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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 September 30, 2022

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 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

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 January 19, 2023, there were 95,404 of the registrant’s Class A units (2,862,128 Depositary Receipts) of limited partnership issued and outstanding and 22,658 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 September 30, 2022 and December 31, 2021

4

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021

5

Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2022 and 2021

6

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021

7

Notes to Consolidated Financial Statements

8

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

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

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosure

44

Item 5.

Other Information

44

Item 6.

Exhibits

44

SIGNATURES

46

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, 2021, 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

Form10-K for the fiscal year ended December 31, 2021.

The results of operations for the three and nine month periods ended September 30, 2022 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

September 30,

December 31,

    

2022

    

2021

 

 

ASSETS

(Unaudited)

Rental Properties

$

242,937,926

$

251,355,202

Cash and Cash Equivalents

 

59,473,939

 

96,083,508

Rents Receivable

 

414,659

 

935,303

Real Estate Tax Escrows

 

1,907,378

 

861,697

Investment in U.S. Treasury Bills

73,995,586

Prepaid Expenses and Other Assets

 

7,613,638

 

6,183,981

Investments in Unconsolidated Joint Ventures

 

1,439,150

 

1,455,888

Total Assets

$

387,782,276

$

356,875,579

LIABILITIES AND PARTNERS’ CAPITAL

Mortgage Notes Payable

411,475,632

370,481,390

Distribution and Loss in Excess of Investment in Unconsolidated Joint Venture

 

24,136,809

 

22,992,420

Accounts Payable and Accrued Expenses

 

4,298,250

 

4,324,879

Advance Rental Payments and Security Deposits

 

8,874,364

 

8,369,497

Total Liabilities

 

448,785,055

 

406,168,186

Commitments and Contingent Liabilities (Notes 3 and 9)

 

 

Partners’ Capital 119,324 and 121,516 units outstanding in 2022 and 2021 respectively

 

(61,002,779)

 

(49,292,607)

Total Liabilities and Partners’ Capital

$

387,782,276

$

356,875,579

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

Nine Months Ended

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

    

  

Revenues

Rental income

$

16,974,515

$

15,832,492

    

$

50,260,258

    

$

46,145,825

    

Laundry and sundry income

 

103,868

 

114,180

 

330,461

 

336,980

 

17,078,383

 

15,946,672

 

50,590,719

 

46,482,805

Expenses

Administrative

 

696,656

 

607,478

 

2,028,319

 

1,819,481

Depreciation and amortization

 

4,114,913

 

3,956,979

 

12,212,278

 

11,806,561

Management fee

 

683,999

 

646,059

 

2,029,453

 

1,867,798

Operating

 

1,410,843

 

1,338,718

 

5,609,302

 

4,792,332

Renting

 

181,574

 

458,040

 

501,906

 

941,281

Repairs and maintenance

 

3,126,953

 

3,128,369

 

8,381,339

 

7,432,860

Taxes and insurance

 

2,302,648

 

2,259,793

 

6,879,455

 

6,688,885

 

12,517,586

 

12,395,436

 

37,642,052

 

35,349,198

Income Before Other Income (Expense)

 

4,560,797

 

3,551,236

 

12,948,667

 

11,133,607

Other Income (Expense)

Interest income

363,350

27

 

363,411

 

74

Interest expense

(3,982,445)

(3,393,518)

 

(11,060,794)

 

(10,136,630)

Income (loss) from investments in unconsolidated joint ventures

93,516

(233,130)

 

203,867

 

(796,725)

Other (expenses)

(39,994)

(874,526)

 

(3,565,573)

 

(3,626,621)

 

(11,368,042)

 

(10,933,281)

Net Income

$

995,224

$

(75,385)

$

1,580,625

$

200,326

Net Income per Unit

$

8.32

$

(0.62)

$

13.12

$

1.65

Weighted Average Number of Units Outstanding

 

119,638

 

121,756

 

120,465

 

121,756

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

Partner’s Capital

 

Limited

General

Treasury

Limited

General

 

  

Class A

  

Class B

  

Partnership

  

Subtotal

  

Units

  

Total

  

Class A

  

Class B

  

Partnership

  

Total

 

Balance January 1, 2021

 

144,180

 

34,243

 

1,802

 

180,225

 

58,469

 

121,756

$

(33,203,447)

(7,852,318)

(413,280)

$

(41,469,045)

Distribution to Partners

 

 

 

 

 

 

 

(2,805,265)

(666,251)

