- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K --------------- /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to Commission file number 0-12138 ------------------------ NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2619298 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 39 BRIGHTON AVE., ALLSTON, MASSACHUSETTS 02134 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 783-0039 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None None Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS (Title of class) DEPOSITARY RECEIPTS (Title of class) ------------------------ 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 /X/ No / / Indicate by check mark if disclosure of deliquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 14, 1997, the aggregate market value of traded securities held by non-affiliates of the registrant was $11,144,128, based on the price at which the securities were sold. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS New England Realty Associates Limited Partnership ("NERA" or the "Partnership"), a Massachusetts limited partnership, was formed on August 12, 1977 as the successor to five real estate limited partnerships (collectively, the "Colonial Partnerships"), which filed for protection under Chapter XII of the Federal Bankruptcy Act in September 1974. The bankruptcy proceedings were terminated in late 1984. The authorized capital of the Partnership is represented by three classes of partnership units ("Partnership Units"). There are two categories of limited partnership interests ("Class A Units" and "Class B Units"), and one category of general partnership interests ("General Partnership Units"). The Class A Units were issued to creditors and limited partners of the Colonial Partnerships and have been registered under Section 12(g) of the Securities Exchange Act of 1934. Each Class A Unit is exchangeable for ten publicly traded Depositary Receipts ("Receipts"). The Class B Units were issued to the original general partners of the Partnership. The General Partnership Units are held by the current general partner of the Partnership, NewReal, Inc. (the "General Partner"). The Partnership is engaged in the business of acquiring, developing, holding for investment, operating, and selling real estate. In connection with various new mortgages obtained in 1995 by the Partnership on certain of its properties, the ownership was restructured as a requirement by the refinancing bank, so that a number of such properties would now be owned by various subsidiary limited partnerships. The Partnership directly or through 19 subsidiary limited partnerships (collectively, the "Subsidiary Partnerships" and individually, a "Subsidiary Partnership"), owns and operates various residential apartment buildings, condominium units, and commercial properties located in Massachusetts, Connecticut, New Hampshire, and Maine. The Partnership owns a 99.67% interest in each of the 19 Subsidiary Partnerships. The remaining .33% interest of each Subsidiary Partnership is held by an unaffiliated third party. The third party has entered into a lease agreement with the Partnership, pursuant to which any benefit derived from its ownership interest in such Subsidiary Partnerships will be returned to the Partnership. The Partnership has also made an investment in another real estate limited partnership. The Partnership acquired one apartment complex containing thirty-six (36) residential units and converted a three (3) bedroom unit at another apartment complex, previously occupied by an on-site manager, to a rental unit in 1996. SEE "ITEM 1. RECENT DEVELOPMENTS." The long-term goals of the Partnership are to manage, rent, and improve its properties and, as suitable opportunities arise, to acquire additional properties with income and capital appreciation potential. When appropriate, the Partnership may sell properties and may refinance selected properties with low debt-to-equity ratios. Proceeds from any such sales or refinancings will be reinvested in acquisitions of other properties, distributed to the partners, or used for operating expenses or reserves, as determined by the General Partner. OPERATIONS OF THE PARTNERSHIP The Partnership is managed by the General Partner, which is a Massachusetts corporation wholly owned by Ronald Brown and Harold Brown. The General Partner has employed the Hamilton Company, Inc. (the "Hamilton Company"), the successor to the Hamilton Company Limited Partnership, to perform the management functions for the Partnership's properties. The Hamilton Company employs Ronald Brown and Harold Brown. The Hamilton Company is wholly owned by Harold Brown. The Partnership and its Subsidiary Partnerships currently employ 59 individuals who are primarily involved in the supervision and maintenance of specific properties. The General Partner has no employees. As of March 14, 1997, the Partnership and its Subsidiary Partnerships owned and leased to residential tenants 1,647 apartment units in 18 residential and mixed-use complexes (collectively, the "Apartment Complexes"), 19 condominium units retained by the Partnership as rental properties in a residential apartment complex formerly owned by the Partnership which has been converted into condominiums, one 1 condominium unit in a separate condominium complex, and one co-operative apartment (the condominium unit and co-operative apartment are collectively referred to as the "Condominium Units"). The Apartment Complexes and the Condominium Units are located primarily in the greater metropolitan Boston, Massachusetts area. Additionally, as of March 14, 1997, the Subsidiary Partnerships owned commercial shopping centers in East Hampton, Connecticut, Gardner, Massachusetts, and Lewiston, Maine and commercial space in mixed-use buildings in Boston and Newton, Massachusetts. These properties are referred to collectively as the "Commercial Properties." The Partnership also owns an interest in a real estate limited partnership which owns an office building in West Peabody, Massachusetts, and is a party to a joint venture which leases space at the Timpany Plaza Shopping Center (the foregoing properties are referred to collectively as the "Investment Properties"). See Note 2 to Notes to Financial Statements included as a part of this Form 10-K. The Apartment Complexes, Condominium Units, Commercial Properties, and Investment Properties are referred to collectively as the "Properties." Harold Brown and, in certain cases, Ronald Brown, own or have owned interests in certain of the Properties. See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." In general, the Properties face no unusual competition. The Apartment Complexes and Condominium Units must compete for tenants with other residential apartments and condominium units in the areas in which they are located. The Commercial Properties and Investment Properties must compete for commercial tenants with other shopping malls and office buildings in the areas in which they are located. In the opinion of the General Partner, the Properties are adequately covered by insurance. The General Partner is not limited in the number or amount of mortgages which may be placed on any property, nor is there a policy limiting the percentage of Partnership assets which may be invested in any specific property. The Second Amended and Restated Contract of Limited Partnership of the Partnership (the "Partnership Agreement") authorizes the General Partner to acquire real estate and real estate related investments from or in participation with either or both of Harold Brown and Ronald Brown, or their affiliates, upon the satisfaction of certain terms and conditions, including the approval of the Partnership's Advisory Committee, and limitations on the price paid by the Partnership for such investments. The Partnership Agreement also permits the Partnership's limited partners and the General Partner to make loans to the Partnership, subject to certain limitations on the rate of interest which may be charged to the Partnership. Except for the foregoing, the Partnership does not have any policies prohibiting any limited partner, general partner, or any other person from having any direct or indirect pecuniary interest in any investment to be acquired or disposed of by the Partnership or in any transaction to which the Partnership is a party or has an interest in or from engaging for their own account in business activities of the types conducted or to be conducted by the Partnership. During the second quarter of 1996, the Partnership announced a plan to repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase of Depositary Receipts may take place over a period of one year or more. The repurchase price will be equal to the price at which such securities are traded on the NASDAQ Stock Market at the time of such repurchase. At December 31, 1996, 15,915 Depositary Receipts had been repurchased for a total cost of $110,060. See Note 8 to Notes to Financial Statements included as part of this Form 10-K. RECENT DEVELOPMENTS In December, 1996 the Partnership acquired a residential complex containing thirty-six (36) apartment units in Lowell, Massachusetts for a purchase price of approximately $790,000. The purchase was paid from the Partnership's cash reserves. 2 The Partnership believes it strengthened its portfolio by making significant acquisitions of residential and mixed-use properties in 1995. The Partnership acquired six properties for a total purchase price of approximately $32,123,000. The properties were acquired from trusts, of which the majority shareholder of the Partnership's General Partner was a substantial beneficial owner. In substance, the properties were owned by the trust's secured lender under a previous restructuring agreement whereby the lender received all of the operating income from the properties as well as the proceeds from the sale to the Partnership. The acquisitions were financed by mortgages on the acquired properties totaling $23,956,000. Additional funds totaling $22,446,000 were provided by 13 mortgages on refinanced or debt-free properties. Approximately $10,900,000 was used to repay existing mortgages, and approximately $8,167,000 was used in the acquisition of the above properties. In connection with these above mortgages, a substantial number of the Partnership's properties were restructured into separate Subsidiary Partnerships. The Subsidiary Partnerships recorded these purchases at the amount paid for the properties. An entity owned by the majority shareholder of the Partnership's General Partner received fees of $311,000 from the sellers of these properties. See Note 2 to Notes to Financial Statements included as part of this Form 10-K. At December 31, 1994 the Partnership made a deposit of $1,898,000 on one of the properties it acquired in 1995. This deposit was funded from cash reserves as well as a loan of $1,175,000 from an entity owned by the majority shareholder of the Partnership's general partner. In May, 1995 the Partnership repaid the $1,175,000 loan. In conjunction with these mortgages, the lender required that escrow accounts be established to fund future capital improvements. Approximately $669,000 was used to establish these accounts. The Partnership is required to make additional monthly payments of $34,000 to fund these escrow accounts. The Partnership sold two unencumbered condominium units located in Stoneham and Boston, Massachusetts for total proceeds of approximately $220,000 and recorded a gain of approximately $152,000 in 1995 as a result of such sale. The Partnership did not sell any properties in 1996. Other than such purchases described above, the Partnership had not acquired new properties since February 1989. See "ITEM 2. PROPERTIES--Commercial Properties." During 1996, the Partnership made certain improvements to its properties at a total cost of approximately $2,400,000. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources." In March, 1996 a major tenant in the Timpany Plaza Shopping Center filed for protection under the Federal Bankruptcy Code, Chapter 11. Subsequently, in December 1996, the same tenant closed its doors to business. This tenant had previously paid approximately $347,000 of rent in 1995 and approximately $188,000 of rent in 1996. The Timpany Plaza is currently 47% vacant and the Partnership cannot determine the effect the vacancy rate Timpany Plaza will have on the Partnership's rental income and net earnings in the future. The Partnership is in active discussions and negotiations with other retail tenants to rent the space. ADVISORY COMMITTEE The Partnership has an Advisory Committee composed of three limited partners who are not general partners or affiliates of the Partnership. The Advisory Committee meets with the General Partner to review the progress of the Partnership, assist the General Partner with policy formation, review the appropriateness, timing and amount of proposed distributions, approve or reject proposed acquisitions and investments with affiliates, and advise the General Partner on various other Partnership affairs. The Advisory Committee has no binding power except with respect to investments and acquisitions involving affiliates of the Partnership. 