For the fiscal year ended December 31, 2003
OR
Commission File Number 0-14695
NTS-PROPERTIES VI,
A MARYLAND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Maryland | 61-1066060 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| 10172 Linn Station Road | 40223 |
| Louisville, Kentucky | (Zip Code) |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code: (502) 426-4800
Securities registered pursuant to Section 12(b) of the Act:
| None | None |
| (Title of each class) | (Name of each exchange on which registered) |
Securities pursuant to Section 12(g) of the Act:
Limited Partnership Interests
(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 delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. [X]
Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2003: No aggregate market value can be determined because no established market exists for the limited partnership interests.
TABLE OF CONTENTS
PART I
| Pages | ||||
| Items 1. and 2. | Business and Properties | 3-13 | ||
| Item 3. | Legal Proceedings | 13-15 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 |
PART II
| Item 5. | Market for Registrant's Limited Partnership Interests and Related Partner Matters |
16 | ||
| Item 6. | Selected Financial Data | 17-18 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
18-31 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
32 | ||
| Item 8. | Consolidated Financial Statements and Supplementary Data | 33-57 | ||
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure |
58 | ||
| Item 9A. | Controls and Procedures | 59 |
PART III
| Item 10. | Directors and Executive Officers of the Registrant | 60-61 | ||
| Item 11. | Management Remuneration and Transactions | 62 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
63 | ||
| Item 13. | Certain Relationships and Related Transactions | 64-65 | ||
| Item 14. | Principal Accountant Fees and Services | 65 |
PART IV
| Item 15. | Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K |
66-72 | ||
| Signatures | 73 |
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Some of the statements included in this Form 10-K, particularly those included in Part I, Items 1 and 2 — Business and Properties, and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those discussed below. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. See Part II — Item 7 for Cautionary Statements.
NTS-Properties VI, a Maryland limited partnership (the “Partnership”), was formed in 1984. The general partner is NTS-Properties Associates VI, a Kentucky limited partnership (the “General Partner”). The general partners of the General Partner are NTS Capital Corporation and J.D. Nichols. As of December 31, 2003, the Partnership owned the following properties and joint venture interests listed below. As used in this Form 10-K the terms “we,” “us” or “our,” as the context requires, may refer to the Partnership or its interests in these properties and joint ventures:
| · | Sabal Park Apartments, a 162-unit luxury apartment complex located on a 13 acre tract in Orlando, Florida, constructed by us. |
| · | Park Place Apartments Phase I, a 180-unit luxury apartment complex located on an 18 acre tract in Lexington, Kentucky, constructed by us. |
| · | Park Place Apartments Phase III, a 152-unit luxury apartment complex, located on a 15 acre tract in Lexington, Kentucky, constructed by us. |
| · | Willow Lake Apartments, a 207-unit luxury apartment complex located on an 18 acre tract in Indianapolis, Indiana, constructed by us. |
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| · | A joint venture interest in Golf Brook Apartments, a 195-unit luxury apartment complex located on a 16 acre tract in Orlando, Florida, constructed by the joint venture between us and NTS-Properties IV (“NTS-Properties IV”), an affiliate of our General Partner. Our percentage interest in the joint venture was 96.03% on December 31, 2003. |
| · | A joint venture interest in Plainview Point Office Center Phase III, an office center with approximately 61,700 net rentable square feet located in Louisville, Kentucky, constructed by the joint venture between us and NTS-Properties IV. Our percentage interest in the joint venture was 95.04% on December 31, 2003. |
We or the joint ventures in which we are a partner have a fee title interest in the above properties. We believe that our properties are adequately covered by property insurance.
As of December 31, 2003, our properties and joint ventures were encumbered by mortgages as shown in the table below:
Interest Maturity Balance
Property Rate Date on 12/31/03
- ---------------------------------------- ------------- --------------- -----------------
Park Place Apartments Phase I and III 7.74% 10/15/2012 (1) $ 11,004,713
Willow Lake Apartments 7.32% 10/15/2012 (3)(4) $ 6,070,365
Golf Brook Apartments 7.57% 05/15/2009 (2)(3) $ 6,044,431
Plainview Point Office Center Phase III 8.38% 12/01/2010 (5) $ 2,988,656
Sabal Park Apartments 7.38% 12/05/2012 (3)(4) $ 2,043,356
Sabal Park Apartments 6.93% 12/05/2012 (6) $ 1,958,280
Sabal Park Apartments 7.38% 12/05/2012 (3)(4) $ 1,362,237
| (1) | Monthly principal payments are based upon a 19-year amortization schedule. We expect the outstanding balance at maturity will be approximately $6,316,000. |
| (2) | Monthly principal payments are based upon a 12-year amortization schedule. |
| (3) | We expect at maturity, the mortgage will have been repaid based on the current rate of amortization. |
| (4) | Monthly principal payments are based upon a 15-year amortization schedule. |
| (5) | Monthly principal payments are based upon a 20-year amortization schedule. We expect the outstanding balance at maturity will be approximately $2,243,000. |
| (6) | Monthly principal payments are based upon a 25-year amortization schedule. We expect the outstanding balance at maturity will be approximately $1,555,000. |
Currently, our plans for renovations and other major capital expenditures include tenant finish improvements at our commercial property as required by lease negotiations, roof replacements at Willow Lake Apartments and Park Place Apartments Phase I and playground equipment upgrades at Sabal Park Apartments. Changes to current tenant finish improvements are a typical part of any lease negotiation. Improvements generally include a revision to the current floor plan to accommodate a tenant’s needs, new carpeting and paint and/or wallcovering. The extent and cost of the improvements are determined by the size of the space being leased and whether the improvements are for a new tenant or incurred because of a lease renewal. The tenant finish improvements will be funded by cash flow from operations, cash reserves, and/or additional financing.