(35,065)

 

(3,506,581)

Net Income

 

 

 

 

 

 

 

160,261

38,062

2,003

 

200,326

Balance September 30 , 2021

 

144,180

 

34,243

 

1,802

 

180,225

 

58,469

 

121,756

$

(35,848,451)

$

(8,480,507)

$

(446,342)

$

(44,775,300)

Balance January 1, 2022

 

144,180

 

34,243

 

1,802

 

180,225

 

58,709

121,516

$

(39,462,357)

$

(9,338,738)

$

(491,512)

$

(49,292,607)

Distribution to Partners

 

 

 

 

 

 

(6,498,504)

(1,543,395)

(81,231)

 

(8,123,130)

Stock Buyback

 

 

 

 

 

2,192

 

(2,192)

(4,134,773)

(981,249)

(51,645)

 

(5,167,667)

Net Income

 

 

 

 

 

 

1,264,500

300,319

15,806

 

1,580,625

Balance September 30, 2022

 

144,180

 

34,243

 

1,802

 

180,225

 

60,901

 

119,324

$

(48,831,134)

$

(11,563,063)

$

(608,582)

$

(61,002,779)

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30,

    

2022

    

2021

    

 

Cash Flows from Operating Activities

Net Income

    

$

1,580,625

    

$

200,326

    

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

Depreciation and amortization

 

12,212,278

 

11,806,561

Amortization of deferred finance costs

350,115

179,879

(Income) Loss from investments in joint ventures

 

(203,867)

 

796,725

Allowance for doubtful accounts

906,986

Change in operating assets and liabilities

Proceeds from unconsolidated joint ventures

 

72,500

 

27,250

Decrease (Increase) in rents receivable

 

520,644

 

(498,584)

(Decrease) Increase in accounts payable and accrued expense

 

(26,636)

 

413,183

(Increase) in real estate tax escrow

 

(1,045,681)

 

(32,970)

(Increase) in prepaid expenses and other assets

 

(931,325)

 

(1,195,693)

Increase in advance rental payments and security deposits

 

504,867

 

244,888

Total Adjustments

 

11,452,895

 

12,648,225

Net cash provided by operating activities

 

13,033,520

 

12,848,551

Cash Flows From Investing Activities

Distribution in excess of investment in unconsolidated joint ventures

 

1,135,000

 

603,202

(Investment) in unconsolidated joint ventures

 

 

(40,702)

Investment in U.S. Treasury Bills

(103,995,587)

Proceeds from U.S.Treasury Bills

30,000,000

Improvement of rental properties

 

(3,708,707)

 

(2,230,442)

Net cash (used in) investing activities

 

(76,569,294)

 

(1,667,942)

Cash Flows from Financing Activities

Principal payments of mortgage notes payable

 

(1,720,335)

 

(1,704,743)

Proceeds from Mortgage Notes Payable

41,937,337

Stock buyback

 

(5,167,667)

 

Distributions to partners

 

(8,123,130)

 

(3,506,581)

Net cash provided by (used in) financing activities

 

26,926,205

 

(5,211,324)

Net (Decrease) Increase in Cash and Cash Equivalents

 

(36,609,569)

 

5,969,285

Cash and Cash Equivalents, at beginning of period

 

96,083,508

 

18,646,972

Cash and Cash Equivalents, at end of period

$

59,473,939

$

24,616,257

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Line of Business: New England Realty Associates Limited Partnership (“NERA”, the “Company” 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.

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.

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

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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 $350,000 and $180,000 for the nine months ended September 30, 2022 and 2021, 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 at the time of purchase.

Investments in Treasury Bills: Investments in Treasury Bills are recorded at amortized cost and classified as held to maturity as the Partnership has the intent and the ability to hold them until they mature. The carrying value of the Treasury Bills are adjusted for accretion of discounts over the remaining life of the investment. Income related to the Treasury Bills is recognized in interest income in the Partnership’s consolidated statement of income.

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.

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 2022 or 2021 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.

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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 2022 or 2021. The Partnership makes its temporary cash investments with high-credit quality financial institutions. At September 30, 2022, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, and investments in U.S. Treasury bills, earning interest at rates from 0.01% to 2.19%. At September 30, 2022 and December 31, 2021, respectively approximately $45,045,000, and $96,166,000 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 $190,316 and $240,814 for the nine months ended September 30, 2022, and 2021, respectively.