3 ITEM 2. PROPERTIES As of March 14, 1997, the Partnership and its Subsidiary Partnerships own the Apartment Complexes, the Condominium Units, the Commercial Properties, and an interest in a real estate partnership which owns the Investment Property. See also "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for further information concerning affiliated transactions. During 1995, limited partnerships were created to own each of the Apartment Complexes and the Commercial Properties listed below, exclusive of the Westgate Apartments and the Condominium Units. In addition to the foregoing, in 1996, the Partnership acquired the Highland Street Apartment Complex in Lowell, Massachusetts, which is owned directly by the Partnership and not through any Subsidiary Partnership. APARTMENT COMPLEXES The table below lists the location of each Apartment Complex, the number and type of units in each complex, the range of rents and vacancies as of March 14, 1997, the principal amount outstanding under any mortgages as of December 31, 1996, and the maturity dates of such mortgages. MORTGAGE BALANCE AND INTEREST NUMBER AND RATE AS OF APARTMENT TYPE OF RENT DECEMBER 31, MATURITY DATE COMPLEX UNITS RANGE VACANCIES 1996 OF MORTGAGE - --------------------------- -------------------------- -------------- ------------- ------------ --------------- Coach LP 48 units $765-825 0 $1,186,593 2005 53-55 Brook St. 24 two-bedrooms $675-725 8.25% Acton, MA 20 one-bedrooms $595-605 4 studios Westgate Woburn 221 units $1,225 3 $6,826,269 2000 2-20 Westgate Dr. 1 three-bedroom $705-905 10.99% Woburn, MA 110 two-bedrooms $675-815 110 one-bedrooms Avon Street Apts. LP 66 units $740-850 2 $1,773,465 2005 130 Avon Street 30 two-bedrooms $645-730 8.775% Malden, MA 33 one-bedrooms $575-590 3 studios Middlesex Apts. LP 18 units $1,250-1,550 0 $1,095,121 2005 132-144 Middlesex Rd 18 three-bedrooms 8.625% Newton, MA Clovelly Apts. LP 103 units $605-735 3 $2,074,129 2005 160-170 Concord St. 53 two-bedrooms $535-595 8.375% Nashua, NH 50 one-bedrooms Nashoba Apts. LP 32 units $795-1,020 4 $1,083,344 2005 284 Great Road 32 two-bedrooms 8.625% Acton, MA River Drive LP 72 units $655-725 3 $1,536,017 2005 3-17 River Drive 60 two-bedrooms $630-635 8.775% Danvers, MA 5 one-bedrooms $520-540 7 studios 4 MORTGAGE BALANCE AND INTEREST NUMBER AND RATE AS OF APARTMENT TYPE OF RENT DECEMBER 31, MATURITY DATE COMPLEX UNITS RANGE VACANCIES 1996 OF MORTGAGE - --------------------------- -------------------------- -------------- ------------- ------------ --------------- Executive Apts. LP 72 units $680-810 2 $1,779,375 2005 545-561 Worcester Road 48 two-bedrooms $640-775 8.775% Framingham, MA 24 one-bedrooms Willard Apts. LP 16 units $715-750 3 $ 291,838 2005 580 Willard St. 8 two-bedrooms $600-700 8.375% Quincy, MA 8 one-bedrooms Olde English Apts. LP 84 units $585-675 0 $1,397,278 2005 703-718 Chelmsford St. 47 two-bedrooms $555-610 8.5% Lowell, MA 30 one-bedrooms $495-540 7 studios Oak Ridge Apts. LP 61 units $780-895 2 $2,090,990 2005 Chestnut St. 41 three-bedrooms $670-840 8.5% Foxboro, MA 20 two-bedrooms Linhart LP 9 units $610-765 0 $1,305,832 2005 4-34 Lincoln St. 6 one-bedrooms $560-615 9.25% Newton, MA 3 studios Commonwealth 1137 LP 35 units $893-1,250 1 $1,260,875 2005 1131-1137 Comm. Ave. 28 three-bedrooms $775-925 8.375% Allston, MA 5 two-bedrooms $395 1 one-bedroom $460 1 studio Redwood Hills LP 180 units $645-800 5 $4,557,866 2005 376-384 Sunderland Rd. 90 two-bedroom $585-785 8.375% Worcester, MA 90 one-bedrooms Commonwealth 1144 LP 261 units $580-765 2 $5,268,093 2005 1144-1160 Comm. Ave. 11 two-bedrooms $650-895 8.375% Allston, MA 108 one-bedrooms $450-735 142 studios Boylston Downtown LP 269 units $445-1,295 15 $7,742,561 2005 62 Boylston St. 53 one-bedrooms $571-1,225 8.375% Boston, MA 216 studios North Beacon 140 LP 64 units $1,295-1,495 4 $3,459,526 2005 140-154 North Beacon St. 54 two-bedrooms $1,295-1,850 8.375% Brighton, MA 10 two-bedrooms Highland Street Apts. 36 Units $488-515 6 0 0 38-40 Highland Street 25 Two-Bedrooms $495-610 Lowell, MA 9 One Bedrooms $470 2 Studios See Note 5 to Notes to Financial Statements included as part of this Form 10-K for information relating to the Partnership's and its Subsidiary Partnership mortgages payable. 5 CONDOMINIUM UNITS The Partnership owns and leases to residential tenants 21 Condominium Units in the greater Boston, Massachusetts area. All of the apartment complexes in which the Condominium Units are located, with the exception of the Riverside Apartments, were developed or partially owned by Harold Brown, and in certain cases by Ronald Brown. The table below lists the location of the Condominium Units, the number of units in each complex, the number and type of units owned by the Partnership in each complex, the range of rents received by the Partnership for such units, and the number of vacancies as of March 14, 1997. No Condominium Unit is subject to an existing mortgage. NUMBER OF NUMBER AND TYPE UNITS IN OF UNITS OWNED RENT APARTMENT COMPLEX COMPLEX BY PARTNERSHIP RANGE VACANCIES - -------------------------------------------------------- ------------- ------------------- ---------- --------------- Riverside Apartments.................................... 106 12 two-bedrooms $ 800-920 1 8-20 Riverside Street 5 one-bedrooms $ 745-800 Watertown, MA 2 studios $635-650 The Kenmore Tower(1).................................... 111 1 one-bedroom $ 1,200 0 566 Commonwealth Avenue Boston, MA Chateaux Westgate....................................... 252 1 two-bedroom $ 780 0 Oak Lane Brockton, MA - ------------------------ (1) This is a co-operative apartment. The Kenmore Tower Corporation is subject to a debt secured by the apartment building, of which approximately $7,000 was allocated to the Partnership as of December 31, 1996. COMMERCIAL PROPERTIES EAST HAMPTON MALL LP. In 1984, the Partnership acquired the East Hampton Mall in East Hampton, Connecticut (the "East Hampton Mall"). The shopping center is set on 4.25 acres of land and consists of 52,500 square feet of rentable space, rented primarily to commercial retail establishments. During 1995, this Subsidiary Partnership obtained a mortgage in the amount of $1,435,000 which carries an interest rate of 8.375% and matures in the year 2005. As of December 31, 1996, the mortgage had an outstanding balance of $1,412,639. As of March 14, 1997, the shopping center had a vacancy rate of 7%, and the average rent per square foot was $5.02. TIMPANY PLAZA LP. In 1985, the Partnership acquired the Timpany Plaza Shopping Center in Gardner, Massachusetts ("Timpany Plaza"). The shopping center is set on 16 acres of land and consists of 184,600 square feet of rentable space. During 1995, this Subsidiary Partnership obtained a mortgage in the amount of $3,561,000 which carries an interest rate of 8.375% and matures in 2005. As of December 31, 1996, the mortgage had an outstanding balance of $3,509,392. As of March 14, 1997, the shopping center had a vacancy rate of 47%, and the average rent per square foot was $5.15. In March, 1996, a major tenant in the Timpany Plaza Shopping Center filed for protection under the Federal Bankruptcy Code, Chapter 11. Subsequently, in December, 1996, the same tenant closed its doors to business. This tenant paid approximately $347,000 of rent in 1995 and approximately $188,000 of rent in 1996. The Partnership is in active discussions and negotiations with other retail tenants to rent space. This Subsidiary Partnership has a ground lease with a major tenant of the Timpany Plaza Shopping Center. Pursuant to the ground lease, the tenant demolished the existing structure and constructed a new store of approximately 60,000 square feet. The tenant moved into the new store in 1989. The Partnership entered into a joint venture with this tenant to lease the space formerly occupied by the tenant. The joint venture pays this Subsidiary Partnership annual minimum rent of $84,546. The joint venture's "net income" (as defined in the ground lease) earned from leasing the tenant's former space is being split evenly between this Subsidiary Partnership and the tenant. This Subsidiary Partnership's share of the joint venture's "net income" in 1996 was $12,294. 6 The term of the ground lease is 20 years, with automatic extension options for an additional 30 years. At the termination of the ground lease, this Subsidiary Partnership will retain sole title to the underlying property. LEWISTON MALL LP. In 1989, the Partnership acquired the Lewiston Mall shopping center in Lewiston, Maine (the "Lewiston Mall"). The shopping center is set on 14 acres of land and consists of 181,000 square feet of rentable space. During 1995, this Subsidiary Partnership obtained a mortgage in the amount of $2,933,000 which carries an interest rate of 8.375% and matures in the year 2005. As of December 31, 1996, the mortgage had an outstanding balance of $2,887,296. As of March 14, 1997, the Shopping Center had a 2% vacancy rate, and the average rent per square foot was $4.08. LINHART LP. During 1995, the Partnership acquired the Linhart property in Newton, Massachusetts ("Linhart"). The property consists of 21,200 square feet of rentable space. As of March 14, 1997, the commercial space had a 1% vacancy rate, and the average rent per square foot was $16.34. BOYLSTON DOWNTOWN LP. During 1995, this Subsidiary Partnership acquired the Boylston Downtown property in Boston, Massachusetts ("Boylston"). The property consists of 17,400 square feet of rentable space. As of March 14, 1997, the commercial space was fully rented, and the average rent per square foot was $9.68. NORTH BEACON 140 LP. During 1995, this Subsidiary Partnership acquired the North Beacon property in Boston, Massachusetts ("North Beacon"). The property consists of 1,000 square feet of rentable space. As of March 14, 1997, the commercial space was fully rented, and the average rent per square foot was $8.95. See Item 13 "Certain Relationships and Related Transactions" concerning ownership interest in the above properties. INVESTMENT PROPERTY The Partnership has an investment in a real estate limited partnership which owns an office building in West Peabody, Massachusetts. During 1996, two of the three real estate limited partnerships (Commerce Way Limited Partnership and 125 Water Street Realty Associates Limited Partnership) of which the Partnership previously held 10% limited partnership interests in each respectively, effectively disposed of their real estate holdings. As a result of such dispositions by these real estate limited partnerships, the Partnership's investment interests as a limited partner were liquidated. The carrying value of these investment interests had previously been reduced to zero. The Partnership did not realize any income from these liquidations. As of December 31, 1996, the Partnership's investment in the real estate limited partnership which owns the Investment Property described below and its interest in the joint venture with a Timpany Plaza tenant comprised less than 1% of the Partnership's total assets. WEST PEABODY LIMITED PARTNERSHIP. The Partnership owns a 10% limited partnership interest in the West Peabody Limited Partnership ("West Peabody L.P."). West Peabody L.P. owns a 125,000 square foot office and warehouse building in West Peabody, Massachusetts. As of March 14, 1997, the building had a 8% vacancy rate. The Partnership's share of losses generated by the West Peabody L.P. through the year ended December 31, 1996 exceeded the Partnership's investment by approximately $650,000. As a limited partner, the Partnership is not liable for amounts in excess of its investment and, accordingly, has not recorded any excess losses. The carrying value of the investment interest has been reduced to zero. There can be no assurance that this investment, which did not produce any income for the Partnership during 1996, will be realized in the future in excess of its carrying value. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Each Class A Unit is exchangeable, through Boston EquiServe Limited Partnership, as Deposit Agent, for ten Depositary Receipts ("Receipts"). The Receipts are publicly-traded on NASDAQ under the symbol "NEWRZ". There has never been an established public market for the Class B Units or General Partnership Units. In 1996, the high and low bid quotations for the Receipts were $7.50 and $5.875, respectively. The table below sets forth the high and low bids for each quarter of 1996 and 1995: 1996 1995 ---------------------------- ---------------------------- LOW BID HIGH BID LOW BID HIGH BID ------------- ------------- ------------- ------------- First Quarter........................................................... $ 57/8 $ 63/4 $ 51/2 $ 61/8 Second Quarter.......................................................... $ 61/16 $ 63/4 $ 51/2 $ 63/8 Third Quarter........................................................... $ 61/2 $ 71/4 $ 6 $ 65/8 Fourth Quarter.......................................................... $ 63/4 $ 71/2 $ 57/8 $ 65/8 These quotations reflect inter-dealer prices without retail markup, markdown, or commission and do not necessarily represent actual transactions. Any portion of the Partnership's cash which the General Partner deems not necessary for cash reserves is distributed to the Partners. The Partnership has made annual distributions to its Partners since 1978. In each of 1996 and 1995, the Partnership made a total distribution of $6.80 per Partnership Unit ($.68 per Receipt), which was paid in equal installments in March and September. The total value of the distribution in 1996 was $1,199,757, an amount determined by the General Partner and the Partnership's Advisory Committee. In March 1997, the Partnership made a regular semi-annual distribution of $3.90 per Partnership Unit ($.39 per Receipt), plus an additional special distribution of $1.00 per Partnership Unit ($.10 per Receipt). See Note 13 to Notes to Financial Statements included as part of this Form 10-K. In the past, assuming Partners hold Partnership Units or Receipts on the record date for a distribution, distributions have exceeded the amount of the individual income tax payable by Partners as a result of Partnership income allocated to them. However, in 1996, the taxable income exceeded statement income by approximately $1,000,000. The Partnership declared a special distribution in March 1997 to assist partners with any negative tax consequences (as described above and in Note 13 to Notes to Financial Statements included as part of this Form 10-K). During the second quarter of 1996, the Partnership announced a plan to repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase of Depositary Receipts may take place over a period of one year or more. The repurchase price will be equal to the price at which such securities are traded on the NASDAQ Stock Market at the time of such repurchase. At December 31, 1996, 15,915 Depositary Receipts had been repurchased for a total cost of $110,060. In order to restore the classes of Partnership Units to the required ratios, the Partnership repurchased from the General Partner 20 General Partnership Units and repurchased from Harold Brown and Ronald Brown 284 and 94 Class B Units respectively, at an aggregate cost of $27,517. See "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for certain information relating to the number of holders of each class of Partnership Units. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is included on page 18 of this Form 10-K. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND 1995 New England Realty Associates Limited Partnership and its Subsidiary Partnerships incurred income from operations of $725,649 during the year ended December 31, 1996, compared to a loss from operations of $3,116,087 for the year ended December 31, 1995, an increase of $3,841,736. Excluding the effect of a special non-cash impairment loss of $3,250,000 in 1995, income from operations increased approximately $592,000. (See Note 2 to Notes to Financial Statements included with this Form 10-K.) In 1996, income from operations before depreciation and amortization and impairment loss was approximately $3,800,000 compared to approximately $2,474,000 in 1995, an increase of approximately $1,326,000. Rental income for the year ended December 31, 1996 was approximately $16,449,000, compared to approximately $12,297,000 for the year ended December 31, 1995, an increase of approximately $4,152,000. This increase was primarily due to rental income of $3,973,000 from the properties acquired in 1995. Rental income from the existing residential properties increased primarily due to increased rental rates and occupancy levels at Westgate Woburn, Chestnut Square and Olde English apartments. Rental income at the Partnership's commercial properties increased approximately $164,000 due to increases in percentage rents and common area maintenance charges. Laundry and sundry income increased approximately $41,000 due to the properties acquired in 1995. Expenses for the year ended December 31, 1996 were approximately $15,909,000, compared to approximately $15,576,000 for the year ended December 31, 1995, an increase of approximately $333,000. Expenses before the impairment loss were approximately $12,326,000 in 1995, an increase of approximately $3,583,000 compared to 1996. The year ended December 31, 1996 included twelve months of expenses for the properties acquired in 1995 compared to six months for the year ended December 31, 1995. Interest expense increased to approximately $4,730,000 for the year ended December 31, 1996 from approximately $3,432,000 for the year ended December 31, 1995, an increase of approximately $1,298,000. This increase was primarily due to interest expense of $952,000 from the properties acquired in 1995. Other significant changes to expenses relating to these properties included an increase in depreciation and amortization expense of approximately $664,000; an increase in repairs and maintenance expense of approximately $310,000; an increase in operating expenses of approximately $651,000; an increase in taxes and insurance of approximately $386,000; and an increase in management fees of approximately $177,000. These increases were partially offset by decreased renting expenses of approximately $72,000 which were due to reduced rental advertising and commission costs. Interest income was approximately $156,000 for the year ended December 31, 1996, compared to approximately $60,000 for the year ended December 31, 1995, an increase of approximately $96,000. This increase was due to an increase in the funds available for investment during the year. The Partnership also sold two condominium units during 1995, for a total gain of approximately $152,000. The Partnership is a partner in a joint venture with a tenant at the Timpany Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the agreement, the two parties have agreed to relet space formerly leased by the tenant, and divide the net income or loss after paying to the Partnership an annual minimum rent of approximately $84,000. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of the Partnership's assets. 9 The Partnership's share of income for 1996 in the joint venture at the Timpany Plaza Shopping Center was approximately $13,000, compared to approximately $29,000 in 1995, a decrease of approximately $16,000. This decrease was due to an increase in vacancies in the relet space. In 1996, the Partnership reported other income of approximately $18,000 from the sale of real estate partnership interests whose carrying value had previously been reduced to zero. As a result of the changes discussed above, net income for the year ended December 31, 1996 was approximately $912,000, compared to net loss for the year ended December 31, 1995 of approximately $2,875,000, an increase of approximately $3,787,000. In March 1996, a major tenant at the Timpany Plaza Shopping Center filed for protection under the Federal Bankruptcy Code, Chapter 11 and the tenant subsequently vacated the premises on or about December 1996. The tenant occupied approximately 71,000 square feet of space, and paid the Partnership approximately $188,000 in 1996. This tenant has ceased making payments to the Partnership, and at March 14, 1997, this location is currently unoccupied. In addition, the Partnership is actively marketing the space. The Partnership is in active discussions and negotiations with other retail tenants to rent the space. YEARS ENDED DECEMBER 31, 1995 AND 1994 New England Realty Associates Limited Partnership and its Subsidiary Partnerships incurred a loss from operations of $3,116,087 during the year ended December 31, 1995 compared to income from operations of $847,980 for the year ended December 31, 1994, a decrease of $3,964,067. This decrease is principally a result of a special non-cash impairment loss of $3,250,000 on the Lewiston Mall shopping center in the fourth quarter of 1995, related to an early adoption of Statement of Financial Accounting Standards No. 121 (FAS No. 121). (See Note 2 to Notes to Financial Statements included as part of this Form 10-K.) Excluding depreciation and amortization and impairment loss, income from operations was approximately $2,474,000 in 1995, compared to approximately $2,484,000 in 1994, a decrease of approximately $10,000. Rental income for the year ended December 31, 1995 was approximately $12,297,000, compared to approximately $8,385,000 for the year ended December 31, 1994, an increase of approximately $3,912,000. This increase was primarily due to rental income of $3,706,000 from the newly acquired properties. Rental income from the existing residential properties increased approximately $266,000, primarily due to increased rental rates; residential occupancy levels remained relatively stable. This increase was partially offset by decreased rental income at existing commercial properties of $60,000. The decrease was primarily due to a vacancy in the East Hampton Mall, a decrease in charges for common area maintenance expenses at the Lewiston Mall, and a decrease in percentage rents at the Timpany Plaza Shopping Center. Laundry and sundry income increased approximately $41,000 due to the newly acquired properties. Expenses for the year ended December 31, 1995 were approximately $15,576,000, compared to approximately $7,658,000 for the year ended December 31, 1994, an increase of approximately $7,918,000. The most significant component of this increase was the impairment loss of $3,250,000 recorded for the Lewiston Mall in the fourth quarter of 1995. Other significant changes were due to the acquisition of new properties. Interest expense increased to approximately $3,432,000 for the year ended December 31, 1995 from approximately $1,672,000 for the year ended December 31, 1994, an increase of approximately $1,760,000. The increase was directly related to the increase in outstanding mortgages. Other significant changes were also due to the acquisition of new properties and consisted of an increase in depreciation and amortization expense of approximately $703,000; an increase in operating expenses of approximately $367,000; an increase in repairs and maintenance expenses of approximately $793,000; and increases in administrative expenses, management fees, renting expenses, and taxes and insurance of approximately $286,000, $206,000, $210,000, and $343,000 respectively. 10 Interest income was approximately $60,000 for the year ended December 31, 1995, compared to approximately $52,000 for the year ended December 31, 1994, an increase of approximately $8,000. This increase was due to an increase in funds available for investment during the second half of 1995. The Partnership also sold two condominium units during the year for a total gain of approximately $152,000. The Partnership is a partner in a joint venture with a tenant at the Timpany Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the agreement, the two parties have agreed to relet space formerly leased by the tenant and divide the net income or loss after paying to the Partnership an annual minimum rent of approximately $84,000. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of the Partnership's assets. The Partnership's share of income for 1995 in the joint venture at the Timpany Plaza Shopping Center was approximately $29,000 compared to approximately $43,000 in 1994, a decrease of approximately $14,000. This decrease was due to an increase in the operating expenses in connection with the joint venture. In 1994, the Partnership reported other income of $130,000 of which $100,000 represented the cost of energy-saving devices installed at the Partnership's properties by utility companies at no cost to the Partnership. The additional $30,000 represents the elimination of a provision for estimated liabilities in connection with the Partnership's investment in a partnership. As a result of the changes discussed above, the net loss for the year ended December 31, 1995 was approximately $2,875,000, compared to net income for the year ended December 31, 1994 of approximately $1,073,000, a decrease of approximately $3,948,000. LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal sources of cash during 1996 and 1995 were the collection of rents and the refinancing of Partnership properties. The majority of cash and cash equivalents totaling $1,830,605 in 1996 and $2,706,124 in 1995 was principally invested in a U.S. government money market account. This represents a decrease of $875,519 from 1995. Additionally, the Partnership has a short-term investment of $51,528 at December 31, 1996, compared to $48,877 at December 31, 1995. This investment consisted of a certificate of deposit with a maturity of up to one year from the date of purchase. In November 1996, the Partnership and its subsidiaries acquired a residential apartment complex consisting of 36 apartments in Lowell, Massachusetts. The total purchase price of this property was approximately $790,000, and was funded from the Partnership's cash reserves. During 1995, the Partnership acquired six properties for a total purchase price of approximately $32,123,000. The acquisitions were financed by new mortgages on the acquired properties totaling $23,956,000. Additional funds, totaling $22,446,000 were provided by 13 mortgages on refinanced or debt-free properties. Approximately $10,900,000 of this amount was used to repay existing mortgages, and approximately $11,546,000 was used in the acquisition of the above properties. In conjunction with these mortgages, the lender required that separate escrow accounts totaling approximately $870,000 be established to fund capital improvements at each of the properties. The Partnership is required to make additional monthly payments of approximately $34,000 to fund these escrow accounts. In connection with these new mortgages, a substantial number of the Partnership's properties were restructured into separate Subsidiary Partnerships. In 1996, the Partnership announced a plan under which it may repurchase up to $500,000 of its Depository Receipts from existing holders of securities. The repurchase plan may take place over a period of one year or more. The purchase price will be equal to the price at which such securities are traded on the NASDAQ Stock Market at the time of the repurchase. In 1996, the Partnership purchased 15,915 11 depository receipts for a total cost of $110,060. In addition, the Partnership purchased Class B and General Partnership units for a total cost of $27,517 to maintain the required ownership percentages. During 1996, the Partnership and its