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We are presently engaged solely in the business of developing, constructing, owning and operating residential apartments and commercial real estate. See Part II, Item 8 — Note 9 for information regarding these operating segments.
General
Our current investment objectives are consistent with our original objectives, which are to provide cash distributions from the operation or financing of our properties, obtain long-term capital gain treatment on the sale or refinancing of properties, provide limited partners with deferrals of federal income taxes, and preserve limited partners’ capital. Proceeds of any sale or refinancing of our properties may be distributed to limited partners, or may be used to repay debt or to make capital improvements to properties.
The properties we currently own, which are described in the following section, are the same as those we originally acquired. Our properties are in a condition suitable for their intended use. We periodically evaluate whether to retain, refinance, or sell or otherwise dispose of these properties, with a view toward meeting the above investment objectives, including the making of distributions. In deciding whether to sell a property, we will consider factors such as potential capital appreciation, mortgage pre-payment penalties, market conditions, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to the limited partners. Distributions have been suspended to fund current and future capital improvements and debt repayment. For information on distributions, see Part II, Item 5 of this Form 10-K. In addition, see Item 8, Note 8 and Note 11 for information regarding our proposed merger with other affiliated entities.
Sabal Park Apartments
Apartments at Sabal Park include two and three-bedroom apartments. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, ovens, dishwashers, ranges, refrigerators, garbage disposals and washer/dryer hook-ups. Tenants have access to and use of the clubhouse, management offices, swimming pool and tennis courts.
Monthly rental rates at Sabal Park Apartments start at $969 for two-bedroom apartments and $1,309 for three-bedroom apartments, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 95% (2003), 96% (2002), 93% (2001), 98% (2000) and 99% (1999). See Part II, Item 7 for average occupancy information.
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Park Place Apartments Phase I
Apartments at Park Place Apartments Phase I include one and two-bedroom apartments and two-bedroom town homes. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators with ice makers, garbage disposals and microwave ovens. All apartments have access to coin-operated washers and dryers and some apartments have a washer/dryer hook-up. Amenities include the clubhouse with a party room, swimming pool, tennis courts, racquetball courts, exercise facility and management offices. The amenities are shared with Phase II and III of the Park Place Development. Park Place Apartments Phase II is owned by NTS-Properties VII, Ltd, an affiliate of our General Partner. Park Place Apartments Phase III is owned by us (see discussion below). The cost to construct and operate the common amenities is shared proportionately by each phase.
Monthly rental rates at Park Place Apartments Phase I start at $699 for one-bedroom apartments, $939 for two-bedroom apartments and $1,099 for two-bedroom town homes, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 82% (2003), 88% (2002), 73% (2001), 72% (2000) and 89% (1999). See Part II, Item 7 for average occupancy information.
Park Place Apartments Phase III
Apartments at Park Place Apartments Phase III include one, two and three-bedroom apartments. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators with ice makers, garbage disposals and microwave ovens. All apartments have access to coin-operated washers and dryers and some apartments have a washer/dryer hook-up. Amenities include the clubhouse with a party room, swimming pool, tennis courts, racquetball courts, exercise facility and management offices. The amenities are shared with Phase I (see discussion above) and Phase II of the Park Place Development. Park Place Apartments Phase II is owned by NTS-Properties VII, Ltd, an affiliate of our General Partner. The cost to construct and operate the common amenities is shared proportionately by each phase.
Monthly rental rates at Park Place Apartments Phase III start at $719 for one-bedroom apartments, $839 for two-bedroom apartments and $1,199 for three-bedroom apartments, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. In May 2000, construction of Park Place Apartments Phase III was completed and all 152 apartment units were available for leasing. The occupancy levels at the apartment complex as of December 31 were 93% (2003), 97% (2002), 73% (2001) and 52% (2000). See Part II, Item 7 for average occupancy information.
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Willow Lake Apartments
Apartments at Willow Lake Apartments include one and two-bedroom apartments and two-bedroom town homes. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators with ice makers, garbage disposals and microwave ovens. All apartments have access to coin-operated washers and dryers and some apartments have a washer/dryer hook-up. Amenities include the clubhouse with a party room, swimming pool, tennis courts, racquetball courts, exercise facility and management offices.
Monthly rental rates at Willow Lake Apartments start at $835 for one-bedroom apartments, $1,080 for two-bedroom apartments and $1,295 for two-bedroom town homes, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 79% (2003), 93% (2002), 90% (2001), 83% (2000) and 82% (1999). See Part II, Item 7 for average occupancy information.
Golf Brook Apartments
Apartments at Golf Brook Apartments include two and three-bedroom apartments. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators, garbage disposals and washer/dryer hook-ups. Tenants have access to and use of the clubhouse, management offices, pool and tennis courts.
Monthly rental rates at Golf Brook Apartments start at $1,195 for two-bedroom apartments and $1,435 for three-bedroom apartments, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 93% (2003), 88% (2002), 89% (2001), 87% (2000) and 95% (1999). See Part II, Item 7 for average occupancy information.