Rental Property Held for Sale: When assets are identified by management as held for sale, the Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. The Partnership generally considers assets to be held for sale when the transaction has received appropriate corporate authority, and there are no significant contingencies relating to the sale. If, in management’s opinion, the estimated net sales price, net of selling costs, of the assets which have been identified as held for sale is less than the carrying value of the assets, a valuation allowance is established.

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 nine months ended September 30, 2022, and 2021 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 refinancings qualify as extinguishment of debt.

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

NOTE 2. RENTAL PROPERTIES

As of September 30, 2022, 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 September 30, 2022, 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 September 30, 2022 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:

    

September 30, 2022

    

December 31, 2021

    

Useful Life

 

Land, improvements and parking lots

$

87,506,136

$

86,887,276

15

-

40

years

Buildings and improvements

 

254,618,756

 

253,952,680

15

-

40

years

Kitchen cabinets

 

17,384,297

 

16,946,916

5

-

10

years

Carpets

 

12,751,418

 

12,029,577

5

-

10

years

Air conditioning

 

501,697

 

501,697

5

-

10

years

Laundry equipment

 

613,961

 

608,271

5

-

7

years

Elevators

 

1,885,265

 

1,885,265

20

-

40

years

Swimming pools

 

1,090,604

 

1,090,604

10

-

30

years

Equipment

 

18,767,307

 

18,072,761

5

-

30

years

Motor vehicles

 

171,519

 

171,519

5

years

Fences

 

46,872

 

46,872

5

-

15

years

Furniture and fixtures

 

8,462,476

 

7,898,163

5

-

7

years

Smoke alarms

 

496,641

 

496,641

5

-

7

years

Total fixed assets

 

404,296,949

 

400,588,242

Less: Accumulated depreciation

 

(161,359,023)

 

(149,233,040)

$

242,937,926

$

251,355,202

NOTE 3. RELATED PARTY TRANSACTIONS

The Partnership’s properties are managed by The Hamilton Company, Inc. (the “Management Company”) an entity that is owned by the majority shareholder of NewReal, Inc., the general partner of the Partnership (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 $2,029,000 and $1,868,000 for the nine months ended September 30, 2022 and 2021, respectively.

The Partnership Agreement permits the General Partner or the Management Company to charge the costs of professional services (such as counsel, accountants and contractors) to NERA. During the nine months ended September 30, 2022 and 2021, approximately $583,000 and $766,000 was charged to NERA for legal, accounting, construction, maintenance, brokerage fees, rental and architectural services and supervision of capital improvements. Of the 2022 expenses referred to above, approximately $215,000 consisted of repairs and maintenance, $256,000 of administrative expense, and approximately $23,000 for renting expense. Approximately $89,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2022, the Hamilton Company received approximately $567,000 from the Investment Properties of which approximately $491,000 was the management fee, approximately $38,000 was for maintenance services, approximately $14,000 was for administrative services and approximately $24,000 for construction, 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 $2,945,000 and $2,759,000 for the nine months ended September 30, 2022 and 2021, 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 nine months ended September 30, 2022, the Partnership accrued $70,000 for the employer’s match portion to the plan. For the nine months ended September 30, 2021, the Partnership contributed $33,000 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 nine months ended September 30, 2022 and 2021, the Management Company charged the Partnership $93,750 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses above.

Sally Michael is a Director of New Real, Inc., and she is a Partner at Saul Ewing Arnstein & Lear LLP. Saul Ewing billed the Partnership for legal fees totaling approximately $68,000 and $8,000 for the nine months ended September 30, 2022 and 2021 respectively.

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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 Brown family related entities, 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 $3,402,000, and $3,067,000 of security deposits are included in prepaid expenses and other assets at September 30, 2022 and December 31, 2021, respectively. The security deposits and escrow accounts are restricted cash.

Also, included in prepaid expenses and other assets at September 30, 2022 and December 31, 2021 is approximately $1,849,000 and $1,819,000, respectively, held in escrow to fund future capital improvements.

Intangible assets on the acquisition of Mill Street Apartments are included in prepaid expenses and other assets. Intangible assets are approximately $7,000 net of accumulated amortization of approximately $1,411,000 and approximately $26,000 net of accumulated amortization of approximately $1,392,000 at September 30, 2022 and December 31, 2021, respectively.

Financing fees in association with the line of credit of approximately $124,000 and $169,000 are net of accumulated amortization of approximately $55,000 and $10,000 at September 30, 2022 and December 31, 2021 respectively.