Subsidiary Partnerships completed certain capital improvements to their properties at a total cost of approximately $2,400,000. These improvements were funded from the aforementioned escrow accounts, as well as from cash reserves. The most significant improvements were made at the Westgate apartments in Woburn, Massachusetts for a total cost of approximately $437,000. Additional capital improvements of approximately $341,000, $221,000, $196,000, $135,000 and $127,000 were made to the Redwood Apartments, 1144 Commonwealth Avenue, Lewiston Mall, Boylston Downtown and 1137 Commonwealth Avenue properties, respectively. In 1997, the Partnership and its Subsidiary Partnerships plan to invest approximately $2,200,000 in capital improvements, of which approximately $1,900,000 is designated for residential properties and approximately $300,000 is designated for commercial properties. These improvements will be funded from escrow accounts as well as from the Partnership's cash reserves. The Partnership anticipates that cash from operations and interest-bearing investments will be sufficient to fund its current operations and to finance current improvements to its properties. The Partnership's net income and cash flow may fluctuate dramatically from year to year as a result of the sale of properties, unanticipated increases in expenses, or the loss of significant tenants. Since the Partnership's long-term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved of this purpose. The Partnership will consider refinancing existing properties if either insufficient funds exist from cash reserves to repay existing mortgages or if funds for future acquisitions are not available. FACTORS THAT MAY AFFECT FUTURE RESULTS The discussion above and elsewhere in this Annual Report contain information based upon management's belief and forward looking statements that involve a number of risks, uncertainties and assumptions. There can be no assurances that actual results will not differ materially as a result of various factors, including but not limited to the following: The Timpany Plaza Shopping Center in Gardner, Massachusetts is 47% vacant at March 14, 1997. If the space remains unoccupied, the 1997 rental income would be approximately $200,000 less than 1996. Should circumstances remain the same in 1997, the Partnership may need to review the carrying value of this property for impairment in accordance with the Statement of Financial Accounting Standards No. 121 (FAS No. 121). A major tenant of the Lewiston Mall in Lewiston, Maine, which paid approximately $240,000 in 1996, can terminate its lease with nine months notice effective January 1, 1997. The Partnership is currently negotiating to obtain a long-term lease. The Partnership, at this time, cannot make any assurances that the tenant will renew its lease for this space. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Partnership appear on pages F-1 through F-20 of this Form 10-K and are indexed herein under Item 14(a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The General Partner is a Massachusetts corporation wholly owned by Harold Brown and Ronald Brown. Harold Brown and Ronald Brown were individual general partners of the Partnership until May 1984 when NewReal, Inc. replaced them as the sole general partner of the Partnership. The General Partner is responsible for making all decisions and taking all action deemed by it necessary or appropriate to conduct the business of the Partnership. Since October 1992, the General Partner employed the Hamilton Partnership as the management company to manage the Partnership's and its Subsidiary Partnership's properties. During 1996, the Hamilton Partnership was dissolved and its successor and general partner assumed the management functions of the Hamilton Partnership. The Hamilton Company, a Massachusetts corporation, was the 99% general partner of Hamilton Partnership. The Hamilton Company was purchased by Harold Brown in August 1993. Harold Brown also owned the corporation that was the 1% limited partner of the Hamilton Partnership. See "ITEM 11. EXECUTIVE COMPENSATION" for information concerning fees paid by the Partnership to the Hamilton Company during 1996. Because the General Partner has employed the Hamilton Company as the manager for the Properties, the General Partner has no employees. The directors and executive officers of the General Partner are Ronald Brown and Harold Brown. Harold Brown and Ronald Brown are brothers. The directors of the General Partner hold office until their successors are duly elected and qualified. The executive officers of the General Partner serve at the pleasure of the Board of Directors. The following table sets forth the name and age of each director and officer of the General Partner and each such person's principal occupation and affiliation during the preceding five years. NAME AND POSITION AGE OTHER POSITIONS - -------------------------------------- --- -------------------------------------------------------------------- Ronald Brown.......................... 61 Associate, Hamilton Realty Company (since 1967); Treasurer, R. Brown President, Clerk and Director Partners Inc. (since 1985), President, Secretary and sole proprietor (since 1984) (since April 1989); Member, Greater Boston Real Estate Board (since 1981); Director, Brookline Chamber of Commerce (since 1978); Trustee of Trustee of Reservations (since 1988); Director, Brookline Music School (since 1993); President, Brookline Chamber of Commerce (1990-1992); Director, Coolidge Corner Theater Foundation (1990-1993); President, Brookline Property Owner's Association (1981-1990); Trustee, Brookline Hospital (1982-1989), Director, Brookline Symphony Orchestra (since 1996), Treasurer, Brookline Greenspace Alliance. Harold Brown.......................... 72 Sole proprietor, Hamilton Realty (since 1955); Trustee of Wedgestone Company Treasurer and Director Realty Investors Trust (1982-1985); (since 1984) Chairman of the Board and principal stockholder of the Wedgestone Advisory Corporation (1980-1985); Director of AFC Financial Corp. (1983-1985); Member, Greater Boston Real Estate Board; Director, Coolidge Bank and Trust (1980-1983). As discussed under "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS," in 1996 the Partnership repurchased certain Partnership Units from each of Harold Brown, Ronald Brown and the General Partner, and the repurchase of these units will be reported by each of Harold Brown and Ronald Brown on a Form 5 for 1996. 13 COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Partnership's directors and executive officers, and persons who own more than 10% of a registered class of the Partnership's equity securities, to file with the Securities and Exchange Commission reports of ownership changes and changes in ownership of the Partnership. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Partnership with copies of all Section 16(a) forms they file. Based solely on review of the copies of such reports furnished to the Partnership or written or oral representations that no reports were required the Partnership believes that during 1996 fiscal year, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except that Harold Brown and Ronald Brown failed to file Forms 4 covering the sale of the Partnership's Class B Partnership Units and General Partnership Units repurchased by the Partnership to maintain the required ownership percentages. Each of Ronald Brown and Harold Brown are filing a Form 5 Annual Statement of Changes in Beneficial Ownership contemporaneously with the filing of this Annual Report. ITEM 11. EXECUTIVE COMPENSATION Pursuant to the Partnership Agreement, the General Partner, or any management entity employed by the General Partner, is entitled to a management fee equal to 4% of the rental and other operating income from the Properties and a mortgage servicing fee equal to 0.5% of the unpaid principal balance of any debt instruments received, held and serviced by the Partnership (the "Management Fee"). The Partnership Agreement also authorizes the General Partner to charge to the Partnership its cost for employing professionals to assist with the administration of the Partnership Properties (the "Administrative Fee"). The Administrative Fee is not charged against the Management Fee. In addition, upon the sale or disposition of any Partnership Properties, the General Partner, or any management entity which is the effective cause of such sale, is entitled to a commission equal to 3% of the gross sale price (the "Commission"), provided that should any other broker be entitled to a commission in connection with the sale, the commission shall be the difference between 3% of the gross sale price and the amount to be paid to such broker. In accordance with the Partnership Agreement, the Management Fee, the Administrative Fee and the Commission are paid to the management company, the Hamilton Company. See "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." The total Management Fee charged by the Hamilton Company during 1996 was approximately $677,000. In 1996, the Partnership and its Subsidiary Limited Partnerships also paid to the Hamilton Company Administrative Fees of approximately $511,000, inclusive of construction supervision and architectural fees of $232,000, repairs and maintenance service fees of $115,000, legal fees of $147,000 and rental fees of $17,000. No commission was paid to the management company in 1996. In addition, during 1996 the Partnership paid the Hamilton Company $50,000 for certain accounting services, which were provided by an outside company prior to 1993. The management services provided by the Hamilton Company include, but are not limited to, collecting rents and other income, approving, ordering and supervising all repairs and other decorations, terminating leases, evicting tenants, purchasing supplies and equipment, financing and refinancing properties, settling insurance claims, maintaining administrative offices and employing personnel. In addition, the Partnership employs the president of the Hamilton Company to provide asset management services to the Partnership for which the Partnership paid approximately $29,000 in 1996. Members of the Partnership's Advisory Committee and Ronald Brown and Harold Brown receive $200 for each committee meeting attended. The Advisory Committee held six meetings during 1996. In addition, in 1996 and 1995, the Partnership paid the Hamilton Company additional construction supervision fees of $16,800 and $14,400 respectively, of which $16,800 and $12,000 were paid to Ronald Brown. 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 14, 1997, except as listed below, the General Partner was not aware of any beneficial owner of more than 5% of the outstanding Class A Units or the Depositary Receipts, other than Boston EquiServe Limited Partnership ("Boston EquiServe"), which under the Deposit Agreement, as Depositary, is the record holder of the Class A Units exchanged for Depositary Receipts. As of March 14, 1997, pursuant to the Deposit Agreement, Boston EquiServe was serving as the record holder of the Class A Units with respect to which 1,055,456 Depositary Receipts had been issued to 1,642 holders. As of March 14, 1997, there were issued and outstanding 33,756 Class A Units held by 1,519 limited partners and 33,234 Class B Units and 1,749 General Partnership Units held by the persons listed below. The following table sets forth certain information regarding each class of Partnership Units beneficially owned on March 14, 1997 by (i) each person known by the Partnership to beneficially own more than 5% of any class of Partnership Units, (ii) each director and officer of the General Partner and (iii) all directors and officers of the General Partner as a group. The inclusion in the table below of any units deemed beneficially owned does not constitute an admission that the named persons are direct or indirect beneficial owners of such units. Unless otherwise indicated, each person listed below has sole voting and investment power with respect to the units listed. CLASS A CLASS B GENERAL PARTNERSHIP ---------------------------- ------------------------------ ------------------------------ % OF % OF % OF NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING UNITS UNITS UNITS UNITS UNITS UNITS 5% OWNERS DIRECTORS AND BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY OFFICERS OWNED OWNED OWNED OWNED OWNED OWNED - ---------------------------- ------------- ------------- ------------- --------------- ------------- --------------- Harold Brown c/o New England Realty Associates Limited Partnership 39 Brighton Ave. Allston, MA 02110 NERA 1994 Irrevocable Trust c/o Lane & Altman 101 Federal St. Boston, MA 02110 (1) (1) 24,925(2) 75%(2) (3) 100%(3) Ronald Brown c/o New England Realty Associates Limited Partnership 39 Brighton Ave. Allston, MA 02110......... 755(4) 0.5%(4) 8,309 25% (3) 100%(3) NewReal, Inc. 39 Brighton Ave. Allston, MA 02134 0 0 0 0 1,749 100% All directors and officers as a group................ 