100.0              | %          |
| (Loss) on early extinguishments of debt    |       | —                  |       | (1,436,238 | )          | 1,436,238          |       | -100.0              | %          |
|                                       |       | (108,566                | )          | (1,504,096 | )          | 1,395,530          |       | -92.8               | %          |
|                                       |       |                    |       |       |       |               |       |                |       |
| Net Income (Loss)                          |       | $                       | 210,011    |       | $          | (843,866           | )          | $                   | 1,053,877  |   | -124.9 | % |
|                                            |            |                         |            |            |            |                    |            |                     |            |  |  |  |  |  |  |

 

22

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Rental income for the three months ended September 30, 2004 wasapproximately $7,640,000 compared to approximately $7,802,000 for the threemonths ended September 30, 2003, a decrease of approximately $162,000 (2%). Theproperties with the most significant decreases are the apartments at NorthBeacon Street for a decrease of approximately $29,000, a decrease ofapproximately $12,000 at Oak Ridge, a decrease of approximately $65,000 atWestgate Apartments, a decrease of approximately $17,000 at Westside Colonialand a decrease of approximately $12,000 at Brookside. There were smallerdecreases at most other properties.  Thedecrease in rental income is due to increased vacancies, rental concessions andsome reductions in rents for new leases.

 

Total expenses for the three months ended September 30, 2004 wereapproximately $7,416,000 compared to approximately $7,216,000 for the threemonths ended September 30, 2003, an increase of approximately $200,000 (3%).Repairs and maintenance expenses increased approximately $103,000 (8%) due toongoing refurbishment, repair and clean up of rental units in an effort toreduce vacancies. Operating expenses increased approximately $64,000 (10%) dueto increased heat, water and other utilities. Renting expenses increasedapproximately $8,000 (3%) due to increases in rental commissions and otherrental related expenses. Total depreciation and amortization increasedapproximately $50,000 (3%) primarily due to continuing improvements in 2004.

 

These increases are offset by a decrease in administrative expenses ofapproximately $25,000 (7%) due to a decrease in salaries and related employeebenefits. Taxes and insurance decreased approximately $15,000 (2%) due to a taxrefund related to one of the Partnership properties.

 

The operations of the 20 new units at Westgate in Woburn commenced inSeptember 2004 and was insignificant for the quarter ended September 30, 2004.

 

The Partnership has a 50% ownership interest in three differentinvestments.  One of the investments is alimited liability Partnership that owns a 40 unit residential property inCambridge, Massachusetts.  For the threemonths ended September 30, 2004, the Partnership’s share of loss on thisinvestment is $48,536 compared to a loss of $47,328 for the three months endedSeptember 30, 2003, an increase of $1,208 (3%). There were no units vacant atNovember 8, 2004.

 

In August and September 2004, the Partnership invested approximately$13,000,000 for a 50% ownership interest in two joint ventures. The first jointventure is a 280 unit residential complex located in Watertown, Massachusetts,referred to as “Hamilton Place”. The total cost of the property was$56,000,000.  The Partnership invested$8,000,000.  The other investors invested$8,000,000 and the joint venture obtained a mortgage of $43,000,000 to fund theacquisition and capital improvements.  Thejoint venture plans to sell 120 units and use the funds to pay down the debt onthe property.  At November 8, 2004, thereare 23 vacant units, nine of which are to be sold. The Partnership’s net losson this investment is $116,784 for the period ended September 30, 2004.

 

The second joint venture purchased a 42 unit residential complex inLexington, Massachusetts referred to as “Hamilton Minuteman”.  The total cost of the property was $10,100,000.Originally, the Partnership invested $5,050,000 and the other investorsinvested $5,050,000. The property was refinanced for $8,025,000 in October2004, and the Partnership received $3,775,000 as part of this

 

23

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financing. The Partnership’s net income on this investment is $4,613for the period ended September 30, 2004. There were five units vacant atNovember 8, 2004.

 

On August 1, 2003, the Partnership refinanced four mortgages withoutstanding balances totaling approximately $11,526,000.  The Partnership recorded a loss on the earlyextinguishment of debt of $1,436,238 due to the prepayment penalties ofapproximately $1,355,000 and deferred financing fees of approximately $81,000on the mortgages paid.