NOTE 5. MORTGAGE NOTES PAYABLE

At September 30, 2022 and December 31, 2021, the mortgages payable consisted of various loans, all of which were secured by first mortgages on properties referred to in Note 2. At September 30, 2022, the interest rates on these loans ranged from 2.97% to 4.95%, payable in monthly installments aggregating approximately $1,471,000 including principal, to various dates through 2035. The majority of the mortgages are subject to prepayment penalties. At September 30, 2022, the weighted average interest rate on the above mortgages was 3.69%. The effective rate of 3.80% 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 $3,213,000 and $2,709,000 are net of accumulated amortization of approximately $948,000 and $1,139,000 at September 30, 2022 and December 31, 2021, respectively, which offset the total mortgage notes payable.

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

Approximate annual maturities at September 30, 2022 are as follows:

2023—current maturities

    

$

8,583,000

 

2024

 

2,749,000

2025

 

3,260,000

2026

 

25,209,000

2027

 

3,121,000

Thereafter

 

371,767,000

414,689,000

Less: unamortized deferred financing costs

(3,213,000)

$

411,476,000

On November 30, 2021, the Partnership entered into a Master Credit Facility Agreement (the “Facility Agreement”) with KeyBank National Association (“KeyBank”) dated as of November 30, 2021, with an initial advance

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in the amount of $156,000,000. Interest only on the debt at a fixed interest rate of 2.97% is payable on a monthly basis through December 31, 2031.

On June 16, 2022, the Partnership entered into an amendment to the Facility Agreement. The additional advance under the Amended Agreement is in the amount of $80,284,000, at a fixed interest rate of 4.33%. The Partnership’s obligations under the Facility Agreement are secured by mortgages on certain properties pursuant to certain Mortgage, Assignment of Leases and Rents, and Security Agreement and Fixture Filings.

The Partnership used the proceeds to pay down approximately $37,065,000 of existing debt secured by four properties, along with approximately $854,000 in prepayment penalties. The remaining balance of approximately $42,384,000 will be used for general partnership purposes.

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 extended until October 31, 2020. The costs associated with the line of credit extension were approximately $128,000. Prior to the line’s expiration in 2020, the Partnership exercised its option for a one-year extension until October 31, 2021. The Partnership paid an extension fee of approximately $37,500 in association with the extension.

On October 29, 2021, the Partnership closed on the modification of its existing line of credit. The agreement extends the credit line for three years until October 29, 2024. The commitment amount is for $25 million but is restricted to $17 million during the modification period. The modification period covers the current period and phases out by December 31, 2022. During this period, the loan covenants are modified from a minimum consolidated debt service ratio of 1.60 to a ratio of 1.35 until September 30, 2022; from a minimum tangible net worth requirement of $200 million to a net worth of $175 million until September 30, 2022; from a maximum consolidated leverage ratio of 65% to a ratio of 70% until September 30, 2022 and from a minimum debt yield of 9.5% to a yield of 8.5% until September 30, 2022 and a yield of 9.0% until December 31, 2022. Once the financial performance of the Partnership meets the original covenant tests for the trailing 12-month period, the commitment amount will return to $25 million. The portfolio’s debt yield fell below the minimum of 8.5% to 8.05%. As of September 30, 2022, the Partnership did not comply with the debt yield financial covenant. As such, the Partnership is unable to draw down any amount from the line of credit until the Partnership meets the required financial covenants.

The interest rate for the new term is LIBOR plus 300 basis points. The costs associated with the modification and renewal of the line of credit was approximately $179,000. On December 3, 2021, the Partnership paid off the outstanding balance of $17,000,000 on the Line of Credit.

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 dividends, 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.

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 September 30, 2022, amounts received for prepaid rents of approximately $2,581,000 are included in cash and cash equivalents, and security deposits of approximately $3,402,000 are included in prepaid expenses and other assets and are restricted cash.

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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 distributions made to the total units outstanding. All classes have equal profit sharing and distribution rights, in proportion to their ownership interests.

In January 2022, the Partnership approved a quarterly distribution of $9.60 per Unit ($0.32 per Receipt), payable on March 31, 2022. In addition to the quarterly distribution, there was a special distribution of $38.40 per Class A unit ($1.28 per Receipt) payable on March 31, 2022. In April 2022, the Partnership approved a quarterly distribution of $9.60 per Unit ($0.32 per Receipt), payable on June 30, 2022. In July 2022, the Partnership approved a quarterly distribution of $9.60 per Unit ($0.32 per Receipt), payable on September 30, 2022.

