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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from to

Commission file number 001-31568

New England Realty Associates Limited Partnership

(Exact name of registrant as specified in its charter)

Massachusetts

04-2619298

(State or other jurisdiction of

(I.R.S. employer

incorporation or organization)

identification no.)

39 Brighton Avenue, Allston, Massachusetts

02134

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617783-0039

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated Filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Class A

NEN

NYSE MKT Exchange

As of August 6, 2020, there were 97,405 of the registrant’s Class A units (2,922,151 Depositary Receipts) of limited partnership issued and outstanding and 23,134 Class B units issued and outstanding.

Table of Contents

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

INDEX

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

4

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019

5

Consolidated Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2020 and 2019

6

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

7

Notes to Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosure

46

Item 5.

Other Information

46

Item 6.

Exhibits

46

SIGNATURES

48

2

Table of Contents

NEW ENGLAND REALTY ASSOCIATES, L.P.

PART 1 -- FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited consolidated balance sheets, statements of income, changes in partners’ capital, and cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in New England Realty Associates L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The results of operations for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

3

Table of Contents

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30,

December 31,

 

    

2020

    

2019

 

ASSETS

(Unaudited)

Rental Properties

$

271,417,401

$

278,363,988

Cash and Cash Equivalents

 

15,396,023

 

7,546,324

Rents Receivable

 

1,014,905

 

484,610

Real Estate Tax Escrows

 

437,502

 

446,781

Prepaid Expenses and Other Assets

 

5,116,550

 

6,021,544

Investments in Unconsolidated Joint Ventures

 

1,453,894

 

1,430,402

Total Assets

$

294,836,275

$

294,293,649

LIABILITIES AND PARTNERS’ CAPITAL

Mortgage Notes Payable

284,402,031

281,771,246

Notes Payable

17,000,000

18,000,000

Distribution and Loss in Excess of Investment in Unconsolidated Joint Venture

 

20,129,903

 

19,970,089

Accounts Payable and Accrued Expenses

 

3,597,414

 

4,274,266

Advance Rental Payments and Security Deposits

 

7,428,945

 

8,101,835

Total Liabilities

 

332,558,293

 

332,117,436

Commitments and Contingent Liabilities (Notes 3 and 9)

 

 

Partners’ Capital 121,756 and 121,978 units outstanding in 2020 and 2019 respectively

 

(37,722,018)

 

(37,823,787)

Total Liabilities and Partners’ Capital

$

294,836,275

$

294,293,649

See notes to consolidated financial statements.

4

Table of Contents

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Revenues

Rental income

$

15,646,814

$

14,886,423

$

31,900,244

$

29,654,899

Laundry and sundry income

 

112,292

 

104,980

 

234,446

 

218,649

 

15,759,106

 

14,991,403

 

32,134,690

 

29,873,548

Expenses

Administrative

 

512,195

 

626,180

 

1,096,853

 

1,238,938

Depreciation and amortization

 

4,601,617

 

3,590,240

 

9,167,084

 

7,272,918

Management fee

 

615,541

 

597,197

 

1,264,534

 

1,187,806

Operating

 

1,291,781

 

1,125,813

 

2,960,183

 

3,009,831

Renting

 

128,608

 

242,515

 

325,479

 

424,573

Repairs and maintenance

 

2,049,174

 

2,287,313

 

4,135,392

 

4,231,544

Taxes and insurance

 

2,115,721

 

1,942,998

 

4,396,262

 

3,977,104

 

11,314,637

 

10,412,256

 

23,345,787

 

21,342,714

Income Before Other Income (Expense)

 

4,444,469

 

4,579,147

 

8,788,903

 

8,530,834

Other Income (Expense)

Interest income

 

52

 

90

159

269

Interest expense

 

(3,423,583)

 

(3,133,439)

(6,873,908)

(6,133,728)

Income from investments in unconsolidated joint ventures

 

444,113

 

513,406

918,680

1,062,345

Other expense

 

 

(194,960)

(194,960)

 

(2,979,418)

 

(2,814,903)

 

(5,955,069)

 

(5,266,074)

Net Income

$

1,465,051

$

1,764,244

$

2,833,834

$

3,264,760

Net Income per Unit

$

12.03

$

14.40

$

23.26

$

26.61

Weighted Average Number of Units Outstanding

 

121,756

 

122,483

 

121,816

 

122,710

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNER’S CAPITAL

(Unaudited)

Units

Partners’ Capital

 

Limited

General

Treasury

Limited

General

 

  

Class A

  

