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EX-31.2 - EX-31.2 - NTS REALTY HOLDINGS LPa11-2231_1ex31d2.htm
EX-32.2 - EX-32.2 - NTS REALTY HOLDINGS LPa11-2231_1ex32d2.htm
EX-31.1 - EX-31.1 - NTS REALTY HOLDINGS LPa11-2231_1ex31d1.htm
EX-21.01 - EX-21.01 - NTS REALTY HOLDINGS LPa11-2231_1ex21d01.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2010

 

OR

 

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

 

For the transition period from             to            

 

Commission file number 001-32389

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-2111139

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

10172 Linn Station Road Louisville, Kentucky

 

40223

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (502) 426-4800

 

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

 

Title of each class:

 

Name of each exchange on which registered:

Limited Partnership Units

 

NYSE Amex

 

Securities registered pursuant to section 12(g) of the Act:

 

None

(Title of Class)

 

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No x

 

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 o

 

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

 

Indicate by check mark if disclosure of delinquent 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.  x

 

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

 

Large accelerated filer £

 

Accelerated filer £

 

 

 

Non-accelerated filer £

 

Smaller reporting company x

 

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

 

As of June 30, 2010, the aggregate market value of the registrant’s limited partnership units held by nonaffiliates of the registrant was $15,918,168, based on the closing price of the NYSE Amex.  As of March 30, 2011, there were 11,380,760 limited partnership units of the registrant issued and outstanding.

 

Documents Incorporated by Reference: Portions of the registrant’s proxy statement for the annual meeting of limited partners to be held in 2011 are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

 

FORM 10-K

 

TABLE OF CONTENTS

 

PART I

 

 

 

ITEM 1

BUSINESS

3

ITEM 1A

RISK FACTORS

7

ITEM 1B

UNRESOLVED STAFF COMMENTS

14

ITEM 2

PROPERTIES

15

ITEM 3

LEGAL PROCEEDINGS

21

ITEM 4

RESERVED

21

 

 

 

PART II

 

 

 

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

22

ITEM 6

SELECTED FINANCIAL DATA

24

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

25

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

36

ITEM 8

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

37

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

61

ITEM 9A

CONTROLS AND PROCEDURES

61

ITEM 9B

OTHER INFORMATION

61

 

 

 

PART III

 

 

 

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

62

ITEM 11

EXECUTIVE COMPENSATION

62

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

62

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

62

ITEM 14

PRINCIPAL ACCOUNTANT FEES AND SERVICES

62

 

 

 

PART IV

 

 

 

ITEM 15

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

63

SIGNATURES

 

70

 

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PART I

 

ITEM 1 - BUSINESS

 

General

 

NTS Realty Holdings Limited Partnership (“NTS Realty,” “we,” “us” or “our”) was organized as a Delaware limited partnership in 2003, but had no operations and a limited amount of assets until December 28, 2004.  On that date, a series of predecessor partnerships merged with us, while other entities affiliated with our general partners contributed assets and liabilities to us.  On December 29, 2004, our limited partnership units (the “Units”) began to be listed for trading on the American Stock Exchange under the trading symbol “NLP.”  Our Units currently are listed on the NYSE Amex, which is the American Stock Exchange’s successor.  As used in this Form 10-K, the terms “we,” “us” or “our,” as the context requires, may refer to NTS Realty, its wholly-owned properties, subsidiaries and its interests in consolidated and unconsolidated joint venture investments or interest in properties held as tenants in common with an unaffiliated third party.

 

At December 31, 2010, we owned wholly, as a tenant in common with an unaffiliated third party or through joint venture investments with an unaffiliated third party, 23 properties, comprised of 6 office and business centers, 15 multifamily properties and 2 retail properties.  The properties are located in and around Louisville (6) and Lexington (1), Kentucky; Fort Lauderdale (3) and Orlando (3), Florida; Indianapolis (4), Indiana; Memphis (1) and Nashville (2), Tennessee; Richmond (2), Virginia; and Atlanta (1), Georgia.  Our commercial properties aggregate approximately 607,000 square feet.  We own multifamily properties containing 4,391 rental units and retail properties containing approximately 47,000 square feet.