In 2021, regular quarterly distributions of $9.60 per unit ($0.32 per receipt), were paid in March, June, September and December.

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:

Nine Months Ended

 

September 30,

 

    

2022

    

2021

 

Net Income per Depositary Receipt

    

$

0.44

    

$

0.05

Distributions per Depositary Receipt

$

2.24

$

0.96

NOTE 8. TREASURY UNITS

Treasury Units at September 30, 2022 are as follows:

Class A

    

48,721

 

Class B

 

11,571

General Partnership

 

609

 

60,901

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 September 30, 2022, the Partnership has repurchased 1,486,802 Depositary Receipts at an average price of $30.09 per receipt (or $902.70 per underlying Class A Unit), 4,034 Class B Units and 212 General Partnership Units, both at an average price of $1,179.00 per Unit, totaling approximately $50,336,000 including brokerage fees paid by the Partnership.

During the nine months ended September 30, 2022, the Partnership purchased a total of 52,613 Depositary Receipts. The average price was $78.53 per receipt or $2,355.90 per unit. The cost including commission was $4,134,773.The Partnership was required to repurchase 416.52 Class B Units and 21.92 General Partnership units at a cost of $981,249 and $51,645 respectively.

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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 nine months ended September 30, 2022, 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 August. Approximately 5% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at September 30, 2022 as follows:

    

Commercial

 

Property Leases

 

2023

$

1,981,000

2024

 

1,409,000

2025

 

871,000

2026

 

728,000

2027

 

406,000

Thereafter

 

1,683,000

$

7,078,000

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 $441,000 and $417,000 for the nine months ended September 30, 2022 and 2021 respectively. Staples and Trader Joe’s, tenants at Staples Plaza, are approximately 28% 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 September 30,

expiring leases

for expiring leases

leases expiring

expiring leases

 

2023

$

430,143

55,286

22

19

%

2024

 

785,710

26,248

13

37

%

2025

 

135,210

2,461

4

6

%

2026

 

198,266

5,396

4

9

%

2027

 

269,210

11,716

5

12

%

2028

 

93,873

2,158

1

4

%

2029

 

181,324

5,104

2

8

%

2030

 

%

2031

%

Thereafter

118,245

1

5

%

Totals

$

2,211,981

 

108,369

 

52

 

100

%

Rents receivable are net of an allowance for doubtful accounts of approximately $824,000 and $832,000 at September 30, 2022 and December 31, 2021. Included in rents receivable at September 30, 2022 is approximately $76,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis.

Rents receivable at September 30, 2022 also includes approximately $13,000 representing the deferral of rental concession primarily related to the residential properties.

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NOTE 11. CASH FLOW INFORMATION

During the nine months ended September 30, 2022 and 2021, cash paid for interest was approximately $10,584,000, and $9,985,000 respectively. Cash paid for state income taxes was approximately $52,000 and $70,000 during the nine months ended September 30, 2022 and 2021 respectively. During the nine months ended September 30, 2022, four properties were involved in a non-cash financing activity of approximately $37,000,000.

NOTE 12. FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis

At September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021 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. The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash, cash equivalents, and restricted cash include cash held in checking, U.S. Treasury Bills, and money market accounts.

The Partnership has investments in Treasury Bills some of which mature over a period greater than 90 days and are classified as short-term investments. The Treasury Bills are carried at amortized cost and classified as held to maturity as the Partnership has the intent and the ability to hold them until they mature. The carrying value of the Treasury Bills are adjusted for accretion of discounts over the remaining life of the investment. Income related to the Treasury Bills is recognized in interest income in the Partnership’s consolidated statement of income. The Treasury Bills classified within Level I of the fair value hierarchy.

At September 30, 2022 and December 31, 2021 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 September 30, 2022 and December 31, 2021, 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.

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

September 30, 2022

December 31, 2021

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

Assets

Cash equivalents

$

59,473,939

$

59,529,805

$

96,083,508

$

96,083,508

Treasury bills

$

73,995,586

$

74,158,935

$

$

Total Assets

$

133,469,525

$

133,688,740

$

96,083,508

$

96,083,508

Liabilities

Mortgage payable

- Partnership properties

*

$

411,475,632

$

366,891,771

$

370,481,390

$

383,244,134

- Investment properties

*

$

166,119,958

$

155,922,343

$

166,203,705

$

175,881,762

Total Liabilities

$

577,595,590

$

522,814,114

$

536,685,095