Plainview Point Office Center Phase III
As of December 31, 2003, there were nine tenants leasing space aggregating approximately 44,800 square feet of rentable area at Plainview Point Office Center Phase III. All leases provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenants who occupy Plainview Point Office Center Phase III are professional service oriented organizations. The principal occupations/professions practiced is insurance claim processing and social security program management. Two tenants individually lease more than 10% of Plainview Point Office Centers Phase III’s rentable area. The occupancy levels at the office center as of December 31 were 52% (2003), 51% (2002), 54% (2001), 73% (2000) and 86% (1999). See Part II, Item 7 for average occupancy information.
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The following table contains approximate data concerning the major tenant leases in effect on December 31, 2003:
Year of Square Feet and % of Current Annual Rental
Major Tenant (1): Expiration Net Rentable Area per Square Foot
- -------------------------- ----------------- -------------------------- ---------------------------
1 2013 10,770 (17.46%) $22.44
2 2008 10,708 (17.36%) $16.00
(1) Major tenants are those that individually occupy 10% or more of the rentable square footage.
Additional operating data regarding our properties and joint ventures is furnished in the following table:
Federal Tax Property Tax Annual Property
Basis Rate Taxes
------------------ ----------------- ------------------
Wholly-Owned Properties
Sabal Park Apartments $ 11,690,098 .017144 $ 156,896
Park Place Apartments Phase I $ 11,758,642 .009600 $ 74,346
Park Place Apartments Phase III $ 12,977,737 .009600 $ 68,694
Willow Lake Apartments $ 16,148,247 .027948 $ 350,087
Joint Venture Properties
Golf Brook Apartments $ 16,649,293 .017144 $ 257,875
Plainview Point Office Center Phase III $ 4,839,381 .010935 $ 35,370
Depreciation for book purposes is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 30 years for buildings, 5-30 years for building improvements, 5-30 years for amenities and the applicable lease term for tenant improvements.
NTS Sabal Golf Villas Joint Venture
On September 1, 1985, we entered into a joint venture agreement with NTS-Properties IV, an affiliate of our General Partner, to develop, construct, own and operate a 158-unit luxury apartment complex on a 13.15 acre site in Orlando, Florida known as Golf Brook Apartments Phase I. On January 1, 1987, the joint venture agreement was amended to include Golf Brook Apartments Phase II, a 37-unit luxury apartment complex located on a 3.069 acre site adjacent to Golf Brook Apartments Phase I. The joint venture will continue until dissolved. Dissolution shall occur upon, but not before, the first to occur of the following:
| · | the withdrawal, bankruptcy or dissolution of a partner or the execution by a partner of an assignment for the benefit of its creditors; |
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| · | the sale, condemnation or taking by eminent domain of all or substantially all of our assets, other than our cash and cash-equivalent assets; |
| · | the vote or consent of each of the partners to dissolve the Partnership; or |
| · | September 30, 2025. |
We contributed land and the cost of constructing and leasing the apartments, valued at approximately $15,800,000. NTS-Properties IV contributed land valued at approximately $1,900,000 with a related note payable to a bank of approximately $1,200,000. We also contributed funds to retire the note payable to a bank. No future contributions are anticipated as of December 31, 2003.
Golf Brook Apartments is encumbered by a mortgage payable to an insurance company. We had originally obtained financing, secured by Golf Brook Apartments, to fund a portion of our contribution to the joint venture. The contribution loan has subsequently been refinanced. The current mortgage payable of $6,044,431 is recorded as a liability by us. The mortgage payable bears interest at a fixed rate of 7.57%, is due May 15, 2009 and is secured by the assets of Golf Brook Apartments. Monthly principal payments are based upon a 12-year amortization schedule. We believe that at maturity, the mortgage will have been repaid based on the current rate of amortization.
The net cash flow for each calendar quarter is distributed to the partners in accordance with their respective percentage interests. The term “Net Cash Flow” for any period shall mean the excess, if any of A) the sum of (i) the gross receipts of the joint venture property for such period, other than capital contributions plus (ii) any funds released by the partners for previously established reserves (referred to in clause (B) (iv) below), over (B) the sum of (i) all cash operating expenses paid by the joint venture property during such period in the course of business, (ii) capital expenditures paid in cash during such period, (iii) payments during such period on account of amortization of the principal of any debts or liabilities of the joint venture property and (iv) reserves for contingent liabilities and future expenses of the joint venture property as established by the partners; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall only be taken into account to the extent not funded by capital contributions or paid out of previously established reserves. “Percentage Interest” means that percentage which the capital contribution of a partner bears to the aggregate capital contributions of all the partners. Net income or loss is allocated between the partners pursuant to the joint venture agreement.
Plainview Point III Joint Venture
On March 1, 1987, we entered into a joint venture agreement with NTS-Properties IV, an affiliate of our General Partner, to develop, construct, own and operate an office building in Louisville, Kentucky known as Plainview Point Office Center Phase III. The joint venture will continue until dissolved. Dissolution shall occur upon, but not before, the first to occur of the following:
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| · | the withdrawal, bankruptcy or dissolution of a partner or the execution by a partner of an assignment for the benefit of its creditors; |
| · | the sale, condemnation or taking by eminent domain of all or substantially all of the assets of the real property, unless such disposition is, in whole or in part, represented by a promissory note of the purchaser; |
| · | the vote or consent of each of the partners to dissolve the Partnership; or |
| · | December 30, 2026. |
We contributed approximately $4,100,000, the cost to construct and lease the building. NTS-Properties IV contributed land valued at $790,000 with an outstanding note payable to a bank of $550,000 which was secured by the land. We also contributed funds to retire the $550,000 note payable to the bank. No future contributions are anticipated as of December 31, 2003.