7,064(5) 5.1%(5) 32,234(6) 100%(6) (3) 100%(3) - ------------------------ (1) 2,000 Depositary Receipts are held of record by Harold Brown and 61,094 Depositary Receipts are held of record by the NERA 1994 Irrevocable Trust (the "Trust"), a grantor trust established by Harold Brown. The beneficiaries of the Trust are trusts for the benefit of children of Mr. Brown. During his lifetime, Mr. Brown is entitled to receive the income from the Trust and has the right to reacquire the Depositary Receipts held by the Trust provided that substitute assets are transferred to the Trust. Accordingly, Mr. Brown may be deemed to beneficially own the Depositary Receipts held by the Trust. Because a Depositary Receipt represents beneficial ownership of one-tenth of a Class A Unit, Harold Brown may be deemed to beneficially own approximately 6,309 Class A Units and the Trust may be deemed to beneficially own approximately 6,109 Class A Units. Mr. Brown currently has no voting or investment power over the Depositary Receipts held by the Trust and disclaims beneficial ownership of such Depositary Receipts. Luci Daley Vincent and Robert Somma, as trustees of the Trust (the "Trustees"), share voting and investment power over the Depositary Receipts held by the Trust, subject to the provisions of the Trust, and thus may each be deemed to beneficially own the 61,094 Depositary Receipts held by the Trust. The Trustees have no pecuniary interest in the Depositary Receipts held by the Trust and disclaim beneficial ownership of such Depositary Receipts. 15 (2) Consists of Class B Units held by the Trust. See Note (1) above. Harold Brown currently has no voting or investment power over the Class B Units held by the Trust and disclaims beneficial ownership of such Class B Units. The Trustees share voting and investment power over the Class B Units held by the Trust, subject to the provisions of the Trust, and thus may each be deemed to beneficially own the 24,925 Class B Units held by the Trust. The Trustees have no pecuniary interest in the Class B Units held by the Trust and disclaim beneficial ownership of such Class B Units. (3) Since Harold Brown and Ronald Brown are the controlling stockholders, executive officers and directors of NewReal, Inc., they may be deemed to beneficially own all 1,749 of the General Partnership Units held of record by NewReal, Inc. (4) Consists of 7,548 Depositary Receipts held of record jointly by Ronald Brown and his wife. Because a Depositary Receipt represents beneficial ownership of one-tenth of a Class A Unit, Ronald Brown may be deemed to beneficially own approximately 755 Class A Units. (5) Consists of the Class A Units described in Notes (1) and (4) above. (6) Includes the Class B Units described in Note (2) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS With the exception of the Riverside Apartment Complex, which was owned by the Partnership prior to its conversion into condominiums, all of the buildings in which the Condominium Units are located were developed or partially owned by Harold Brown, together, in certain instances, with Ronald Brown. In addition, certain Subsidiary Partnerships purchased certain properties in 1995 from entities in which Harold Brown had substantial equity interest. In each case, the General Partner believes that the Partnership and its Subsidiary Partnerships acquired the Condominium Units and the other properties purchased in 1995 at prices not in excess of fair market value. In 1995, Harold Brown, through an entity in which he is the majority shareholder, loaned the Partnership $1,175,000 to purchase certain property. The loan was repaid in May, 1995 with interest at rates from 8.5% to 9%. Total interest paid on the loan was $38,073. In addition, Harold Brown is a limited partner as well as a general partner in the limited partnership which owns the Investment Property. Harold Brown's interest in the Investment Property referred to herein as the West Peabody Limited Partnership is 79.0%. See also "ITEM 2. PROPERTIES," "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" and "ITEM 11. EXECUTIVE COMPENSATION" for information regarding the fees paid to Hamilton Partnership, an affiliate of the General Partner and "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS" for information regarding Units repurchased by the Partnership from Harold Brown, Ronald Brown and the General Partner. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following Financial Statements are included in this Form 10-K: Independent Auditors' Report Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1995 and 1994 16 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 Notes to Financial Statements (a) 2. Financial Statement Schedules: All financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (a) 3. Exhibits: The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index included herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter. 17 SELECTED FINANCIAL INFORMATION INCOME STATEMENT INFORMATION YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------- ------------- ------------ ------------- ------------- Revenues.............................. $ 16,634,883 $ 12,459,478 $ 8,506,195 $ 8,414,801 $ 8,296,670 Expenses.............................. 15,909,234 15,575,565 7,658,215 7,388,323 7,357,327 Income (Loss) from Operations......... 725,649 (3,116,087) 847,980 1,026,478 939,343 Other Income.......................... 186,781 241,276 224,571 113,537 164,500 Net Income (Loss)..................... 912,430 (2,874,811) 1,072,551 1,140,015 1,103,843 Net Income (Loss) per Unit............ 5.17 (16.23) 6.05 6.36 6.13 Net Income (Loss) per Depository Receipt............................. .52 (1.62) .61 .64 .61 Distributions to Partners per Unit.... 6.80 6.80 6.80 6.80 6.80 Distributions to Partners per Depository Receipt.................. .68 .68 .68 .68 .68 BALANCE SHEET INFORMATION Total Assets.......................... $ 58,788,939 $ 59,750,970 28,321,816 $ 27,693,357 $ 28,624,502 Net Real Estate Investments........... 52,239,981 51,688,269 23,782,167 23,665,365 23,182,129 Total Debt Outstanding................ 52,538,499 53,072,037 18,742,909 17,884,116 18,693,789 Partners' Capital..................... 3,898,498 4,323,402 8,400,979 8,556,758 8,746,369 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP By: NewReal, Inc., its General Partner By: /s/ RONALD BROWN ----------------------------------------- Ronald Brown, PRESIDENT Dated: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- President and Director of /s/ RONALD BROWN the General Partner - ------------------------------ (Principal Executive March 31, 1997 Ronald Brown Officer) Treasurer and Director of /s/ HAROLD BROWN the General Partner - ------------------------------ (Principal Financial March 31, 1997 Harold Brown Officer and Principal Accounting Officer) 19 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - ----------- ------------------------------------------------------------------------------------------- ----- (3) -- Second Amended and Restated Contract of Limited Partnership(1) (4)(a) -- Specimen certificate representing Depositary Receipts(2) (b) -- Description of rights of holders of Partnership securities* (c) -- Deposit Agreement, dated August 12, 1987, between the General Partner and the First National Bank of Boston(3) (10) -- Purchase and Sale Agreement by and between Sally A. Starr and Lisa Brown, Trustees of Omnibus Realty Trust, a nominee trust.(4) (21) -- Subsidiaries of the Partnership.(5) (27) -- Financial Data Schedule of Partnership - ------------------------ (1) Incorporated by reference to Exhibit A to the Partnership's Statement Furnished in Connection with the Solicitation of Consents filed under the Securities Exchange Act of 1934 on October 14, 1986. (2) Incorporated herein by reference to Exhibit A to Exhibit 2(b) to the Partnership's Registration Statement on Form 8-A, filed under the Securities Exchange Act of 1934 on August 17, 1987. (3) Incorporated herein by reference to Exhibit 2(b) to the Partnership's Registration Statement on Form 8-A, filed under the Securities Exchange Act of 1934 on August 17, 1987. (4) Incorporated by reference to Exhibit 2.1 to the Partnership's Current Report on Form 8-K dated June 30, 1995. (5) Incorporated by reference to Note 2 to Financial Statements included as part of this Form 10-K. INDEPENDENT AUDITORS' REPORT The Partners New England Realty Associates Limited Partnership We have audited the accompanying consolidated balance sheets of New England Realty Associates Limited Partnership and its Subsidiary Partnerships as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in partners' capital and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New England Realty Associates Limited Partnership and its Subsidiary Partnerships at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 1995 the Partnership adopted the method of accounting for impairment of long-lived assets prescribed by Statement of Financial Accounting Standards No. 121. /s/ MILLER WACHMAN LLP CERTIFIED PUBLIC ACCOUNTANTS Boston, Massachusetts March 14, 1997 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- ASSETS Rental Properties.................................................................. $ 52,293,981 $ 51,688,269 Cash and Cash Equivalents.......................................................... 1,830,605 2,706,124 Short-term Investments............................................................. 51,528 48,877 Rents Receivable................................................................... 688,245 684,409 Real Estate Tax Escrows............................................................ 503,234 538,945 Prepaid Expenses and Other Assets.................................................. 1,696,237 1,933,472 Investment in Joint Venture........................................................ 93,734 129,989 Financing and Leasing Fees......................................................... 1,631,375 2,020,885 ------------- ------------- TOTAL ASSETS..................................................................... $ 58,788,939 $ 59,750,970 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable.................................................................. $ 52,538,499 $ 53,072,037 Accounts Payable and Accrued Expenses.............................................. 684,626 804,865 Advance Rental Payments and Security Deposits...................................... 1,667,316 1,550,666 ------------- ------------- Total Liabilities................................................................ 54,890,441 55,427,568 Commitments and Contingent Liabilities (Note 9) Partners' Capital: 175,163 units outstanding in 1996 and 177,152 in 1995............................ 3,898,498 4,323,402 ------------- ------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL............................................ $ 58,788,939 $ 59,750,970 ------------- ------------- ------------- ------------- See notes to consolidated financial statements. F-1 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------- ------------- ------------ Revenues: Rental income...................................................... $ 16,448,939 $ 12,296,735 $ 8,384,546 Laundry and sundry income.......................................... 185,944 162,743 121,649 ------------- ------------- ------------ 16,634,883 12,459,478 8,506,195 ------------- ------------- ------------ Expenses: Administrative..................................................... 854,337 836,048 550,142 Depreciation and amortization...................................... 3,055,786 2,339,883 1,636,390 Interest........................................................... 4,729,769 3,432,090 1,672,035 Management fees.................................................... 699,806 522,842 339,668 Operating.......................................................... 1,908,616 1,257,852 890,885 Renting............................................................ 287,485 359,053 149,310 Repairs and maintenance............................................ 2,577,952 2,175,014 1,359,490 Taxes and insurance................................................ 1,795,483 1,402,783 1,060,295 Impairment loss.................................................... -- 3,250,000 -- ------------- ------------- ------------ 15,909,234 15,575,565 7,658,215 ------------- ------------- ------------ Income (Loss) from Operations...................................... 725,649 (3,116,087) 847,980 ------------- ------------- ------------ Other Income: Interest income.................................................... 156,127 59,909 51,826 Income from investments in partnerships and joint venture.......... 12,294 28,904 42,745 Gain on sale of rental properties.................................. -- 152,463 -- Other.............................................................. 18,360 -- 130,000 ------------- ------------- ------------ 186,781 241,276 224,571 ------------- ------------- ------------ Net Income (Loss).................................................... $ 912,430 $ (2,874,811) $ 1,072,551 ------------- ------------- ------------ ------------- ------------- ------------ Net Income (Loss) per Unit........................................... $ 5.17 $ (16.23) $ 6.05 ------------- ------------- ------------ ------------- ------------- ------------ Weighted Average Number of Units Outstanding......................... 176,572 177,152 177,344 ------------- ------------- ------------ ------------- ------------- ------------ See notes to consolidated financial statements. F-2 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL UNITS ------------------------------------------------------------ LESS LIMITED TREASURY ---------------- GENERAL SUB- UNITS, CLASS A CLASS B PARTNERSHIP TOTAL AT COST TOTAL ------- ------- ----------- ------- -------- ------- Balance, January 1, 1994........ 144,180 34,243 1,802 180,225 2,561 177,664 Unit Buyback..... -- -- -- -- 512 (512) Distributions to Partners....... -- -- -- -- -- -- Net Income....... -- -- -- -- -- -- ------- ------- ----- ------- -------- ------- Balance, December 31, 1994....... 