Class B

  

Partnership

  

Subtotal

  

Units

  

Total

  

Class A

  

Class B

  

Partnership

  

Total

 

Balance January 1, 2019

 

144,180

 

34,243

 

1,802

 

180,225

 

55,839

 

124,386

$

(28,527,352)

$

(6,741,825)

$

(354,833)

$

(35,624,010)

Distribution to Partners

 

 

 

 

 

 

 

(1,881,955)

 

(446,964)

 

(23,524)

 

(2,352,443)

Stock Buyback

 

 

 

 

1,995

 

(1,995)

 

(2,644,552)

 

(628,044)

 

(33,055)

 

(3,305,651)

Net Income

 

 

 

 

 

 

 

2,611,808

 

620,304

 

32,648

 

3,264,760

Balance June 30, 2019

 

144,180

 

34,243

 

1,802

 

180,225

 

57,834

122,391

$

(30,442,051)

$

(7,196,529)

$

(378,764)

$

(38,017,344)

Balance January 1 , 2020

144,180

34,243

1,802

180,225

58,247

121,978

$

(30,287,245)

$

(7,159,715)

$

(376,827)

$

(37,823,787)

Distribution to Partners

 

 

 

 

 

 

 

(1,870,428)

 

(444,226)

 

(23,380)

 

(2,338,034)

Stock Buyback

 

 

 

 

222

 

(222)

 

(315,220)

 

(74,870)

 

(3,941)

 

(394,031)

Net Income

 

 

 

 

 

 

 

2,267,068

 

538,428

 

28,338

 

2,833,834

Balance June 30, 2020

 

144,180

 

34,243

 

1,802

 

180,225

 

58,469

 

121,756

$

(30,205,825)

$

(7,140,383)

$

(375,810)

$

(37,722,018)

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

    

2020

    

2019

 

Cash Flows from Operating Activities

Net income

$

2,833,834

$

3,264,759

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

 

9,167,084

 

7,272,918

Amortization of deferred financing costs

119,835

225,494

(Income) from investments in joint ventures

 

(918,680)

 

(1,062,345)

Allowance for doubtful accounts

729,653

323,728

Change in operating assets and liabilities

Proceeds from unconsolidated joint ventures

 

5,000

 

770,000

(Increase) in rents receivable

 

(1,259,948)

 

(166,880)

(Decrease) Increase in accounts payable and accrued expense

 

(676,850)

 

474,466

Decrease in real estate tax escrow

 

9,279

 

49,347

Decrease (Increase) in prepaid expenses and other assets

 

188,556

 

(62,380)

( Decrease) Increase in advance rental payments and security deposits

 

(672,890)

 

822,139

Total Adjustments

 

6,691,039

8,646,487

Net cash provided by operating activities

 

9,524,873

11,911,246

Cash Flows From Investing Activities

Distribution in excess of investment in unconsolidated joint ventures

 

1,060,585

 

1,597,152

(Investment) in unconsolidated joint ventures

 

(10,585)

 

(19,152)

Improvement of rental properties

 

(1,504,059)

 

(1,715,987)

Net cash provided by (used in) investing activities

 

(454,059)

(137,987)

Cash Flows from Financing Activities

Payment of financing costs

 

(136,325)

(235,147)

Proceeds of mortgage notes payable

 

3,781,877

679,000

Payment of note payable

(1,000,000)

(2,000,000)

Principal payments of mortgage notes payable

 

(1,134,602)

(1,028,035)

Stock buyback

 

(394,031)

(3,305,651)

Distributions to partners

 

(2,338,034)

(2,352,443)

Net cash (used in) financing activities

 

(1,221,115)

 

(8,242,276)

Net Increase in Cash and Cash Equivalents

 

7,849,699

3,530,983

Cash and Cash Equivalents, at beginning of period

 

7,546,324

 

9,059,901

Cash and Cash Equivalents, at end of period

$

15,396,023

$

12,590,884

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Line of Business: New England Realty Associates Limited Partnership (“NERA” or the “Partnership”) was organized in Massachusetts in 1977. NERA and its subsidiaries own 29 properties which include 21 residential buildings; 4 mixed use residential, retail and office buildings; 3 commercial buildings and individual units at one condominium complex. These properties total 2,892 apartment units, 19 condominium units and 108,043 square feet of commercial space. Additionally, the Partnership also owns a 40 - 50% interest in 7 residential and mixed use properties consisting of 688 apartment units, 12,500 square feet of commercial space and a 50 car parking lot. The properties are located in Eastern Massachusetts and Southern New Hampshire.