Plainview Point Office Center Phase III is encumbered by a mortgage payable to an insurance company. The current mortgage payable of $2,988,656 is recorded by us as a liability. The mortgage payable bears interest at a fixed rate of 8.38%, is due December 1, 2010 and is secured by the assets of Plainview Point Office Center Phase III. Monthly principal payments are based upon a 20-year amortization schedule. We expect the outstanding balance at maturity to be approximately $2,243,000.
The net cash flow for each calendar quarter is distributed to the partners in accordance with their respective percentage interests. The term “Net Cash Flow” for any period shall mean the excess, if any of A) the sum of (i) the gross receipts of the joint venture property for such period, other than capital contributions plus (ii) any funds released by the partners for previously established reserves (referred to in clause (B) (iv) below), over (B) the sum of (i) all cash operating expenses paid by the joint venture property during such period in the course of business, (ii) capital expenditures paid in cash during such period, (iii) payments during such period on account of amortization of the principal of any debts or liabilities of the joint venture property and (iv) reserves for contingent liabilities and future expenses of the joint venture property as established by the partners; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall only be taken into account to the extent not funded by capital contributions or paid out of previously established reserves. “Percentage Interest” means that percentage which the capital contribution of a partner bears to the aggregate capital contributions of all the partners. Net income or loss is allocated between the partners pursuant to the joint venture agreement.
Our properties are subject to competition from similar types of properties (including, in certain areas, properties owned or managed by affiliates of our General Partner) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants at lease
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expiration or for new tenants when vacancies occur. We maintain the suitability and competitiveness of our properties primarily on the basis of effective rents, amenities and service provided to tenants. Competition is expected to increase in the future as a result of the construction of additional properties. As of December 31, 2003, the properties under construction, or scheduled to start construction in 2004, in the respective vicinities in which our properties are located are as follows: In the vicinity of Golf Brook Apartments and Sabal Park Apartments, there is one apartment community that could potentially start construction in 2004. The apartment community is planning to construct 460 apartments, but construction is temporarily on hold. In the vicinity of Park Place Apartments Phase I and III, there is one community of approximately 90 apartments currently under construction. The apartments are scheduled for completion in May 2004. This property will be marketed as student housing. There is currently no new competition in the vicinity of Willow Lake Apartments. At this time it is unknown the effect these new apartment units will have on occupancy at our properties. We have not commissioned a formal market analysis of competitive conditions in any market in which we own properties, but rely upon the market condition knowledge of the employees of NTS Development Company who manage and supervise leasing for each property. See “Conflict of Interest.”
NTS Development Company, an affiliate of our General Partner, directs the management of our properties pursuant to a written agreement (the “Agreement”). NTS Development Company is a wholly-owned subsidiary of NTS Corporation. Mr. J.D. Nichols has a controlling interest in NTS Corporation and is a general partner of NTS-Properties Associates VI. Under the Agreement, NTS Development Company establishes rental policies and rates and directs the marketing activity of leasing personnel. It also coordinates the purchase of equipment and supplies, maintenance activity and the selection of all vendors, suppliers and independent contractors.
As compensation for its services, NTS Development Company received a total of $548,558 in property management fees for the year ended December 31, 2003. $517,054 was received from the apartment communities and $31,504 was received from the commercial property. The fee is equal to 6% of gross revenues from the commercial property and 5% of gross revenues from the apartment communities.
In addition, the Agreement requires us to purchase all insurance relating to the managed properties, to pay the direct out-of-pocket expenses of NTS Development Company in connection with our operations, including the cost of goods and materials used for and on our behalf, and to reimburse NTS Development Company for the salaries, commissions, fringe benefits and related employment expenses of personnel.
The term of the Agreement between NTS Development Company and us was initially for five years, and renewed thereafter for succeeding one-year periods, until cancelled. The Agreement is subject to cancellation by either party upon 60-days written notice. As of December 31, 2003, the Agreement is still in effect.
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Information about our working capital practices is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
We do not consider our operations to be seasonal to any material degree.
Principals of the General Partner or its affiliates own or operate real estate properties that compete, directly or indirectly, with properties owned by us. Because we were organized by, and are operated by the General Partner, conflicts arising from our competition with properties owned by affiliated partnerships are not resolved through arms-length negotiations, but through the exercise of the General Partner’s judgment consistent with its fiduciary responsibility to the limited partners and our investment objectives and policies. The General Partner is accountable to the limited partners as a fiduciary and consequently must exercise good faith and integrity in handling our affairs. A provision has been made in our Partnership Agreement that the General Partner will not be liable to us except for acts or omissions performed or omitted fraudulently, in bad faith or with negligence. The Partnership Agreement provides for indemnification of the General Partner by us for liability resulting from errors in judgment or certain acts or omissions. The General Partner and its affiliates have the right to compete with our properties including the right to develop competing properties now and in the future, in addition to the existing properties which may compete directly or indirectly.