 

During the three months ended September 30, 2003, the Partnershiprecorded a non-cash charge of $60,000 due to the write-off of air conditioningand heating equipment replaced at 62 Boylston Street.

 

Interest income was approximately $52,000 for the three months endedSeptember 30, 2004 compared to approximately $39,000 for the three months endedSeptember 30, 2003 an increased $13,000 (33%). This is due primarily due to an increase in the cash available forinvestment and some increases in rates earned. Total interest expense increased approximately $14,000 due to theincreased mortgage debt.

 

As a result of the changes discussed above, net income for the threemonths ended September 30, 2004 was $210,011 compared to a loss of $843,866 forthe three months ended September 30, 2003, a change of $1,053,877.

 

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

 

The Partnership and its Subsidiary Partnerships earned income beforeother income of  $1,675,932 for the ninemonths ended September 30, 2004 compared to $3,494,779 for the nine monthsended September 30, 2003 a decrease of $1,818,847 (52%).  The following is a summary of the Partnership’srental income for the nine months ended September 30, 2004 and 2003.  As more fully described in the schedulesbelow, this decrease is primarily due to increased vacancies and increases inoperating expenses including significant depreciation, repairs and maintenance,and interest expense.

 

24

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***Nine Months Ended September 30, 2004 Compared to Nine MonthsEnded September 30, 2003***

 
| ** **                                  | ** ** | **September 30,** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|---------------------------------------------|------------|-------------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                    | ** ** | **2003**          |
| ** **                                  | ** ** | ** **        | ** ** | ** **         | ** ** | ** **          | ** ** | ** ** | ** ** |
| Revenues:                                   |       |              |       |               |       |                |       |   |   |
| Rental income                               |       | $                 | 23,094,191 |               | $          | 23,036,610          |       | $ | 57,581 |   | 0.2 | % |
| Laundry and  sundry income                  |       | 255,125           |       | 225,470            |       | 29,655              |       | 13.2 | % |
|                                        |       | 23,349,316        |       | 23,262,080         |       | 87,236              |       | 0.4 | % |
|                                        |       |              |       |               |       |                |       |   |   |
| Expenses                                    |       |              |       |               |       |                |       |   |   |
| Administrative                              |       | 982,726           |       | 1,075,120          |       | (92,394             | )          | -8.6 | % |
| Depreciation and  amortization              |       | 4,481,480         |       | 3,884,258          |       | 597,222             |       | 15.4 | % |
| Interest                                    |       | 5,970,652         |       | 5,478,199          |       | 492,453             |       | 9.0 | % |
| Management fees                             |       | 952,539           |       | 933,655            |       | 18,884              |       | 2.0 | % |
| Operating                                   |       | 2,467,742         |       | 2,230,580          |       | 237,162             |       | 10.6 | % |
| Renting                                     |       | 512,692           |       | 469,892            |       | 42,800              |       | 9.1 | % |
| Repairs and  maintenance                    |       | 3,727,362         |       | 3,210,507          |       | 516,855             |       | 16.1 | % |
| Taxes and  insurance                        |       | 2,578,191         |       | 2,485,090          |       | 93,101              |       | 3.7 | % |
|                                        |       | 21,673,384        |       | 19,767,301         |       | 1,906,083           |       | 9.6 | % |
|                                        |       |              |       |               |       |                |       |   |   |
| Income before  other income                 |       | 1,675,932         |       | 3,494,779          |       | (1,818,847          | )          | -52.0 | % |
|                                        |       |              |       |               |       |                |       |   |   |
| Other Income  (Loss)                        |       |              |       |               |       |                |       |   |   |
| Interest income                             |       | 186,863           |       | 138,498            |       | 48,365              |       | 34.9 | % |
| (Loss) from  investment in partnerships     |       | (233,758          | )          | (93,366            | )          | (140,392            | )          | 150.4 | % |
| (Loss) on the  write off of property assets |       | —            |       | (60,000            | )          | 60,000              |       | -100.0 | % |
| (Loss) on early  extinguishments of debt    |       | —            |       | (1,436,238         | )          | 1,436,238           |       | -100.0 | % |
|                                        |       | (46,895           | )          | (1,451,106         | )          | 1,404,211           |       | -96.8 | % |
|                                        |       |              |       |               |       |                |       |   |   |
| Net Income  (Loss)                          |       | $                 | 1,629,037  |               | $          | 2,043,673           |       | $ | (414,636 | ) | -20.3 | % |