Basis of Presentation: The financial statements have been prepared in conformity with GAAP. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgement. The Partnership’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on the Partnership’s financial results. Judgements and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.

Principles of Consolidation: The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for the seven limited liability companies (the “Investment Properties” or “Joint Ventures”) in which the Partnership has a 40 - 50% ownership interest. The consolidated group is referred to as the “Partnership”. Minority interests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in the above-mentioned Investment Properties using the equity method of consolidation. (See Note 14: Investment in Unconsolidated Joint Ventures.)

The Partnership accounts for its investments in joint ventures using the equity method of accounting. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses. In 2013 and beyond, the carrying values of some investments fell below zero. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. (See Note 14: Investment in Unconsolidated Joint Ventures.)

The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that equity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the

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variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.

Impairment: On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties or investments in unconsolidated subsidiaries may be impaired. In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment. The criteria considered by management include reviewing low leased percentages, significant near term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near term mortgage debt maturities or other factors that might impact the Partnership’s intent and ability to hold property. A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.

Revenue Recognition: Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Revenue from commercial leases also include reimbursements and recoveries received from tenants for certain costs as provided in the lease agreement. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Rental concessions are also accounted for on the straight-line basis.

Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases. The capitalized above-market lease amounts are accounted for as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract: the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).

Under this standard, the Partnership evaluates the non-lease components (lease arrangements that include common area maintenance services) with related lease components (lease revenues). If both the timing and pattern of transfer are the same for the non-lease component and related lease component, the lease component is the predominant component. The Partnership elected an allowed practical expedient. For (i) operating lease arrangements involving real estate that include common area maintenance services and (ii) all real estate arrangements that include real estate taxes and insurance costs, we present these amounts within lease revenues in our consolidated statements of income. We record amounts reimbursed by the lessee in the period in which the applicable expenses are incurred.

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the

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beginning of the earliest comparative period presented. We elected the allowable practical expedients as permitted under the transition guidance, which allowed us to not reassess whether arrangements contain leases, lease classification, and initial direct costs. The adoption of the lease standard did not result in a cumulative effect adjustment recognized in the opening balance of retained earnings as of January 1, 2019. The adoption of this standard does not have a material impact to the Partnership’s financial statements.

Rental Properties: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions which improve or extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Partnership’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

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

Leasing Fees: Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease. Unamortized balances are expensed when the corresponding fee is no longer applicable.

Deferred Financing Costs: Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Deferred financing costs are presented in the balance sheet as a direct deduction from the carrying value of the debt liability to which they relate, except deferred financing costs related to the revolving credit facility, which are presented in prepaid expenses and other assets. In all cases, amortization of such costs is included in interest expense and was approximately $120,000 and $225,000 for the six months ended June 30, 2020 and 2019, respectively.

Income Taxes: The financial statements have been prepared on the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes have been recorded (See Note 13).

Cash Equivalents: The Partnership considers cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less.

Segment Reporting: Operating segments are revenue producing components of the Partnership for which separate financial information is produced internally for management. Under the definition, NERA operated, for all periods presented, as one segment.

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Comprehensive Income: Comprehensive income is defined as changes in partners’ equity, exclusive of transactions with owners (such as capital contributions and dividends). NERA did not have any comprehensive income items in 2020 or 2019 other than net income as reported.

Income (Loss) Per Depositary Receipt: Effective January 3, 2012, the Partnership authorized a 3-for-1 forward split of its Depositary Receipts listed on the NYSE Amex and a concurrent adjustment of the exchange ratio of Depositary Receipts for Class A Units of the Partnership from 10-to-1 to 30-to-1, such that each Depositary Receipt represents one-thirtieth (1/30) of a Class A Unit of the Partnership. All references to Depositary Receipts in the report are reflective of the 3- for-1 forward split.

Income Per Unit: Net income per unit has been calculated based upon the weighted average number of units outstanding during each period presented. The Partnership has no dilutive units and, therefore, basic net income is the same as diluted net income per unit (see Note 7: Partner’s Capital).

Concentration of Credit Risks and Financial Instruments: The Partnership’s properties are located in New England, and the Partnership is subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnership’s revenues in 2020 or 2019. The Partnership makes its temporary cash investments with high-credit quality financial institutions. At June 30, 2020, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from 0.01% to 0.03%. At June 30, 2020 and December 31, 2019, respectively approximately $15,636,000, and $7,407,000 of cash and cash equivalents, and security deposits included in prepaid expenses and other assets exceeded federally insured amounts.