NTS Development Company, an affiliate of our General Partner, acts in a similar capacity for other affiliated entities in the same geographic region where we have property interests. As a result of the affiliation between NTS Development Company and our General Partner, there is a conflict of interest between our General Partner’s duty to the limited partners and its incentive to cause us to retain our properties because of the payment of fees to NTS Development Company. We believe the agreement with NTS Development Company is on terms no less favorable to us than those which could be obtained from a third party for similar services in the same geographical region in which the properties are located. The contract is terminable by either party without penalty upon 60-days written notice.
We have no employees. Under the terms of the property management agreement with NTS Development Company, NTS Development Company makes its employees available to perform services for us. In addition to the property management fees that we pay to NTS Development Company, we reimburse this affiliate for the actual costs of providing such services. See Part II, Item 8 — Note 7 and Part III, Item 13 for further discussions of related party transactions.
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Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
On November 17, 2003, the Plaintiff/Counterclaim Defendant, Elder Construction & Associates, Inc., and the Defendants/Counterclaim Plaintiffs, NTS Development Company, NTS-Properties VI, a Maryland limited partnership, NTS-Properties Associates VI, and NTS Capital Corporation, entered into a Settlement and Mutual Release Agreement with respect to the lawsuit. NTS paid $120,000 to Elder in exchange for the release of Elder’s claim. An Agreed Order Dismissing as Settled and Release of Bonds was signed by the Judge on November 21, 2003.
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners. These claims are based on, among other things, tender offers made by the public partnerships and an affiliate of our general partner, as well as the operation of the partnerships by the general partners. The plaintiffs allege, among other things, that the prices at which limited partnership interests were purchased in these tender offers were too low. The plaintiffs are seeking monetary damages and equitable relief, including an order directing the disposition of the properties owned by the public partnerships and the distribution of the proceeds. No amounts have been accrued as a liability for this action in our consolidated financial statements. Under an indemnification agreement with our general partner, we are responsible for the costs of defending any such action.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) against our general partner, the general partners of three public partnerships affiliated with us and several individuals and entities affiliated with us. On March 21, 2003, the complaint was amended to include the general partner of a public partnership affiliated with us and the general partner of a partnership that was affiliated with us but is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and affiliated public partnerships based on alleged overpayments of fees, prohibited investments, improper failures to make distributions, purchases of limited partnership interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are
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seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the public partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued as a liability for this action in our financial statements. Our general partner believes that this action is without merit, and is vigorously defending it. On March 2, 2004, we, along with all defendants, filed a Motion to Dismiss the Bohm litigation. That Motion is currently pending before the court.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle (the “Settlement Agreement”) with representatives of the class of plaintiffs to settle the Buchanan action. This settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for all of the claims asserted in the Buchanan litigation and the Bohm litigation. As part of the proposed settlement, the general partners have agreed, among other things, to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed entity. For more information on the merger, see Item 7, Proposed Merger.
On February 26, 2004, the Superior Court of the State of California for the County of Contra Costa preliminarily approved the settlement as set forth in the Stipulation and Agreement of Settlement jointly filed by the general partners (the “General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) on December 5, 2003. The Superior Court’s order, which sets forth its preliminary determination that the Stipulation and Agreement of Settlement is within the range of reasonableness, and is fair, just and adequate to the class of plaintiffs, is filed as an attachment to our Form 8-K filed on March 1, 2004. The Superior Court has scheduled a hearing (the “Final Hearing”) on May 6, 2004, to finally determine, among other things, whether: (1) the Stipulation and Agreement of Settlement is fair, reasonable and adequate, and in the best interests of the class of plaintiffs, and (2) the Buchanan litigation should be dismissed with prejudice and on the merits in accordance with the Stipulation and Agreement of Settlement.
At the Final Hearing, any member of the class of plaintiffs may appear personally or through his or her counsel to object to the final approval of the Stipulation and Agreement of Settlement, the entry of a final judgment dismissing with prejudice the Buchanan litigation or the application for an award of attorneys’ fees and expenses to the counsel for the class of plaintiffs. To do so, a class member must file the following with the Superior Court and the attorneys for the class of plaintiffs and the General Partners and other defendants at least fourteen days prior to the Final Hearing: (1) a notice of the class member’s intention to appear at the Final Hearing, (2) a detailed statement of the class member’s specific objections and (3) the grounds for the objections and any documents that the class member desires the Superior Court to consider.
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Pending the entry by the Superior Court of a final judgment and order dismissing the Buchanan litigation with prejudice, all members of the class of plaintiffs are barred and enjoined from: (1) transferring, selling, assigning or otherwise disposing of any limited partner units of the Partnerships, (2) granting a proxy to object to the merger of the Partnerships into NTS Realty Holdings Limited Partnership (“NTS Realty”) as contemplated by the joint consent solicitation statement/prospectus that NTS Realty filed with the Securities and Exchange Commission or (3) commencing a tender offer for the limited partner units of the Partnerships.
For the year ended December 31, 2003, our share of the legal costs for the Buchanan and Bohm litigations was approximately $204,000, which was included in our professional and administrative expenses.
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our consolidated financial position or results of operations except as discussed herein.
None.
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There is no established trading market for the limited partnership interests, nor is one likely to develop. We had 2,059 limited partners as of January 31, 2004. Cash distributions and allocations of income (loss) are made as described in Item 8 — Note 1D.