 

25

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The following is a comparative schedule for the nine months endedSeptember 30, 2004 and 2003 of the changes in revenue from rental operationsexcluding the 2003 acquisitions.

 
| ** **                     | ** ** | **Total  Partnership  2004** | ** ** | **Less  Aquired  Properties** | ** ** | **Same  Properties  in 2004** | ** ** | **Same  Properties  in 2003** | ** ** | **Dollar  Change** | ** ** | **Percent**

**Change** | ** ** |
|--------------------------------|------------|------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|--------------------|------------|-------------------------|------------|
| Revenues:                      |       |                         |       |                          |       |                          |       |                          |       |               |       |                    |       |
| Rental income                  |       | $                            | 23,094,191 |                          | $          | 802,336                       |       | $                             | 22,291,855 |               | $          | 23,036,610              |       | $ | (744,755 | ) | -3.2 | % |
| Laundry and  sundry income     |       | 255,125                      |       | 14,660                        |       | 240,465                       |       | 225,470                       |       | 14,995             |       | 6.7                     | %          |
|                           |       | 23,349,316                   |       | 816,996                       |       | 22,532,320                    |       | 23,262,080                    |       | (729,760           | )          | -3.1                    | %          |
|                           |       |                         |       |                          |       |                          |       |                          |       |               |       |                    |       |
| Expenses                       |       |                         |       |                          |       |                          |       |                          |       |               |       |                    |       |
| Administrative                 |       | 982,726                      |       | 18,370                        |       | 964,356                       |       | 1,075,120                     |       | (110,764           | )          | -10.3                   | %          |
| Depreciation and  amortization |       | 4,481,480                    |       | 437,599                       |       | 4,043,881                     |       | 3,884,258                     |       | 159,623            |       | 4.1                     | %          |
| Interest                       |       | 5,970,652                    |       | 356,971                       |       | 5,613,681                     |       | 5,478,199                     |       | 135,482            |       | 2.5                     | %          |
| Management fees                |       | 952,539                      |       | 31,774                        |       | 920,765                       |       | 933,655                       |       | (12,890            | )          | -1.4                    | %          |
| Operating                      |       | 2,467,742                    |       | 114,983                       |       | 2,352,759                     |       | 2,230,580                     |       | 122,179            |       | 5.5                     | %          |
| Renting                        |       | 512,692                      |       | 12,787                        |       | 499,905                       |       | 469,892                       |       | 30,013             |       | 6.4                     | %          |
| Repairs and  maintenance       |       | 3,727,362                    |       | 129,830                       |       | 3,597,532                     |       | 3,210,507                     |       | 387,025            |       | 12.1                    | %          |
| Taxes and  insurance           |       | 2,578,191                    |       | 85,721                        |       | 2,492,470                     |       | 2,485,090                     |       | 7,380              |       | 0.3                     | %          |
|                           |       | 21,673,384                   |       | 1,188,037                     |       | 20,485,347                    |       | 19,767,301                    |       | 718,046            |       | 3.6                     | %          |
|                           |       |                         |       |                          |       |                          |       |                          |       |               |       |                    |       |
| Income before  other income    |       | $                            | 1,675,932  |                          | $          | (371,041                      | )          | $                             | 2,046,973  |               | $          | 3,494,779               |       | $ | (1,447,806 | ) | -41.4 | % |
|                                |            |                              |            |                               |            |                               |            |                               |            |                    |            |                         |            |  |  |  |  |  |  |  |  |  |

 

Rental income for thenine months ended September 30, 2004 was approximately $23,094,000 compared toapproximately $23,037,000 for the nine months ended September 30, 2003 anincrease of approximately $58,000 (.2%). As indicated in the table above, the increase in rental income is dueprimarily to the acquisition of the School Street property in April 2003.  Rental income at the Partnership’s existingproperties decreased during the nine months ended September 30, 2004 byapproximately $745,000 (3%).  The mostsignificant decrease in rental income was at the Westgate Apartments in Woburn,Massachusetts with a decrease of approximately $294,000 (13%).   This decrease is due to vacancies and rentalconcessions given to new tenants in the ongoing effort to stay competitive in arelatively soft rental market at that location.   Other significant decreases in rental incomewere at Redwood Hills of approximately $57,000 (4%), at 1144 CommonwealthAvenue of approximately $55,000 (2%), at Hamilton Oaks of approximately $46,000(2%), at Brookside of approximately $45,000 (10%), and at North Beacon ofapproximately $54,000 (5%).   Most otherresidential properties experienced smaller decreases in rental income.  Additionally, bad debts increasedapproximately $35,000.