 

NTS Realty Capital, Inc. (“NTS Realty Capital”) and NTS Realty Partners, LLC serve as our general partners.  Our partnership agreement vests principal management discretion in our managing general partner, NTS Realty Capital, which has the exclusive authority to oversee our business and affairs, subject only to the restrictions in our certificate of limited partnership and partnership agreement.  NTS Realty Capital has a five-member board of directors, the majority of whom must be considered to be “independent directors” under the standards promulgated by the New York Stock Exchange.  Our limited partners have the power to elect these directors on an annual basis.

 

We do not have any employees.  NTS Development Company or its affiliate, NTS Management Company (“NTS Development”), affiliates of our general partners, oversee and manage the day-to-day operations of our properties pursuant to various management agreements.  Pursuant to these agreements, NTS Development receives fees for a variety of services performed for our benefit.  NTS Development receives fees under separate management agreements for each of our consolidated joint venture properties and unconsolidated joint venture properties and our properties owned as a tenant in common with an unaffiliated third party, as well as properties owned by our wholly-owned subsidiaries.  Property management fees are paid in an amount equal to 5% of the gross collected revenue from our wholly-owned properties, consolidated joint venture properties and properties owned by our wholly-owned subsidiaries.  Fees are paid in an amount equal to 3.5% of the gross collected revenue from our unconsolidated properties owned as a tenant in common with an unaffiliated third party.  We were the beneficiary of a preferential ownership interest, disproportionately greater than our initial cash investment in each property owned as a tenant in common with an unaffiliated third party.  Construction supervision fees are generally paid in an amount equal to 5% of the costs incurred which relate to capital improvements and significant repairs.  Also pursuant to the management agreements, NTS Development receives commercial leasing fees equal to 4% of the gross rental amount for new leases and 2% of the gross rental amount for new leases in which a broker is used and for renewals or extensions.  Disposition fees are paid to NTS Development in an amount of 1% to 4% of the aggregate sales price of a property pursuant to our management agreements and up to a 6% fee upon disposition of our properties owned as a tenant in common with an unaffiliated third party under their respective management agreements.  NTS Development has agreed to accept a lower management fee for the properties we own as a tenant in common with an unaffiliated third party in exchange for a larger potential disposition fee.  NTS Development is reimbursed its actual costs for services rendered to NTS Realty.

 

The independent directors engaged an independent nationally recognized real estate expert (the “expert”) to assist them in their review of the management agreement entered into as of December 28, 2004, as amended.  The expert made suggestions as to the types and amounts of fees and reimbursements to be included in the amended and restated management agreement and assisted in the drafting of the amended and restated management agreement.  The amended and restated management agreement was approved by the independent directors and entered into on April 11, 2006, and was effective as of December 29, 2005.  It is automatically renewed annually unless terminated pursuant to its terms.  The independent directors review the amended and restated management agreement periodically.

 

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Employee costs are allocated among NTS Realty, other affiliates of our managing general partner and for the benefit of third parties so that a full-time employee can be shared by multiple entities.  Each employee’s services, which are dedicated to a particular entity’s operations, are allocated as a percentage of each employee’s costs to that entity.  We only reimburse NTS Development Company for actual costs of employee services incurred for our benefit.

 

Business and Investment Objectives and Operating Strategies

 

Since our formation, our business and investment objectives have been to:

 

·                  generate cash flow for distribution;

·                  obtain long-term capital gain on the sale of any properties;

·                  make new investments in properties either wholly, as tenants in common or through joint ventures, including by, directly or indirectly, developing new properties; and

·                  preserve and protect the limited partners’ capital.

 

The board of directors of NTS Realty Capital, in the board’s sole discretion, may change these investment objectives as it deems appropriate and in our best interests.  Prior to changing any of the investment objectives, the board of directors will consider, among other factors, expectations, changing market trends, management expertise and ability and the relative risks and rewards associated with any change.