No distributions were paid during 2003, 2002 or 2001. Quarterly distributions are determined based on current cash balances, cash flow being generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements. Distributions have been indefinitely suspended to fund current and future capital improvements and debt repayment. Our ability to pay distributions is dependent upon, among other things, our ability to refinance properties on favorable terms.
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Years ended December 31:
2003 2002 2001 2000 1999
-------------- --------------- ---------------- --------------- ----------------
Total revenues $ 10,839,806 $ 10,610,589 $ 10,959,423 $ 10,433,067 $ 9,693,133
Operating income $ 1,013,251 $ 1,232,616 $ 1,444,827 $ 1,754,054 $ 2,090,845
Minority interest $ 35,228 $ 37,145 $ 41,316 $ 42,216 $ 42,995
Net loss $ (1,507,305) $ (1,366,534)$ (1,321,621)$ (862,023)$ (187,157)
Net loss allocated to:
General Partner $ (15,073) $ (13,665)$ (13,216)$ (8,620)$ (1,872)
Limited partners $ (1,492,232) $ (1,352,869)$ (1,308,405)$ (853,403)$ (185,285)
Net loss per limited
partnership interest $ (38.37) $ (34.79)$ (33.57)$ (21.85)$ (4.66)
Weighted average number
of limited partnership
interests 38,889 38,889 38,974 39,053 39,751
Cumulative net loss
allocated to:
General Partner $ (122,734) $ (107,661)$ (93,996)$ (80,780)$ (72,160)
Limited partners $ (16,941,339) $ (15,449,107)$ (14,096,238)$ (12,787,833)$ (11,934,430)
Cumulative taxable income
(loss) allocated to:
General Partner $ 107,640 $ 108,016 $ 105,373 $ 110,406 $ 111,613
Limited partners $ (20,047,376) $ (18,784,373)$ (17,550,296)$ (16,097,799)$ (15,165,626)
Distributions declared:
General Partner $ -- $ -- $ -- $ -- $ 4,005
Limited partners $ -- $ -- $ -- $ -- $ 396,514
Cumulative distributions
declared:
General Partner $ 121,277 $ 121,277 $ 121,277 $ 121,277 $ 121,277
Limited partners $ 12,006,384 $ 12,006,384 $ 12,006,384 $ 12,006,384 $ 12,006,384
At year end:
Cash and equivalents $ 125,342 $ 1,058,814 $ 60,167 $ 47,683 $ 909
Land, buildings and
amenities, net $ 40,446,437 $ 42,445,109 $ 44,986,348 $ 47,498,726 $ 47,739,483
Total assets $ 42,153,523 $ 44,998,108 $ 46,496,128 $ 49,077,535 $ 49,231,418
Mortgages and notes
payable $ 31,872,038 $ 33,536,428 $ 33,474,382 $ 35,149,376 $ 33,312,443
The above selected financial data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K report.
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The Emerging Issues Tasks Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue No. 00-1, “Applicability of the Pro Rata Method of Consolidation to Investments in Certain Partnerships and Other Unincorporated Joint Ventures.” The EITF reached a consensus that a proportionate gross financial statement presentation (referred to as “proportionate consolidation” in the Notes to Consolidated Financial Statements) is not appropriate for an investment in an unincorporated legal entity accounted for by the equity method of accounting, unless the investee is in either the construction industry or an extractive industry where there is a longstanding practice of its use.
The consensus is applicable to financial statements for annual periods ending after June 15, 2000. We have applied the consensus to all comparative financial statements, restating them to conform with the consensus for all periods presented. The application of this consensus did not result in a restatement of previously reported partners’ equity or results of operations, but did result in a recharacterization or reclassification of certain financial statements’ captions and amounts. The affected data in the table above has been restated to provide comparable information for all periods presented.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements in Item 8 and the cautionary statements below.
General
A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
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Impairment and Valuation
Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
Recognition of Rental Income
Our apartment communities have operating leases with apartment residents with terms generally of twelve months or less. We recognize rental revenue related to these leases on an accrual basis when due from residents. In accordance with our standard lease terms, rental payments are generally due on a monthly basis.
Our commercial property leases are accounted for as operating leases. We accrue minimum rents on a straight-line basis over the terms of their respective leases. We structure our leases to allow us to recover a significant portion of our property operating, real estate taxes and repairs and maintenance expenses from our commercial tenants. Property operating expenses typically include utility, insurance, security, janitorial, landscaping and other administrative expenses. We accrue reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. We also receive estimated payments for these reimbursements from substantially all our tenants throughout the year. We do this to reduce the risk of loss on uncollectible accounts once we perform the final year-end billings for recoverable expenditures. We recognize the difference between estimated recoveries and the final billed amounts in the subsequent year and we believe these differences were not material in any period presented.
Under GAAP, we are required to recognize rental income based on the effective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent during the term of the lease, not the stated rent for any particular month. The process, known as “straight-lining” or “stepping” rent generally has the effect of increasing rental revenues during the early phases of a lease and decreasing rental revenues in the latter phases of a lease. Due to the impact of “straight- lining,” rental income exceeded the cash collected for rent by approximately $100 and $1,300, for the years ended December 31, 2003 and 2001, respectively, and cash collected for rent exceeded rental income by approximately $4,400 for the year ended December 31, 2002. If rental income
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calculated on a straight-line basis exceeds the cash rent due under the lease, the difference is recorded as an increase in deferred rent receivable and included as a component of accounts receivable on the relevant balance sheet. If the cash rent due under the lease exceeds rental income calculated on a straight-line basis, the difference is recorded as a decrease in deferred rent receivable and is recorded as a decrease of accounts receivable on the relevant balance sheet. We defer recognition of contingent rental income, such as percentage or excess rent, until the specified target that triggers the contingent rental income is achieved. We periodically review the collectability of outstanding receivables. Allowances are generally taken for tenants with outstanding balances due for a period greater than ninety days and tenants with outstanding balances due for a period less than ninety days but that we believe are potentially uncollectible.