Advertising Expense: Advertising is expensed as incurred. Advertising expense was $145,803 and $141,975 for the six months ended June 30, 2020 and 2019, respectively.

Interest Capitalized: The Partnership follows the policy of capitalizing interest as a component of the cost of rental property when the time of construction exceeds one year. During the six months ended June 30, 2020 and 2019 there was no capitalized interest.

Extinguishment of Debt: When existing mortgages are refinanced with the same lender and it is determined that the refinancing is substantially different, then they are recorded as an extinguishment of debt. However if it is determined that the refinancing is substantially the same, then they are recorded as an exchange of debt. All refinancing qualify as extinguishment of debt.

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

NOTE 2. RENTAL PROPERTIES

As of June 30, 2020, the Partnership and its Subsidiary Partnerships owned 2,892 residential apartment units in 25 residential and mixed-use complexes (collectively, the “Apartment Complexes”). The Partnership also owns 19 condominium units in a residential condominium complex, all of which are leased to residential tenants (collectively referred to as the “Condominium Units”). The Apartment Complexes and Condominium Units are located primarily in the metropolitan Boston area of Massachusetts.

Additionally, as of June 30, 2020, the Partnership and Subsidiary Partnerships owned a commercial shopping center in Framingham, commercial buildings in Newton and Brookline and mixed-use properties in Boston, Brockton and Newton, all in Massachusetts. These properties are referred to collectively as the “Commercial Properties.”

The Partnership also owned a 40% to 50% ownership interest in seven residential and mixed use complexes (the “Investment Properties”) at June 30, 2020 with a total of 688 apartment units, accounted for using the equity method of consolidation. See Note 14 for summary information on these investments.

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Rental properties consist of the following:

    

June 30, 2020

    

December 31, 2019

    

Useful Life

 

Land, improvements and parking lots

$

86,864,868

$

86,693,759

15

-

40

years

Buildings and improvements

 

253,113,482

 

252,896,183

15

-

40

years

Kitchen cabinets

 

17,633,302

 

17,376,841

5

-

10

years

Carpets

 

11,317,057

 

10,976,972

5

-

10

years

Air conditioning

 

573,389

 

573,389

5

-

10

years

Laundry equipment

 

709,210

 

709,210

5

-

7

years

Elevators

 

1,885,265

 

1,885,265

20

-

40

years

Swimming pools

 

1,092,194

 

1,092,194

10

-

30

years

Equipment

 

17,574,649

 

17,391,731

5

-

30

years

Motor vehicles

 

211,660

 

178,847

5

years

Fences

 

46,872

 

38,482

5

-

15

years

Furniture and fixtures

 

8,520,979

 

8,235,292

5

-

7

years

Smoke alarms

 

505,835

 

505,835

5

-

7

years

Total fixed assets

 

400,048,762

 

398,554,000

Less: Accumulated depreciation

 

(128,631,361)

 

(120,190,012)

$

271,417,401

$

278,363,988

On December 20, 2019, Mill Street Gardens, LLC and Mill Street Development, LLC, collectively referred to as Mill Street, a wholly-owned subsidiary of New England Realty Associates Limited Partnership closed on a Purchase Agreement dated as of September 27, 2019 with Ninety-Three Realty Limited Partnership pursuant to which Mill Street acquired Country Club Garden Apartments, a 181 unit apartment complex located at 57 Mill Street, Woburn, Massachusetts for an aggregate purchase price of $59,550,000 in cash. Mill Street funded $18,000,000 of the purchase price out of an existing line of credit, $10,550,000 of the cash portion of the purchase price out of cash reserves and the remaining $31,000,000 from the proceeds of the Loan from Insurance Strategy Funding Corp. LLC described below. The closing costs were approximately $237,000. From the purchase price, the Partnership allocated approximately $1,282,000 for in- place leases, and approximately $136,000 to the value of tenant relationships. These amounts are being amortized over 12 and 36 months respectively.

On December 20, 2019, Mill Street entered into a Loan Agreement with Insurance Strategy Funding Corp. LLC providing for a loan in the maximum principal amount of $35,000,000, consisting of the initial advance of $31,000,000 and a subsequent advance of up to $4,000,000 if certain financial conditions are met. Interest on the Note is payable on a monthly basis at a fixed interest rate of: (i) 3.586% per annum with respect to the initial advance and (ii) the greater of (A) the sum of the market spread rate and the interpolated (based on the remaining term of the Loan) US Treasury rate at the time of the advance and (B) 3.500% with respect to any subsequent advance. The principal amount of the Note is due and payable on January 1, 2035. The Note is secured by a mortgage on the Property and is guaranteed by the Partnership pursuant to a Guaranty Agreement dated December 20, 2019.