144,180 34,243 1,802 180,225 3,073 177,152 Distributions to Partners....... -- -- -- -- -- -- Net Income (Loss)......... -- -- -- -- -- -- ------- ------- ----- ------- -------- ------- Balance, December 31, 1995....... 144,180 34,243 1,802 180,225 3,073 177,152 Unit Buyback..... -- -- -- -- 1,989 (1,989) Distribution to Partners....... -- -- -- -- -- -- Net Income....... -- -- -- -- -- -- ------- ------- ----- ------- -------- ------- Balance, December 31, 1996....... 144,180 34,243 1,802 180,225 5,062 175,163 ------- ------- ----- ------- -------- ------- ------- ------- ----- ------- -------- ------- PARTNERS' CAPITAL --------------------------------------------------- LIMITED ------------------------ GENERAL CLASS A CLASS B PARTNERSHIP TOTAL ----------- ----------- ----------- ----------- Balance, January 1, 1994........ $ 6,821,992 $ 1,648,030 $ 86,736 $ 8,556,758 Unit Buyback..... -- (24,350) (1,250) (25,600) Distributions to Partners....... (962,184) (228,519) (12,027) (1,202,730) Net Income....... 858,041 203,785 10,725 1,072,551 ----------- ----------- ----------- ----------- Balance, December 31, 1994....... $ 6,717,849 $ 1,598,946 $ 84,184 $ 8,400,979 Distributions to Partners....... (962,213) (228,526) (12,027) (1,202,766) Net Income (Loss)......... (2,299,849) (546,214) (28,748) (2,874,811) ----------- ----------- ----------- ----------- Balance, December 31, 1995....... $ 3,455,787 $ 824,206 $ 43,409 $ 4,323,402 Unit Buyback..... (110,060) (26,141) (1,376) (137,577) Distribution to Partners....... (959,806) (227,954) (11,997) (1,199,757) Net Income....... 729,944 173,362 9,124 912,430 ----------- ----------- ----------- ----------- Balance, December 31, 1996....... $ 3,115,865 $ 743,473 $ 39,160 $ 3,898,498 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- See notes to consolidated financial statements. F-3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 ------------- -------------- -------------- Cash Flows from Operating Activities: Net income (loss)............................................... $ 912,430 $ (2,874,811) $ 1,072,551 ------------- -------------- -------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................................. 3,055,786 2,339,883 1,636,390 (Income) from investments in partnerships and joint venture... (12,294) (28,904) (42,745) Impairment loss............................................... -- 3,250,000 -- (Gain) on sale of rental properties -- (152,463) -- Contribution by utility companies............................. -- -- (100,000) (Increase) Decrease in rents receivable....................... (3,836) (41,305) 50,874 (Increase) in financing and leasing fees...................... (53,449) (1,970,607) (82,961) Increase (Decrease) in accounts payable....................... (120,239) 183,876 (108,296) (Increase) Decrease in real estate tax escrows................ 35,711 (515,387) 31,081 (Increase) Decrease in prepaid expenses and other assets...... 237,235 (1,444,689) (52,527) Increase in advance rental payments and security deposits..... 116,650 993,727 33,741 ------------- -------------- -------------- Total Adjustments............................................. 3,255,564 2,614,131 1,365,557 ------------- -------------- -------------- Net cash provided by (used in) operating activities........... 4,167,994 (260,680) 2,438,108 ------------- -------------- -------------- Cash Flows from Investing Activities: Distribution from joint venture................................. 48,549 64,255 82,350 Payment for purchase and improvement of rental properties....... (3,218,539) (31,436,551) (3,474,764) Maturity of short-term investments.............................. -- -- 793,787 Purchase of short-term investments.............................. (2,651) (3,322) (45,555) Proceeds from sale of properties................................ -- 219,706 -- ------------- -------------- -------------- Net cash (used in) investing activities........................... (3,172,641) (31,155,912) (2,644,182) ------------- -------------- -------------- Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable..... (533,538) (10,897,871) (5,376,207) Proceeds from mortgages......................................... -- 46,402,000 5,060,000 Distributions to partners....................................... (1,199,757) (1,202,766) (1,202,730) Purchase of treasury units...................................... (137,577) -- (25,600) Proceeds from (repayment of) note payable....................... -- (1,175,000) 1,175,000 ------------- -------------- -------------- Net cash provided by (used in) financing activities........... (1,870,872) 33,126,363 (369,537) Net (Decrease) Increase in Cash and Cash Equivalents.............. (875,519) 1,709,771 (575,611) Cash and Cash Equivalents, Beginning.............................. 2,706,124 996,353 1,571,964 ------------- -------------- -------------- Cash and Cash Equivalents, Ending................................. $ 1,830,605 $ 2,706,124 $ 996,353 ------------- -------------- -------------- ------------- -------------- -------------- See notes to consolidated financial statements. F-4 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES LINE OF BUSINESS: New England Realty Associates Limited Partnership ("NERA" or the "Partnership") was organized in Massachusetts during 1977. NERA and its subsidiaries own and operate various residential apartment buildings, condominium units, and commercial properties located in Massachusetts, Connecticut, New Hampshire, and Maine. NERA has also made investments in other real estate partnerships and has participated in other real estate-related activities, primarily located in Massachusetts. In connection with the mortgages referred to in Note 5, a substantial number of NERA's properties were restructured into separate subsidiary limited partnerships. The financial statements for prior periods are unchanged. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of NERA and its subsidiary limited partnerships. NERA has a 99.67% ownership interest in each of such subsidiary limited partnerships. The consolidated group is referred to as the "Partnerships." 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 joint venture on the equity method. ACCOUNTING ESTIMATES: The preparation of the financial statements is in accordance with generally accepted accounting principles (GAAP) requiring management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates. REVENUE RECOGNITION: Rental income from residential and commercial properties is recognized ratably over the term of the related lease. Amounts sixty days in arrears are charged against income. 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. RENTAL PROPERTIES: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions 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. Rental properties are depreciated on the straight-line method over their estimated useful lives. In the event that facts and circumstances indicate that the carrying value of rental properties may be impaired, an analysis of recoverability is performed. The estimated future undiscounted cash flows are compared to the asset's carrying value to determine if a write-down to fair value or discounted cash flow value is required. This policy was adopted in 1995. Previously, impairment was considered on a case-by-case basis. See Note 2 for the effect of this accounting change. FINANCING AND LEASING FEES: Financing fees are capitalized and amortized, using the interest method, over the life of the related mortgages. Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease. INCOME TAXES: The financial statements have been prepared under the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes on income has been recorded. F-5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS: The Partnerships consider cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less. SHORT-TERM INVESTMENTS: The Partnerships consider short-term investments to be any bank certificates of deposit, Treasury obligations, or commercial paper with initial maturities between three and twelve months. These investments are considered to be trading account securities and are carried at fair value. CONCENTRATION OF CREDIT RISKS AND FINANCIAL INSTRUMENTS: The Partnerships' tenants are located in New England, and the Partnerships are subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnerships' revenues in 1996, 1995, or 1994. The Partnerships make their temporary cash investments with high credit quality financial institutions or purchase money market accounts invested in U.S. Government securities. At December 31, 1996, approximately $1,212,000 of cash and cash equivalents exceeded federally insured amounts of which approximately $1,200,000 was held in a money market fund invested in U.S. Government securities. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following: DECEMBER 31, ---------------------------- USEFUL 1996 1995 LIFE ------------- ------------- ------------- Land................................................................ $ 9,710,733 $ 9,554,732 -- Buildings........................................................... 43,622,868 42,988,784 25-31 years Building improvements............................................... 10,648,403 9,437,144 15-31 years Kitchen cabinets.................................................... 940,870 1,089,407 5-10 years Carpets............................................................. 977,574 1,028,473 5-10 years Air conditioning.................................................... 233,995 87,745 7-10 years Land improvements................................................... 599,909 422,646 10-31 years Laundry equipment................................................... 45,248 46,994 5-7 years Elevators........................................................... 16,842 16,842 20 years Swimming pools...................................................... 42,450 42,450 10 years Equipment........................................................... 311,809 166,132 5-7 years Motor vehicles...................................................... 49,852 46,704 5 years Fences.............................................................. 20,785 22,229 5-10 years Furniture and fixtures.............................................. 201,638 95,793 5-7 years Smoke alarms........................................................ 6,224 6,224 5-7 years ------------- ------------- 67,429,200 65,052,299 Less accumulated depreciation....................................... 15,135,219 13,364,030 ------------- ------------- ------------- ------------- $ 52,293,981 $ 51,688,269 ------------- ------------- ------------- ------------- On December 11, 1996, the Partnership acquired a residential complex containing 36 apartment units in Lowell, Massachusetts for a purchase price of approximately $790,000. The purchase was paid from the Partnership's cash reserves and is unencumbered. F-6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) On June 30, 1995, the Partnerships purchased for $30,198,000 five properties containing an aggregate of 809 residential apartments and 18,400 square feet of commercial space. The purchase was paid for in part with the proceeds from the refinancing of thirteen of the Partnerships' properties and the issuance of new mortgage notes payable aggregating $22,627,000 and maturing in ten years. The properties were acquired from a trust owned nominally by the majority shareholder of NERA's General Partner. In substance, the properties were owned by the trust's secured lender under a previous restructuring agreement whereby the lender received all of the operating income from the properties as well as the proceeds from the sale to NERA. The Partnerships have recorded the purchase at the amount paid for the properties and have allocated the amounts to the individual properties acquired. In 1995, an entity owned by the majority shareholder of the Partnership's General Partner received a fee of $300,000 from the trust's secured lender. Included in rental properties is a building in Newton, Massachusetts acquired by the Partnership on January 25, 1995. The building consists of 21,223 square feet of commercial space, 9 residential units, and 29 parking spaces for a total purchase price of $1,925,000. This building was acquired from an entity in which the majority shareholder of NERA's General Partner had a substantial ownership interest. The Partnership's management company received a fee of approximately $11,000 from the seller in this transaction. To facilitate this acquisition, the Partnership's management company, an entity owned by the majority shareholder of NERA's General Partner, loaned the Partnership $1,175,000 in December 1994. In May 1995, the Partnership refinanced this property and obtained a $1,329,000 mortgage payable in 10 years with interest at 9.25%, and paid off the existing loan of $1,175,000 to the management company. Total interest paid on this refinanced loan was $38,073. The operating results of these acquired properties have been included in the consolidated statements of operations since the date of acquisition. The following unaudited proforma results assume the acquisitions in 1995 occurred at the beginning of 1994 and are based on historical amounts adjusted for changes in interest expense and depreciation and amortization (stated in thousands except for per unit amounts): YEAR ENDED DECEMBER 31, -------------------- 1995 1994 --------- --------- Rental income........................................................... $ 15,789 $ 15,168 Operating income (loss)................................................. (3,320) (71) Net income (loss)....................................................... (3,078) 