 

We intend to reach our business and investment objectives through our acquisition and operating strategies.  Our acquisition and operating strategies are to:

 

·                  maintain a portfolio which is diversified by property type and to some degree by geographical location;

·                  achieve and maintain high occupancy and increase rental rates through: (1) efficient leasing strategies, and (2) providing quality maintenance and services to tenants;

·                  control operating expenses through operating efficiencies and economies of scale;

·                  attract and retain high quality tenants;

·                  invest in properties that we believe offer significant growth opportunity; and

·                  emphasize regular repair and capital improvement programs to enhance the properties’ competitive advantages in their respective markets.

 

Competition

 

We compete with other entities to locate suitable properties for acquisition, to locate purchasers for our properties and to locate tenants for each of our properties.  Although our business is competitive, it is not seasonal to a material degree.  While the markets in which we compete are highly fragmented with no dominant competitors, we face substantial competition.  This competition is generally for the retention of existing tenants at lease expiration or for new tenants when vacancies occur.  There are numerous other similar types of properties located in close proximity to each of our properties.  We maintain the suitability and competitiveness of our properties primarily on the basis of effective rents, amenities and services provided to tenants.  The amount of leasable space available in any market could have a material adverse effect on our ability to rent space and on the rents charged.

 

Competitive Advantages

 

We believe that we have competitive advantages that will enable us to be selective with respect to additional real estate investment opportunities.  Our competitive advantages include:

 

·                  substantial local market expertise where we own many of our properties;

·                  long standing relationships with tenants, real estate brokers and institutional and other owners of real estate in our markets; and

·                  fully integrated real estate operations that allow us to respond quickly to acquisition opportunities.

 

Distribution Policy

 

We pay distributions if and when authorized by our managing general partner using proceeds from advances drawn on our revolving note payable to a bank.  We are required to pay distributions on a quarterly basis of an amount no less than sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended;

 

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provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax.  Any distribution other than a distribution with respect to the final quarter of a calendar year shall be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year.  Any distribution with respect to the final quarter of a calendar year shall be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year.  For these purposes, “net cash flow from operations” means taxable income or loss increased by:

 

·                  tax-exempt interest;

·                  depreciation;

·                  amortization;

·                  cost recovery allowances; and

·                  other noncash charges deducted in determining taxable income or loss, and decreased by:

·                  principal payments on indebtedness;

·                  property replacement or reserves actually established;

·                  capital expenditures when made other than from reserves or from borrowings, the proceeds of which are not included in operating cash flow; and

·                  any other cash expenditures not deducted in determining taxable income or loss.

 

As noted above, “net cash flow from operations” may be reduced by the amount of reserves as determined by us each quarter.  NTS Realty Capital may establish these reserves for, among other things, working capital or capital improvement needs.  Therefore, there is no assurance that we will have “net cash flow from operations” from which to pay distributions in the future.  For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures.  Because “net cash flow from operations” is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any “net cash flow from operations” from which to pay distributions.

 

Investment and Financing Policies

 

We will consider the acquisition of additional multifamily properties, retail properties, office buildings and business centers from time to time, with our primary emphasis on multifamily properties.  These properties may be located anywhere within the continental United States.  However, we will continue to focus on the Midwest and Southeast portions of the United States.  We will evaluate all new real estate investment opportunities based on a range of factors including, but not limited to: (1) rental levels under existing leases; (2) financial strength of tenants; (3) levels of expense required to maintain operating services and routine building maintenance at competitive levels; and (4) levels of capital expenditure required to maintain the capital components of the property in good working order and in conformity with building codes, health, safety and environmental standards.  We also plan not to acquire any new properties at a capitalization rate less than five percent (5%).  Any properties we acquire in the future would be managed and financed in the same manner as the properties that we acquired in the merger, and we will continue to enforce our policy of borrowing no more than seventy-five percent (75%) of the sum of: (a) the appraised value of our fully-constructed properties and (b) the appraised value of our properties in the development stage as if those properties were completed and ninety-five percent (95%) leased.