NOTE 3. RELATED PARTY TRANSACTIONS

The Partnership’s properties are managed by an entity that is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of gross receipts of rental revenue and laundry income on the majority of the Partnership’s properties and 3% on Linewt. Total fees paid were approximately $1,265,000 and $1,188,000 for the six months ended June 30, 2020 and 2019, respectively.

The Partnership Agreement permits the General Partner or Management Company to charge the costs of professional services (such as counsel, accountants and contractors) to NERA. During the six months ended June 30, 2020 and 2019, approximately $533,000 and $593,000, was charged to NERA for legal, accounting, construction, maintenance, brokerage fees, rental and architectural services and supervision of capital improvements. Of the 2020 expenses referred to above, approximately $102,000 consisted of repairs and maintenance, and $126,000 of administrative expense. Approximately $305,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2020, the Hamilton Company received approximately $578,000 from the Investment Properties of which approximately $321,000 was the management fee, approximately $12,000 was for maintenance services, approximately $10,000 was for administrative services and

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approximately $235,000 for architectural services and supervision of capital projects. The management fee is equal to 4% of gross receipts of rental income on the majority of investment properties and 2% on Dexter Park.

The Partnership reimburses the management company for the payroll and related expenses of the employees who work at the properties. Total reimbursement was approximately $1,738,000 and $1,668,000 for the six months ended June 30, 2020 and 2019, respectively. The Management Company maintains a 401K plan for all eligible employees whereby the employees may contribute the maximum allowed by law. The plan also provides for discretionary contributions by the employer. For the six months ended June 30, 2020, the Partnership accrued $22,000 for the employer’s match portion to the plan. For the six months ended June 30, 2019, the Partnership contributed $18,000 for the employer’s match portion to the plan.

Bookkeeping and accounting functions are provided by the Management Company’s accounting staff, which consists of approximately 14 people. During the six months ended June 30, 2020 and 2019, the Management Company charged the Partnership $62,500 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses above.

The Partnership has invested in seven limited partnerships, which have invested in mixed use residential apartment complexes. The Partnership has a 40% to 50% ownership interest in each investment property. The other investors are the Estate of Harold Brown, and five current and previous employees of the Management Company. The Brown Family related entities’ ownership interest was between 47.6% and 59%. See Note 14 for a description of the properties and their operations.

NOTE 4. PREPAID EXPENSES and OTHER ASSETS

Approximately $2,906,000, and $2,936,000 of security deposits are included in prepaid expenses and other assets at June 30, 2020 and December 31, 2019, respectively. The security deposits and escrow accounts are restricted cash.

Also, included in prepaid expenses and other assets at June 30, 2020 and December 31, 2019 is approximately $769,000 and $501,000, respectively, held in escrow to fund future capital improvements.

Intangible assets on the acquisitions of Mill Street Apartments and Webster Green Apartments are included in prepaid expenses and other assets. Intanbible assets are approximately $715,000 net of accumulated amortization of approximately $845,000 and approximately $1,382,000 net of accumulated amortization of approximately $178,000 at June 30, 2020 and December 31, 2019, respectively.

Financing fees in association with the line of credit of approximately $15,000 and $36,000 are net of accumulated amortization of approximately $114,000 and $93,000 at June 30, 2020 and December 31, 2019 respectively.

NOTE 5. MORTGAGE NOTES PAYABLE

At June 30, 2020 and December 31, 2019, the mortgages payable consisted of various loans, all of which were secured by first mortgages on properties referred to in Note 2. At June 30, 2020, the interest rates on these loans ranged from 3.53% to 5.66%, payable in monthly installments aggregating approximately $1,257,000 including principal, to various dates through 2035. The majority of the mortgages are subject to prepayment penalties. At June 30, 2020, the weighted average interest rate on the above mortgages was 4.42%. The effective rate of 4.51% includes the amortization expense of deferred financing costs. See Note 12 for fair value information. The Partnership’s mortgage debt and the mortgage debt of its unconsolidated joint ventures generally is non-recourse except for customary exceptions pertaining to misuse of funds and material misrepresentations.

Financing fees of approximately $1,465,000 and $1,449,000 are net of accumulated amortization of approximately $1,444,000 and $1,411,000 at June 30, 2020 and December 31, 2019, respectively offset the total mortgage notes payable.