 

Total expenses for the nine months ended September 30, 2004 wereapproximately $21,673,000 compared to approximately $19,767,000 for the ninemonths ended September 30, 2003, an increase of approximately $1,906,000 (10%).  As indicated in the schedule above,approximately $1,188,000 of this increase represents the property acquired in2003.  Other comparable increases includerepairs and maintenance expenses of approximately $387,000 (12%), interestexpense of approximately $135,000

 

26

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(3%), depreciation and amortization expense of approximately $160,000 (4%)and operating expenses of approximately $122,000 (5%).  An explanation of these increases isdiscussed above.

 

Interest expense increased due to the refinancing of mortgages in 2003.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The majority of cash and cash equivalents of $6,679,544 at September30, 2004 and $24,362,328 at December 31, 2003 were held in interest bearingaccounts at creditworthy financial institutions.

 

This decrease of $17,682,784 for the nine months ended September 30,2004 is summarized as follows:

 
| ** **                                             | ** ** | **Nine Months Ended September** | ** **  |
|--------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                             | ** ** | **2004**                        | ** **  | **2003** | ** ** |
|                                                   |       |                            |        |   |   |
| Cash provided by  operating activities                 |       | $                               | 6,273,278   |   | $ | 6,782,153 |   |
| Cash (used in)  investing activities                   |       | (19,925,928                     | )           | (11,262,777 | ) |
| Cash provided by  (used in) other financing activities |       | (535,638                        | )           | 14,773,370 |   |
| Dividends paid                                         |       | (3,494,496                      | )           | (3,943,761 | ) |
| Net increase  (decrease) in cash and cash equivalents  |       | $                               | (17,682,784 | ) | $ | 6,348,985 |   |
|                                                        |            |                                 |             |  |  |  |  |  |  |

 

The cash provided by operating activities is primarily due to the netincome plus depreciation expense.  Theincrease in cash used in investing activities is due to the investments inPartnerships made in August and September 2004. The decrease in cash provided by financing activities is due to therefinancing of some Partnership properties in August 2003.

 

As discussed previously, the Partnership invested approximately $13,000,000for a 50% ownership interest in two partnerships in August 2004.  See above for a discussion of the investmentsand the related net loss on these investments. In October 2004, $3,775,000 was received from one of these investmentsupon the mortgaging of that property.

 

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

 

27

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reserves increased approximately $13,000,000 as a result of thisrefinancing.  There are substantialprepayment penalties if paid before maturity.

 

On June 30, 2003, the Partnership purchased five condominium units froma group of investors who are also affiliated with the Partnership.  In the event any of these units are soldduring the three year period commencing on the date of acquisition and the saleprice is less than the price paid by the Partnership for such units, HaroldBrown has agreed to indemnify the Partnership for the difference.  The total purchase price for the five unitswas $2,421,286 including closing costs. This acquisition was funded from cash reserves.  In August 2003, the Partnership obtained a$1,600,000 mortgage loan for three years, with interest only payments at 5.25%and no prepayment penalties, secured by these five condominium units.

 

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

 

The Partnership paid a quarterly distribution of $6.60 per unit ($0.66per depositary receipts) on March 31, 2004, June 30, 2004, and $7.00 per unit($0.70 per depositary receipt) on September 30, 2004.  The total distributions paid during the ninemonths ended September 30, 2004 were $3,494,496.  On November 11, 2004, the Partnership votedto pay additional distributions of $ 7.00 per unit ($.70 per depositaryreceipt) on December 31, 2004.

 

In February 2003, the Partnership voted to increase the quarterlydistribution to $6.60 per unit ($0.66 per depositary receipt) and pay anadditional one-time distribution of $3.00 ($0.30 per depositary receipt) perunit for a total distribution of $9.60 per unit payable on March 31, 2003.  The total distribution paid to the partnersduring the nine months ended September 30, 2003 was $3,943,761.