Recognition of Lease Termination Income
We recognize lease termination income upon receipt of the income. We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.
Cost Capitalization and Depreciation Policies
We review all expenditures and capitalize any item exceeding $1,000 deemed to be an upgrade or a tenant improvement with an expected useful life greater than one year. Land, building and amenities are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements have estimated useful lives between 5 — 30 years, land improvements have estimated useful lives of between 5 — 30 years, and amenities have estimated useful lives between 5 — 30 years.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.
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In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:
| (i) | Special purpose entities (“SPEs”) created prior to February 1, 2003. We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. |
| (ii) | Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
| (iii) | All entities, regardless of whether a SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
The adoption of the provisions applicable to FIN 46 did not have any impact on our financial statements.
Minority Interest
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 was effective for all financial instruments created or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, FASB Staff Position No. FAS 150-3 was issued, which deferred for an indefinite period the classification and measurement provisions, but not the disclosure provisions of SFAS 150.
We consolidate certain properties that are also owned by affiliated parties that have noncontrolling interests. In certain cases, the applicable joint venture agreement provides for a contractual termination date of the agreement based on certain specified events. SFAS 150 describes this type of arrangement as a “limited-life subsidiary”. SFAS 150 requires the disclosure of the estimated settlement value of these noncontrolling interests. As of December 31, 2003, the estimated settlement value of these noncontrolling interests is approximately $555,000. This settlement value is based on estimated third party consideration paid to the joint venture upon disposition of each property and is net of all other assets and liabilities including any yield maintenance that would have been due on that date had the mortgages encumbering the properties been prepaid on December 31, 2003. Due to the inherent risks and uncertainties related to the operations and sale of real estate assets, among other things, the amount of any potential distribution to the noncontrolling interests is likely to change.
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The following table includes our selected summarized operating data for the years ended December 31, 2003, 2002 and 2001. This data is presented to provide assistance in identifying trends in our operating results and other factors affecting our business. This data should be read in conjunction with our financial statements, including the notes thereto, in Part II, Item 8 of this report.
The following table of segment data is provided:
2003
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 10,326,587 $ 513,219 $ -- $ 10,839,806
Operating expenses and operating expenses
- affiliated 4,144,729 297,616 -- 4,442,345
Depreciation and amortization 2,324,165 206,505 89,466 2,620,136
Interest expense 867,225 -- 1,646,668 2,513,893
Net income (loss) 1,390,266 (57,306) (2,840,265) (1,507,305)
2002
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 9,999,631 $ 610,958 $ -- $ 10,610,589
Operating expenses and operating expenses
- affiliated 4,139,268 338,074 -- 4,477,342
Depreciation and amortization 2,527,785 183,967 89,466 2,801,218
Interest expense 840,145 -- 1,738,038 2,578,183
Net income (loss) 1,131,128 29,117 (2,526,779) (1,366,534)
2001
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 10,102,931 $ 856,492 $ -- $ 10,959,423
Operating expenses and operating expenses
- affiliated 4,294,594 393,742 8,403 4,696,739
Depreciation and amortization 2,422,606 195,055 89,466 2,707,127
Interest expense 828,955 -- 1,827,251 2,656,206
Net income (loss) 1,021,031 182,643 (2,525,295) (1,321,621)
During the year ended December 31, 2003, our continuing net losses have been negatively impacted by the expense related to our ongoing litigation. Net revenues have increased due to increased average occupancy at the apartment communities, with the exception of commercial revenues, which have been negatively affected by the recent decrease in occupancy at Plainview Point III Office Center, where we have not been successful in renewing several tenants’ expired leases. We continue our leasing efforts by seeking new tenants for this property. Operating expenses and operating expenses — affiliated have remained relatively stable. Interest expense continues to decline as our debt balances are reduced by normal recurring principal reductions.