The Partnership has pledged tenant leases as additional collateral for certain of these loans.

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Approximate annual maturities at June 30, 2020 are as follows:

2021—current maturities

    

$

2,357,000

 

2022

 

2,542,000

2023

 

79,930,000

2024

 

25,419,000

2025

 

11,027,000

Thereafter

 

164,592,000

285,867,000

Less: unamortized deferred financing costs

(1,465,000)

$

284,402,000

On March 31, 2020, Nera Brookside Associates, LLC (“Brookside Apartments”), entered into a Mortgage Note with KeyBank National Associates ( KeyBank) in the principal amount of $6,175,000. Interest only payments on the Note are payable on a monthly basis at a fixed interest rate of 3.53% per annum, and the principal amount of the Note is due and payable on April 1, 2035. The Note is secured by a mortgage on the Brookside apartment complex located at 5-12 Totman Drive, Woburn, Massachusetts pursuant to a Mortgage, Assignment of Leases and Rents and Security Agreement dated March 31, 2020. The Note is guaranteed by the Partnership pursuant to a Guaranty Agreement dated March 31, 2020. Brookside Apartments used the proceeds of the loan to pay off an outstanding loan of approximately $2,390,000, with the remaining portion of the proceeds added to cash reserves. In connection with this refinancing, there were closing costs of approximately $136,000.

On December 20, 2019, Mill Street Gardens, LLC and Mill Street Development LLC, collectively referred to as Mill Street, wholly-owned subsidiaries of New England Realty Associates Limited Partnership closed on a Purchase Agreement dated as of September 27, 2019 with Ninety-Three Realty Limited Partnership pursuant to which Mill Street acquired Country Club Garden Apartments, a 181 unit apartment complex located at 57 Mill Street, Woburn, Massachusetts for an aggregate purchase price of $59,550,000 . Mill Street funded $18,000,000 of the purchase price out of an existing line of credit, $10,550,000 of the cash portion of the purchase price out of cash reserves and the remaining $31,000,000 from the proceeds of the Loan. The closing costs were approximately $237,000. From the purchase price, the Partnership allocated approximately $1,282,000 for in- place leases, and approximately $136,000 to the value of tenant relationships. These amounts are being amortized over 12 and 36 months respectively.

On December 20, 2019, Mill Street entered into a Loan Agreement with Insurance Strategy Funding Corp. LLC providing for a loan in the maximum principal amount of $35,000,000, consisting of an initial advance of $31,000,000 and a subsequent advance of up to $4,000,000 if certain conditions are met. Interest on the Note is payable on a monthly basis at a fixed interest rate of: (i) 3.586% per annum with respect to the initial advance and (ii) the greater of (A) the sum of the market spread rate and the interpolated (based on the remaining term of the Loan) US Treasury rate at the time of the advance and (B) 3.500% with respect to any subsequent advance. The principal amount of the Note is due and payable on January 1, 2035. The Note is secured by a mortgage on the Property and is guaranteed by the Partnership pursuant to a Guaranty Agreement dated December 20, 2019.

On May 31, 2019, Residences at Captain Parker, LLC (“Captain Parker”), entered into a Mortgage Note with Strategy Funding Corp., LLC in the principal amount of $20,750,000. Interest only payments on the Note are payable on a monthly basis at a fixed interest rate of 4.05% per annum, and the principal amount of the Note is due and payable on June 1, 2029. The Note is secured by a mortgage on the Captain Parker apartment complex located at 125 Worthen Road and Ryder Lane, Lexington, Massachusetts pursuant to a Mortgage, Assignment of Leases and Rents and Security Agreement dated May 31, 2019. The Note is guaranteed by the Partnership pursuant to a Guaranty Agreement dated May 31, 2019. Captain Parker used the proceeds of the loan to pay off an outstanding loan of approximately $20,071,000. In connection with this refinancing, the property incurred a prepayment penalty of approximately $202,000. This expense was included in other expense on the consolidated statement of income.

Line of Credit

On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit. The term of the line was for three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The agreement originally expired on July 31, 2017, and was

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extended until October 31, 2020. Management is currently working with the lender on a three year extension for the credit line. The costs associated with the line of credit extension were approximately $128,000.

On December 19, 2019, the Partnership drew down on the line of credit in the amount of $20,000,000, used in conjunction with the purchase of Mill Street Apartments. On December 20, 2019, the Partnership paid down $2,000,000. On January 22, 2020, the Partnership paid down $1,000,000. As of June 30, 2020, the line of credit had an outstanding balance of $17,000,000.