154 Income (loss) per unit.................................................. (17.38) .87 The proforma amounts do not include the immaterial impact of the December 1996 acquisition of the Highland Avenue property in Lowell, Massachusetts, referred to above. The proforma financial information is not necessarily indicative of the operating results that would have occurred had the acquistion in 1995 been consummated at January 1, 1994, nor are these results necessarily indicative of future operating results. In 1995, the Partnership sold two condominiums located in Stoneham and Boston, Massachusetts. The sales price, net of closing costs, was $219,706, and the gain of $152,463 is included in other income. F-7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) In the fourth quarter of 1995, the Partnerships recorded a special charge of $3,250,000 relating to the early adoption of Statement of Financial Accounting Standards No. 121 (FAS 121) on accounting for the impairment of long-lived assets, effective for fiscal years beginning after December 15, 1995. This statement requires that long-lived assets held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. During 1995, the Lewiston Mall, with a carrying value of approximately $8,200,000, was remortgaged for $2,933,000. As part of this refinancing, the lender obtained an appraisal of $5,000,000. A further analysis of estimated future cash flows, as required by FAS 121, indicated an impairment. The carrying value of the Lewiston Mall has been reduced to the net present value of expected future cash flows, which approximates the aforementioned appraisal. Included in other income in the fourth quarter of 1994 is $100,000 representing the approximate fair value of insulation and other energy saving devices installed in residential properties by utility companies at no cost to the Partnership. Statement of Financial Accounting Standards No. 116 (FAS No. 116) requires that contributions received shall be recognized as revenues or gain in the period received and as assets. These building improvements will be depreciated over their expected useful lives. F-8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES Real estate and accumulated depreciation as of December 31, 1996 is: COST INITIAL COST TO CAPITALIZED GROSS AMOUNT AT WHICH CARRIED AT CLOSE SUBSEQUENT TO PARTNERSHIPS (1) ACQUISITION OF PERIOD ENCUMBRANCES -------------------------- (2) ---------------------------------------- (FIRST BUILDINGS & ------------- BUILDINGS & MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTALS ---------------- ----------- ------------- ------------- ----------- ------------- ------------ Condominium Units Residential Units Massachusetts.......... $ 0 $ 33,746 $ 311,527 $ 53,165 $ 33,746 $ 364,692 $ 398,438 Westgate Woburn Residential Apartments Woburn, Massachusetts.......... 6,826,269 461,300 2,424,636 4,349,209 461,300 6,773,845 7,235,145 Coach L.P. Residential Apartments Acton, Massachusetts... 1,186,593 140,600 445,791 471,443 140,600 917,234 1,057,834 Avon Street Apartments L.P. Residential Apartments Malden, Massachusetts.......... 1,773,465 62,700 837,318 253,001 62,700 1,090,319 1,153,019 Middlesex Apartments L.P. Residential Apartments Newton, Massachusetts.......... 1,095,121 37,700 161,012 200,618 37,700 361,630 399,330 Clovelly Apartments L.P. Residential Apartments Nashua, New Hampshire.............. 2,074,129 177,610 1,478,359 412,840 177,610 1,891,199 2,068,809 Nashoba Apartments L.P. Residential Apartments Acton, Massachusetts... 1,083,344 79,650 284,548 631,231 79,650 915,779 995,429 River Drive L.P. Residential Apartments Danvers, Massachusetts.......... 1,536,017 72,525 587,777 974,861 72,525 1,562,638 1,635,163 Executive Apartments L.P. Residential Apartments Framingham, Massachusetts.......... 1,779,375 91,400 740,360 814,360 91,400 1,554,720 1,646,120 Willard Apartments L.P. Residential Apartments Quincy, Massachusetts.......... 291,838 15,825 63,477 141,480 15,825 204,957 220,782 Olde English Apartments L.P. Residential Apartments Lowell, Massachusetts.......... 1,397,278 46,181 878,323 486,959 46,181 1,365,282 1,411,463 ACCUMULATED DEPRECIATION DATE (3) ACQUIRED --------------- ----------- Condominium Units Residential Units Massachusetts.......... $ 241,148 Various Westgate Woburn Residential Apartments Woburn, Massachusetts.......... 3,474,968 Sept. 1977 Coach L.P. Residential Apartments Acton, Massachusetts... 558,481 Sept. 1977 Avon Street Apartments L.P. Residential Apartments Malden, Massachusetts.......... 773,032 Sept. 1977 Middlesex Apartments L.P. Residential Apartments Newton, Massachusetts.......... 163,577 Sept. 1977 Clovelly Apartments L.P. Residential Apartments Nashua, New Hampshire.............. 1,245,319 Sept. 1977 Nashoba Apartments L.P. Residential Apartments Acton, Massachusetts... 437,221 Sept. 1977 River Drive L.P. Residential Apartments Danvers, Massachusetts.......... 769,778 Sept. 1977 Executive Apartments L.P. Residential Apartments Framingham, Massachusetts.......... 996,273 Sept. 1977 Willard Apartments L.P. Residential Apartments Quincy, Massachusetts.......... 84,181 Sept. 1977 Olde English Apartments L.P. Residential Apartments Lowell, Massachusetts.......... 944,616 Sept. 1977 F-9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) COST INITIAL COST TO CAPITALIZED GROSS AMOUNT AT WHICH CARRIED AT CLOSE SUBSEQUENT TO PARTNERSHIPS (1) ACQUISITION OF PERIOD ENCUMBRANCES -------------------------- (2) ---------------------------------------- (FIRST BUILDINGS & ------------- BUILDINGS & MORTGAGES) LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTALS ---------------- ----------- ------------- ------------- ----------- ------------- ------------ Oak Ridge Apartments L.P. Residential Apartments Foxboro, Massachusetts.......... 2,090,990 135,300 406,544 929,401 135,300 1,335,945 1,471,245 Commonwealth 1137 L.P. Residential Apartments Boston, Massachusetts.......... 1,260,875 342,000 1,367,669 148,682 342,000 1,516,351 1,858,351 Commonwealth 1144 L.P. Residential Apartments Boston, Massachusetts.......... 5,268,093 1,410,000 5,664,816 238,277 1,410,000 5,903,093 7,313,093 Boylston Downtown L.P. Residential Apartments Boston, Massachusetts.......... 7,742,561 2,112,000 8,593,111 285,808 2,112,000 8,878,919 10,990,919 North Beacon 140 L.P. Residential Units Boston, Massachusetts.......... 3,459,526 936,000 3,762,013 149,732 936,000 3,911,745 4,847,745 Redwood Hills L.P. Residential Units Worcester, Massachusetts.......... 4,557,866 1,200,000 4,810,604 407,341 1,200,000 5,217,945 6,417,945 East Hampton L.P. Strip Shopping Mall East Hampton, Connecticut............ 1,412,639 394,011 1,182,031 1,233,605 394,011 2,415,636 2,809,647 Timpany Plaza L.P. Shopping Mall Gardner, Massachusetts.......... 3,509,392 378,125 4,729,978 332,191 378,125 5,062,169 5,440,294 Lewiston Mall L.P.(4) Shopping Mall Lewiston, Maine........ 2,887,296 1,043,059 3,694,731 369,120 1,043,059 4,063,851 5,106,910 Linhart L.P. Residential/ Commercial Newton, Massachusetts.......... 1,305,832 385,000 1,540,000 236,434 385,000 1,776,434 2,161,434 Highland Street Apartments, L.P. Residential Apartments Lowell, Massachusetts.......... 0 156,000 634,085 0 156,000 634,085 790,085 ---------------- ----------- ------------- ------------- ----------- ------------- ------------ $ 52,538,499 $ 9,710,732 $44,598,710 $13,119,758 $ 9,710,732 $57,718,468 $ 67,429,200 ---------------- ----------- ------------- ------------- ----------- ------------- ------------ ---------------- ----------- ------------- ------------- ----------- ------------- ------------ ACCUMULATED DEPRECIATION DATE (3) ACQUIRED --------------- ----------- Oak Ridge Apartments L.P. Residential Apartments Foxboro, Massachusetts.......... 600,644 Sept. 1977 Commonwealth 1137 L.P. Residential Apartments Boston, Massachusetts.......... 88,788 July 1995 Commonwealth 1144 L.P. Residential Apartments Boston, Massachusetts.......... 364,067 July 1995 Boylston Downtown L.P. Residential Apartments Boston, Massachusetts.......... 562,550 July 1995 North Beacon 140 L.P. Residential Units Boston, Massachusetts.......... 252,125 July 1995 Redwood Hills L.P. Residential Units Worcester, Massachusetts.......... 321,422 July 1995 East Hampton L.P. Strip Shopping Mall East Hampton, Connecticut............ 725,829 Sept. 1984 Timpany Plaza L.P. Shopping Mall Gardner, Massachusetts.......... 2,181,393 Sept. 1985 Lewiston Mall L.P.(4) Shopping Mall Lewiston, Maine........ 217,897 Feb. 1989 Linhart L.P. Residential/ Commercial Newton, Massachusetts.......... 130,946 Jan. 1995 Highland Street Apartments, L.P. Residential Apartments Lowell, Massachusetts.......... 964 Dec. 1996 --------------- $ 15,135,219 --------------- --------------- F-10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) - ------------------------ (1) The initial cost to the Partnerships represents both the balance of mortgages assumed in September 1977, including subsequent adjustments to such amounts and subsequent acquisitions at cost. (2) Net of retirements, which are not significant. (3) In 1996, rental properties were depreciated over the following estimated useful lives: Assets............................................................................................ Life 10-31 Buildings and Improvements........................................................................ years Other Categories of Assets........................................................................ 5-10 years (4) Initial costs and carrying values are net of $3,250,000 improvement loss. F-11 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) A reconciliation of rental properties and accumulated depreciation is as follows: YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Rental Properties Balance, Beginning................................................ $ 65,052,299 $ 37,753,503 $ 36,605,219 Additions Buildings, improvements, and other assets............. 3,218,539 33,334,751 1,676,564 ------------- ------------- ------------- 68,270,838 71,088,254 38,281,783 ------------- ------------- ------------- Deduct: Write-off of retired or disposed assets......................... 841,638 1,101,345 528,280 Loss on impairment of rental properties......................... -- 4,934,610 -- ------------- ------------- ------------- 841,638 6,035,955 528,280 ------------- ------------- ------------- Balance, Ending................................................... $ 67,429,200 $ 65,052,299 $ 37,753,503 ------------- ------------- ------------- ------------- ------------- ------------- Accumulated Depreciation Balance, Beginning................................................ $ 13,364,030 $ 13,971,336 $ 12,939,854 Add: Depreciation for the year....................................... 2,612,827 2,111,405 1,559,762 ------------- ------------- ------------- 15,976,857 16,082,741 14,499,616 ------------- ------------- ------------- Deduct: Accumulated depreciation of retired or disposed assets.......... 841,638 1,034,101 528,280 Loss on impairment of rental properties......................... -- 1,684,610 -- ------------- ------------- ------------- 841,638 2,718,711 528,280 ------------- ------------- ------------- Balance, Ending................................................... $ 15,135,219 $ 13,364,030 $ 13,971,336 ------------- ------------- ------------- ------------- ------------- ------------- F-12 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--RELATED PARTY TRANSACTIONS The Partnerships' properties are managed by an entity which is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of rental revenue and laundry income. Total fees paid were $677,006, $504,842, and $334,868 in 1996, 1995, and 1994 respectively. Advance rental payments and security deposits are held in escrow by the management company (see Note 6). The management company also receives a mortgage servicing fee equal to an annual rate of 1/2% of the monthly outstanding balance of mortgages receivable resulting from the sale of property. There were no mortgage servicing fees paid in 1996, 1995, and 1994. The Partnership Agreement also permits the General Partner or management company to charge the costs of professional services (such as counsel, accountants, and contractors) to NERA. In 1996, 1995, and 1994 approximately $511,000, $231,000, and $130,000 was charged to NERA for legal, construction, maintenance, and architectural services, and supervision of capital improvements. Approximately $232,000, $50,000, and $74,000 was capitalized in 1996, 1995 and 1994 in leasehold improvements. Included in the 1996 expenses referred to above, approximately $115,000 is recorded in repairs and maintenance, $147,000 in administrative expense, and $17,000 in renting expense. In 1995 and 1994 the balance of $181,000 and $56,000 was included in administrative expense. Additionally in 1996, 1995 and 1994, the Partnership paid to the management company $50,000, $30,000, and $30,000 respectively for accounting services previously provided by an outside company. The Partnership Agreement entitles the General Partner or a management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%. No such commissions were paid in 1996, 1995, or 1994. In 1996, an unrelated individual that performed asset management consulting services to NERA and the management company was appointed President of the management company. This individual continues to receive asset management fees from NERA, receiving $28,800 in 1996. Included in prepaid expenses and other assets were amounts due from related parties of $416,317 and $366,258 at December 31, 1996 and 