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Rental income and tenant reimbursements generated by our properties and joint ventures for the years ended December 31 were as follows:
2003 2002 2001
------------- ------------- -------------
Wholly-Owned Properties
Sabal Park Apartments (1) $ 1,902,491 $ 1,881,597 $ 1,947,501
Park Place Apartments Phase I (1) $ 1,726,943 $ 1,480,563 $ 1,514,766
Willow Lake Apartments (1) $ 2,190,889 $ 2,365,523 $ 2,555,725
Park Place Apartments Phase III (1) $ 1,511,890 $ 1,311,185 $ 1,154,341
Joint Venture Properties
(Ownership % on December 31, 2003)
Golf Brook Apartments (96.03%) (1) $ 2,994,374 $ 2,960,763 $ 2,930,598
Plainview Point Office Center Phase III (95.04%) $ 513,219 $ 610,958 $ 856,492
| (1) | We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The occupancy levels at our properties and joint ventures as of December 31 were as follows:
2003 2002 2001
------------ ------------- ------------
Wholly-Owned Properties
Sabal Park Apartments (2) 95% 96% 93%
Park Place Apartments Phase I (2) 82% 88% 73%
Willow Lake Apartments (2) 79% 93% 90%
Park Place Apartments Phase III (2) 93% 97% 73%
Joint Venture Properties
(Ownership % on December 31, 2003)
Golf Brook Apartments (96.03%) (2) 93% 88% 89%
Plainview Point Office Center Phase III (95.04%) 52% 51% 54%
| (2) | We believe the changes in occupancy on December 31 from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The average occupancy levels at our properties and joint ventures for the years ended December 31 were as follows:
2003 2002 2001
------------ ------------- ------------
Wholly-Owned Properties
Sabal Park Apartments (3) 93% 93% 94%
Park Place Apartments Phase I (3) 88% 79% 78%
Willow Lake Apartments (3) 85% 88% 95%
Park Place Apartments Phase III (3) 93% 83% 67%
Joint Venture Properties
(Ownership % on December 31, 2003)
Golf Brook Apartments (96.03%) (3) 93% 91% 90%
Plainview Point Office Center Phase III (95.04%) 50% 55% 90%
| (3) | We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
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In an effort to continue to improve occupancy at our apartment communities, we have an on-site leasing staff, who are employees of NTS Development Company, at each of the apartment communities. The staff handles all on-site visits from potential tenants, coordinates local advertising with NTS Development Company’s marketing staff, makes visits to local companies to promote fully furnished apartments, and negotiates lease renewals with current residents.
The leasing and renewal negotiations for our commercial property are handled by leasing agents, who are employees of NTS Development Company, located in Louisville, Kentucky. The leasing agents are located in the same city as the commercial property. All advertising for the commercial property is coordinated by NTS Development Company’s marketing staff located in Louisville, Kentucky.
The following discussion relating to changes in our results of operations includes only material line items within our Statements of Operations or line items for which there was a material change between the years ending December 31, 2003, 2002 and 2001.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the years ended December 31, 2003 and 2002 was approximately $10,840,000 and $10,611,000, respectively. The increase of approximately $229,000, or 2%, is not a significant change. There were no offsetting material changes.
Rental income and tenant reimbursements for the years ended December 31, 2002 and 2001 was approximately $10,611,000 and $10,959,000, respectively. The decrease of approximately $348,000, or 3%, is not a significant change. There were no offsetting material changes.
Operating Expenses and Operating Expenses — Affiliated
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $2,941,000 and $2,883,000, respectively. The increase of approximately $58,000, or 2%, is not a significant change. There were no offsetting material changes.
Operating expenses for the years ended December 31, 2002 and 2001 were approximately $2,883,000 and $3,046,000, respectively. The decrease of approximately $163,000, or 5%, is not a significant change. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $1,501,000 and $1,595,000, respectively. The decrease of approximately $94,000, or 6%, is not a significant change. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2002 and 2001 were approximately $1,595,000 and $1,651,000, respectively. The decrease of approximately $56,000, or 3%, is not a significant change. There were no offsetting material changes.
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Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Real Estate Taxes
Real estate taxes for the years ended December 31, 2003, 2002 and 2001 were $1,057,000, $883,000 and $980,000, respectively. The increase of $174,000, or 20%, in 2003 is primarily due to increased tax assessments at Willow Lake Apartments and at Plainview Point Office Center Phase III, partially offset by a decreased tax assessment at Park Place Apartments Phase I. The decrease of $97,000, or 10%, in 2002 is primarily due to decreased tax assessments at Park Place Apartments Phase III.
Professional and Administrative Expenses and Professional and Administrative Expenses —Affiliated
Professional and administrative expenses for the years ended December 31, 2003 and 2002 were $763,000 and $279,000, respectively. The increase of $484,000, or 173%, is primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners. See Part II, Item 8 – Note 8 and Note 11 for information regarding our proposed merger and litigation filed by limited partners.
Professional and administrative expenses for the years ended December 31, 2002 and 2001 were approximately $279,000 and $161,000, respectively. The increase of $118,000, or 73%, is primarily the result of increased legal and professional fees related to litigation filed by limited partners.
Professional and administrative expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $395,000 and $390,000, respectively. The increase of approximately $5,000, or 1%, is not a significant change. There were no offsetting material changes.
Professional and administrative expenses – affiliated for the years ended December 31, 2002 and 2001 were approximately $390,000 and $408,000, respectively. The decrease of approximately $18,000, or 4%, is not a significant change. There were no offsetting material changes.
Professional and administrative expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Depreciation and Amortization Expense
Depreciation and amortization expense for the years ended December 31, 2003 and 2002 was approximately $2,620,000 and $2,801,000, respectively. The decrease of approximately $181,000, or 6%, is not a significant change. There were no offsetting material changes.
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Depreciation and amortization expense for the years ended December 31, 2002 and 2001 was approximately $2,801,000 and $2,707,000, respectively. The increase of approximately $94,000, or 3%, is not a significant change. There were no offsetting material changes.
Interest Expense
Interest expense for the years ended December 31, 2003 and 2002 was approximately $2,514,000 and $2,578,000, respectively. The decrease of approximately $64,000, or 2%, is not a significant change. There were no offsetting material changes.
Interest expense for the years ended December 31, 2002 and 2001 was approximately $2,578,000 and $2,656,000, respectively. The decrease of approximately $78,000, or 3%, is not a significant change. There were no offsetting material changes.