The line of credit may be used for acquisition, refinancing, improvements, working capital and other needs of the Partnership. The line may not be used to pay distributions, make distributions or acquire equity interests of the Partnership.

The line of credit is collateralized by varying percentages of the Partnership’s ownership interest in 23 of its subsidiary properties and joint ventures. Pledged interests range from 49% to 100% of the Partnership’s ownership interest in the respective entities.

The Partnership paid fees to secure the line of credit. Any unused balance of the line of credit is subject to a fee ranging from 15 to 20 basis points per annum. The Partnership paid approximately $5,000 in fees for the six months ended June 30, 2020.

The line of credit agreement has several covenants, such as providing cash flow projections and compliance certificates, as well as other financial information. The covenants include, but are not limited to the following: maintain a leverage ratio that does not exceed 65%; aggregate increase in indebtedness of the subsidiaries and joint ventures should not exceed $15,000,000; maintain a tangible net worth (as defined in the agreement) of a minimum of $150,000,000; a minimum ratio of net operating income to total indebtedness of at least 9.5%; debt service coverage ratio of at least 1.6 to 1, as well as other items. The Partnership is in compliance with these covenants as of June 30, 2020.

NOTE 6. ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

The Partnership’s residential lease agreements may require tenants to maintain a one-month advance rental payment and/or a security deposit. At June 30, 2020, amounts received for prepaid rents of approximately $2,138,000 are included in cash and cash equivalents, and security deposits of approximately $2,906,000 are included in prepaid expenses and other assets and are restricted cash.

NOTE 7. PARTNERS’ CAPITAL

The Partnership has two classes of Limited Partners (Class A and B) and one category of General Partner. Under the terms of the Partnership Agreement, distributions to holders of Class B Units and General Partnership Units must represent 19% and 1%, respectively, of the total units outstanding. All classes have equal profit sharing and distribution rights, in proportion to their ownership interests.

In January 2020, the Partnership approved a quarterly distribution to its Class A Limited Partners and holders of Depositary Receipts of record as of March 15, 2020 and payable on March 31, 2020, of $9.60 per unit ($0.32 per receipt).

In April 2020, the Partnership approved a quarterly distribution to its Class A Limited Partners and holders of Depositary Receipts of record as of June 15, 2020 and payable on June 30, 2020, of $9.60 per unit ($0.32 per receipt).

In 2019, regular quarterly distributions of $9.60 per unit ($0.32 per receipt), were paid in March, June, September and December.

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The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners’ interests in Class A Units. Under the terms of this agreement, the holders of Class A Units have the right to exchange each Class A Unit for 30 Depositary Receipts. The following is information per Depositary Receipt:

Six Months Ended

 

June 30,

 

    

2020

    

2019

 

Net Income per Depositary Receipt

$

0.78

$

0.89

Distributions per Depositary Receipt

$

0.64

$

0.64

NOTE 8. TREASURY UNITS

Treasury Units at June 30, 2020 are as follows:

Class A

    

46,775

 

Class B

 

11,109

General Partnership

 

585

 

58,469

On August 20, 2007, NewReal, Inc., the General Partner authorized an equity repurchase program (“Repurchase Program”) under which the Partnership was permitted to purchase, over a period of twelve months, up to 300,000 Depositary Receipts (each of which is one-tenth of a Class A Unit). Over time, the General Partner has authorized increases in the equity repurchase program. On March 10, 2015, the General Partner authorized an increase in the Repurchase Program from 1,500,000 to 2,000,000 Depository Receipts and extended the Program for an additional five years from March 31, 2015 until March 31, 2020. On March 9, 2020, the General Partner extended the program for an additional five years from March 31, 2020 to March 31, 2025. The Repurchase Program requires the Partnership to repurchase a proportionate number of Class B Units and General Partner Units in connection with any repurchases of any Depositary Receipts by the Partnership based upon the 80%, 19% and 1% fixed distribution percentages of the holders of the Class A, Class B and General Partner Units under the Partnership’s Second Amended and Restated Contract of Limited Partnership. Repurchases of Depositary Receipts or Partnership Units pursuant to the Repurchase Program may be made by the Partnership from time to time in its sole discretion in open market transactions or in privately negotiated transactions. From August 20, 2007 through June 30, 2020, the Partnership has repurchased 1,428,437 Depositary Receipts at an average price of $28.43 per receipt (or $852.90 per underlying Class A Unit), 3,572 Class B Units and 188 General Partnership Units, both at an average price of $1,033.00 per Unit, totaling approximately $44,718,000 including brokerage fees paid by the Partnership.