1995 respectively, representing Massachusetts tenant security and prepaid rent deposits, which are held for the Partnerships by another entity also owned by one of the shareholders of the General Partner (see Note 6). Also included in prepaid expenses and other assets is an insurance reserve account funded by the Partnerships and held by the management company. The insurance reserve includes funds from other properties which are also owned by the related parties. The balance in the reserve was $82,856 and $105,924 at December 31, 1996 and December 31, 1995 respectively. See Note 10 for rental arrangements with the Timpany Plaza joint venture. As described in Note 4, the Partnership has interests in certain entities in which the majority shareholder of the General Partner is also involved. See Note 2 for fees paid to related parties by the sellers of the Partnerships' 1995 acquisitions. NOTE 4--OTHER ASSETS The short-term investment, totalling $51,528 at December 31, 1996 and $48,877 at December 31, 1995, is carried at cost, which approximates fair value. Such investment at December 31, 1996 is a 5.07% certificate of deposit at Citizens Bank maturing in February 1997. F-13 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--OTHER ASSETS (CONTINUED) Included in prepaid expenses and other assets at December 31, 1996, is approximately $669,000 held in escrow to fund projected capital improvements. Additional payments of approximately $34,000 are paid monthly. As the improvements are made, funds are used from these escrow accounts. The carrying value of the Partnership's 50% interest in the Timpany Plaza joint venture, at equity, is $93,734 and $129,989 at December 31, 1996 and December 31, 1995 respectively. The Partnership owns a 10% ownership interest in a real estate partnership accounted for by the equity method and reduced to a carrying value of zero. Losses in excess of cost in limited partnerships have not been recorded as the Partnership is not liable for such amounts. In 1996, $18,360 is recorded in other income for the amount received from the disposition of investment partnerships in prior years that had previously been reduced to a carrying value of zero. NERA recorded a $30,000 provision in 1990 representing the estimated liabilities allocable to NERA in those partnerships where NERA was a General Partner. No amounts were paid, and this amount was eliminated and included in other income in 1994. During the fourth quarter of 1995, the real estate owned by another partnership in which NERA had a 10% ownership interest was sold for less than the mortgage debt. Accordingly, NERA did not receive proceeds from this sale. The majority shareholder of the General Partner is also the majority owner of this partnership. There can be no assurance that any of NERA's partnership investments will be realizable in the future in excess of their carrying value. NOTE 5--MORTGAGES PAYABLE At December 31, 1996 and December 31, 1995, the mortgages payable consisted of various loans, substantially all of which were secured by first mortgages on properties referred to in Note 2, with interest ranging from 8.25% to 10.99%, payable in monthly installments currently aggregating approximately $431,000 including interest, to various dates through 2005. Although the loans mature within ten years, they are being amortized on a basis between 25 and 27.5 years. The carrying amounts of the Partnerships' mortgages payable approximate their fair value. The Partnerships have pledged tenant leases as additional collateral for certain of these mortgages. Approximate annual maturities are as follows: 1997--current maturities....................................... $ 581,000 1998........................................................... 634,000 1999........................................................... 692,000 2000........................................................... 7,334,000 2001........................................................... 743,000 Thereafter..................................................... 42,554,000 ---------- $52,538,000 ---------- ---------- NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS The lease agreements for certain properties require tenants to maintain a one-month advance rental payment plus security deposits. The funds are held in escrow by another entity owned by the majority shareholder of the General Partner (see Note 3). F-14 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--PARTNERS' CAPITAL The Partnership has two categories of limited partners (Class A and B) and one category of General Partner (General Partner). Under the terms of the Partnership Agreement, 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. The Partnership declared distributions of $6.80 per unit in 1996, 1995, and 1994. In March 1997, the Partnership declared a regular semi-annual dividend of $3.90 and a special distribution of $1.00 per unit. 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 ten Depositary Receipts. The following is information on the net income (loss) per Depositary Receipt: YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Net Income (Loss) per Depository Receipt.................................................. $ .52 $ (1.62) $ .61 NOTE 8--CAPITAL UNIT REPURCHASE PLAN During the second quarter of 1996, the Partnership announced a plan to repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase of Depositary Receipts may take place over a period of a year or more. The purchase price will be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. During the third and fourth quarter of 1996, the Partnership repurchased 15,915 depositary receipts for a total cost of $110,060. In addition, 378 Class B and 20 General Partnership units were purchased for a total of $27,517 to maintain the required ownership percentage (see note 7). Treasury units at December 31, 1996 are as follows: Class A.............................................................. 4,152 Class B.............................................................. 865 General Partner...................................................... 45 --------- 5,062 --------- --------- NOTE 9--COMMITMENTS AND CONTINGENCIES From time to time, the Partnerships are involved in various ordinary routine litigation incidental to their business. The Partnerships are not involved in any material pending legal proceedings. F-15 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--RENTAL INCOME In 1996, approximately 86% of rental income is related to residential apartments and condominium units with leases of one year or less. The remaining 14% is related to commercial properties which have minimum future rental income on noncancellable operating leases as follows: COMMERCIAL PROPERTY LEASES LAND LEASES TOTAL ------------ ------------ ------------ 1997............................................................... $ 1,503,000 $ 130,000 $ 1,633,000 1998............................................................... 1,149,000 130,000 1,279,000 1999............................................................... 777,000 130,000 907,000 2000............................................................... 504,000 130,000 634,000 2001............................................................... 311,000 130,000 441,000 Thereafter......................................................... 1,197,000 1,366,000 2,563,000 ------------ ------------ ------------ $ 5,441,000 $ 2,016,000 $ 7,457,000 ------------ ------------ ------------ ------------ ------------ ------------ In August 1988, the Partnership entered into a land lease agreement with an existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts. As part of this lease, the tenant, at its cost, demolished approximately one-third of the mall and replaced it with a new store of comparable size. The minimum fixed term of this lease is for 20 years, which commenced with the opening of the new store in December 1989. The minimum annual rents are $110,000 per year for the first five years, increasing each subsequent five-year period, with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at December 31, 1996 and 1995 is $163,000 and $158,000 respectively, representing the deferred rental income from this lease. There are also contingent rents based upon sales volume, common area maintenance, and other charges. This lease also provides for six extension periods of five years each at increased rents. The minimum rents pertaining to this agreement are reflected in the foregoing table. The ownership of this building addition transfers to the Partnership at the termination of the lease. Accordingly, the Partnership included in property assets approximately $1,400,000 of book value of the demolished building allocable to the Partnership leasehold interest and is depreciating this amount on a straight-line basis over a twenty-year period. Concurrently, the Partnership entered into a joint venture with this same tenant relating to the space formerly leased by the tenant. Under this arrangement, the two parties have agreed to relet the space and divide the net income or loss after paying to the Partnership an annual minimum rent of $84,546. The Partnership's share of income was $12,294, $28,904, and $42,745 for the years ended 1996, 1995, and 1994 respectively. The aggregate minimum future rental income does not include contingent rentals which may be received under various leases in connection with percentage rents, common area charges, and real estate taxes. Aggregate contingent rentals were $927,294, $730,613, and $792,510 for the years ended December 31, 1996, 1995, and 1994 respectively. NOTE 11--CASH FLOW INFORMATION During the years ended December 31, 1996, 1995, and 1994, cash paid for interest was $4,644,058, $3,461,577, and $1,670,695 respectively. F-16 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--CASH FLOW INFORMATION (CONTINUED) In 1994, non-cash investing activities included $100,000 of building improvements contributed by utility companies (see Note 2). NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership considers the fair value of its financial instruments to approximate their carrying values because conditions pertaining to the historic carrying values approximate those in the current market. NOTE 13--TAXABLE INCOME AND TAX BASIS Taxable income reportable by the Partners is different than statement income because of accelerated depreciation, different tax lives for some properties, impairment losses, and the inclusion for tax purposes of profits and losses realized on equity investments. Taxable income for 1996 is approximately $1,000,000 greater than statement income. This is primarily due to the reportablity for tax purposes of approximately $1,050,000 of previously deducted losses in excess of basis for two equity investments disposed of in 1996. In March 1997, the Partnership declared a special $.10 dividend per depository receipt payable March 31, 1997 to assist partners with any negative tax consequences of these transactions. Cumulative tax basis at December 31, 1996 is approximately $2,100,000 greater than the statement basis. F-17 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--QUARTERLY FINANCIAL DATA THREE MONTHS ENDED, ---------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, (UNAUDITED) 1996 1996 1996 1996 TOTAL - ---------------------------------------- ------------ ------------ ------------- ------------ ------------- Revenues................................ $ 4,235,464 $ 4,187,671 $ 4,101,730 $4,110,018 $ 16,634,883 Expenses................................ 3,881,730 3,904,970 3,853,986 4,268,548 15,909,234 ------------ ------------ ------------- ------------ ------------- Income (Loss) from Operations........... 353,734 282,701 247,744 (158,530) 725,649 Other Income............................ 59,268 40,522 42,125 44,866 186,781 ------------ ------------ ------------- ------------ ------------- Net Income (Loss)....................... $ 413,002 $ 323,223 $ 289,869 $ (113,664) $ 912,430 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- Net Income (Loss) per Unit.............. $ 2.33 $ 1.82 $ 1.67 $ (.65) $ 5.17 Net Income (Loss) per Depositary Receipt............................... $ .23 $ .18 $ .17 (.06) $ .52 THREE MONTHS ENDED, ----------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, (UNAUDITED) 1995 1995 1995 1995 TOTAL - ---------------------------------------------- ------------ ------------ ------------- ------------- ------------- Revenues...................................... $ 2,278,487 $ 2,309,046 $ 3,861,853 $ 4,010,092 $ 12,459,478 Expenses...................................... 2,037,076 2,218,689 3,779,525 7,540,275 15,575,565 ------------ ------------ ------------- ------------- ------------- Income (Loss) from Operations................. 241,411 90,357 82,328 (3,530,183) (3,116,087) Other Income.................................. 20,848 13,027 83,144 124,257 241,276 ------------ ------------ ------------- ------------- ------------- Net Income (Loss)............................. $ 262,259 $ 103,384 $ 165,472 $ (3,405,926) $ (2,874,811) ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- ------------- ------------- Net Income (Loss) per Unit.................... $ 1.48 $ .58 $ .93 $ (19.22) $ (16.23) Net Income (Loss) per Depositary Receipt...... $ .15 $ .06 $ .09 $ (1.92) $ (1.62) See Note 2 regarding the impairment loss recorded in the fourth quarter of 1995. During the fourth quarter of 1996, the Partnership revised its estimates of depreciation and amortization and recorded approximately $200,000 of expenses applicable to earlier quarters during the year. F-18