 

During the quarter ended September 2004, the Partnership completed theconstruction of ten residential units at the Westgate Apartments in Woburn,Massachusetts for a total cost of approximately $2,400,000.  In addition, ten units were completed inOctober 2004 for a cost of approximately the same amount.  The Partnership anticipates obtaining amortgage on this property of approximately $2,000,000 in late 2004 or early2005.

 

During the nine months ended September 30, 2004, the Partnership andits Subsidiary Partnerships completed certain improvements to their propertiesat a total cost of approximately $3,562,000. The most significant improvementswere made at the following properties: approximately $563,000 at Westgate inWoburn, Massachusetts; approximately $523,000 at 62 Boylston Street, Boston, Massachusetts;approximately $294,000 at Westside Colonial in Brockton, Massachusetts;  approximately $290,000 at Hamilton Oaks inBrockton, Massachusetts; approximately $238,000 at School Street in Framingham,Massachusetts; approximately $209,000 at 1144 Commonwealth Avenue in Brighton,Massachusetts and approximately $214,000 at Redwood Hills in Worcester,

 

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Massachusetts.  All suchimprovements were funded from the Partnership’s cash reserves and escrow accountsestablished in connection with the refinancing of applicable properties.

 

In addition to theimprovements made to date in 2004, the Partnership and its SubsidiaryPartnerships plan to invest approximately $200,000 in capital improvementsduring the balance of 2004, the majority of which will be spent at Middlesex,North Beacon Street and River Drive Apartments. These improvements will be funded from escrow accounts established inconnection with the refinancing of applicable properties, as well as from thePartnership’s cash.  Additionally, thePartnership is budgeting approximately $2,000,000 for 2005.

 

The Partnership anticipates that cash from operations, property sales,mortgage financings and interest-bearing investments will be sufficient to fundits current operations and to finance current improvements to its properties.  The Partnership’s net income and cash flowmay fluctuate dramatically from year to year as a result of the sale ofproperties, mortgage financings, unanticipated increases in expenses, or theloss of significant tenants.

 

Factors That May Affect Future Results

 

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

 

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

 

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

 

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

 

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

 

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

 

Given the nature of the real estate business, thePartnership is subject to potential environmental liabilities.  These include environmental contamination inthe soil at the Partnership’s or neighboring real estate, whether caused by thePartnership, previous owners of the subject property or neighbors of thesubject property, and the presence of hazardous materials in the Partnership’sbuildings, such as asbestos, mold and radon gas.  Management is not aware of any materialenvironmental liabilities at this time.

 

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

 

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

 

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

 

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

 

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

 

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

 

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IItem 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

As of September 30, 2004, the Partnership and its subsidiaryPartnerships collectively have approximately $115,400,000 in long-term debt,all of which have fixed interest rates. Accordingly, the fair value of thesedebt instruments is affected by changes in market interest rates.  For information regarding the fair value andmaturity dates of these debt obligations, see Notes 5 and 12 to theConsolidated Financial Statements.

 

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

 

Item 4—CONTROLS AND PROCEDURES

 

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

 

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PART II - OTHER INFORMATION

 

Item1.    Legal Proceedings

 

None.

 

Item 2.    Unregistered Sales of EquitySecurities and Use of Proceeds

 

None.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Submission of Matters to a Vote of SecurityHolders

 

None.

 

Item5.    Other Information

 

None.

 

Item 6.    Exhibits

 

(a)          See the exhibit index below.

 

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SIGNATURES

 

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

 
| Date:     November 12,  2004 |   |                                                |
|-------------------------------------------------------|--------|-----------------------------------------------------|
|                                                  |   |                                                |
|                                                  |   | NEW ENGLAND REALTY ASSOCIATES   LIMITED PARTNERSHIP |
|                                                  |   |                                                |
|                                                  |   | By:                                                 |       NEWREAL, INC., |   |
|                                                  |   |                                                |       its General  Partner* |
|                                                  |   |                                                |
|                                                  |   | By:                                                 |       /s/   Ronald Brown |   |
|                                                  |   |                                                | Ronald Brown, President |

 
| *      Functional equivalent of Chief Executive  Officer, Principal Financial Officer and Principal Accounting Officer |
|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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**EXHIBIT INDEX**

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

 

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