During the six months ended June 30, 2020, the Partnership purchased a total of 5,328 Depositary Receipts. The average price was $59.14 per receipt or $1,774.20 per unit. The total cost including commission was $315,216. The Partnership was required to repurchase 42.18 Class B Units and 2.22 General Partnership units at a cost of $74,839 and $3,939 respectively.

Given the economic uncertainty caused by the coronavirus issue, as of April 15, 2020, the Partnership has elected to temporarily suspend the repurchase program.

NOTE 9. COMMITMENTS AND CONTINGENCIES

From time to time, the Partnership is involved in various ordinary routine litigation incidental to its business. The Partnership either has insurance coverage or provides for any uninsured claims when appropriate. The Partnership is not involved in any material pending legal proceedings.

NOTE 10. RENTAL INCOME

During the six months ended June 30, 2020, approximately 95% of rental income was related to residential apartments and condominium units with leases of one year or less. The majority of these leases expire in June, July and

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August. Approximately 5% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at June 30, 2020 as follows:

    

Commercial

 

Property Leases

 

2021

$

2,659,000

2022

 

1,727,000

2023

 

1,316,000

2024

 

827,000

2025

 

242,000

Thereafter

 

581,000

$

7,352,000

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $251,000 and $277,000 for the six months ended June 30, 2020 and 2019 respectively. Staples and Trader Joes, tenants at Staples Plaza, are approximately 26% of the total commercial rental income.

The following information is provided for commercial leases:

    

Annual base

    

    

    

Percentage of

 

rent for

Total square feet

Total number of

annual base rent for

 

Through June 30,

expiring leases

for expiring leases

leases expiring

expiring leases

 

2021

$

759,320

39,256

18

27

%

2022

 

605,587

24,225

8

21

%

2023

 

421,687

11,481

7

15

%

2024

 

491,548

14,668

8

17

%

2025

 

414,562

14,674

7

15

%

2026

 

%

2027

 

%

2028

 

%

2029

 

%

2030

 

142,450

3,850

1

5

%

Totals

$

2,835,154

 

108,154

 

49

 

100

%

Rents receivable are net of an allowance for doubtful accounts of approximately $730,000 and $240,000 at June 30, 2020 and December 31, 2019. Included in rents receivable at June 30, 2020 is approximately $96,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis. The majority of this amount is for long-term leases at 62 Boylston Street, Cypress Street, and Staples Plaza in Massachusetts.

Rents receivable at June 30, 2020 also includes approximately $172,000 representing the deferral of rental concession primarily related to the residential properties.

NOTE 11. CASH FLOW INFORMATION

During the six months ended June 30, 2020 and 2019, cash paid for interest was approximately $6,611,000, and $5,936,000 respectively. Cash paid for state income taxes was approximately $81,000 and $76,000 during the six months ended June 30, 2020 and 2019 respectively. Additionally, during the six months ended June 30, 2020, the Partnership was involved in a non-cash financing activity of approximately $2,393,000 in connection with the refinancing of Brookside Apartments.

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NOTE 12. FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis

At June 30, 2020 and December 31, 2019, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.

Financial Assets and Liabilities not Measured at Fair Value

At June 30, 2020 and December 31, 2019 the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, and note payable, accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments or, the recent acquisition of these items.

At June 30, 2020 and December 31, 2019, we estimated the fair value of our mortgages payable and other notes based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimated the fair value of our secured mortgage debt that does not have current quoted market prices available by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The differences in the fair value of our debt from the carrying value are the result of differences in interest rates and/or borrowing spreads that were available to us at June 30, 2020 and December 31, 2019, as compared with those in effect when the debt was issued or acquired. The secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments:

For cash and cash equivalents, accounts receivable, other assets, investment in partnerships, accounts payable, advance rents and security deposits: fair value approximates the carrying value of such assets and liabilities.

For mortgage notes payable: fair value is generally based on estimated future cash flows, which are discounted using the quoted market rate from an independent source for similar obligations. Refer to the table below for the carrying amount and estimated fair value of such instruments.

The following table reflects the carrying amounts and estimated fair value of our debt.

    

Carrying Amount

    

Estimated Fair Value

 

Mortgage Notes Payable

Partnership Properties

At June 30, 2020

*

$

284,402,031

$

305,678,933

At December 31, 2019

*

$

281,771,246

$

290,892,652

Investment Properties