 

In addition to the foregoing, we may engage in transactions structured as “like-kind exchanges” of property to obtain favorable tax treatment under Section 1031 of the Internal Revenue Code.  If we are able to structure an exchange of properties as a “like-kind exchange,” then any gain we realize from the exchange would not be recognized for federal income tax purposes.  The test for determining whether exchanged properties are of “like-kind” includes whether the properties are of the same nature or character.

 

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Other Policies

 

On April 11, 2006, the board of directors of NTS Realty Capital, our managing general partner, approved the Amended and Restated Agreement of Limited Partnership of NTS Realty Holdings Limited Partnership effective December 29, 2005.  The following policies were included:

 

We must obtain the approval of the majority of NTS Realty Capital’s independent directors before we may:

 

·                  enter into a contract or a transaction with either of our general partners or their respective affiliates;

·                  acquire or lease any properties from, or sell any properties to, either of our general partners or their respective affiliates;

·                  enter into leases with our general partners or their affiliates; or

·                  acquire any properties in exchange for Units.

 

We are prohibited from:

 

·                  making any loans to our general partners or their affiliates;

·                  paying any insurance brokerage fee to, or obtaining an insurance policy from, our general partners or their affiliates; and

·                  commingling our funds with funds not belonging to us.

 

Change in Policies

 

NTS Realty Capital, through its board of directors, determines our distribution, investment, financing and other policies.  The board of directors reviews these policies at least annually to determine whether they are being followed and if they are in the best interests of our limited partners.  The board of directors may revise or amend these policies at any time without a vote of the limited partners.

 

Working Capital Practices

 

Information about our working capital practices are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

 

Conflicts of Interest

 

Each of our general partners is controlled directly or indirectly by Mr. J.D. Nichols, Chairman of the Board of NTS Realty Capital, our managing general partner.  As of December 31, 2010, Mr. Nichols beneficially owns approximately 60.7% of the issued and outstanding limited partnership units.  Other entities controlled directly or indirectly by Mr. Nichols have made and may continue to make investments in properties similar to those that we acquired in the merger or contribution.  These affiliates may acquire additional properties in the future, which may be located adjacent to properties that we acquired in the merger or contribution.

 

Environmental Matters

 

We believe that our portfolio of properties complies in all material respects with all federal, state and local environmental laws, ordinances and regulations regarding hazardous or toxic substances.  Independent environmental consultants have conducted Phase I or similar environmental site assessments on a majority of the properties that we acquired in the merger and all properties and interests in properties acquired by us since the merger.  Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties.  These assessments may not, however, have revealed all environmental conditions, liabilities or compliance concerns.

 

Access to Company Information

 

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (the “SEC”).  The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330.  The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

 

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Information concerning NTS Realty Holdings Limited Partnership is available through the NTS Development Company website (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) of the Securities Exchange Act are available and may be accessed free of charge through the “Investor Services” section of our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.

 

ITEM 1A - RISK FACTORS

 

Factors That May Affect Our Future Results

 

Forward-looking statements

 

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance.  Such statements include information relating to anticipated operating results, financial resources, changes in revenues, changes in profitability, interest expense, growth and expansion, anticipated income to be realized from our investments in unconsolidated entities, the ability to acquire land, the ability to gain approvals and to open new communities, the ability to sell properties, the ability to secure materials and subcontractors, the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities in the future and stock market valuations. From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-Q and 8-K, in press releases, in presentations, on our website and in other material released to the public.

 

Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us may turn out to be inaccurate.  This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties.  Many factors mentioned in this report or in other reports or public statements made by us, such as government regulation and the competitive environment, will be important in determining our future performance.  Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

 

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.  However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.  The following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results.  Other factors beyond those listed below, including factors unknown to us and factors known to us, which we have not determined to be material, could also adversely affect us.

 

Our principal unit holders may effectively exercise control over matters requiring unit holder approval.

 

As of December 31, 2010, Mr. J.D. Nichols beneficially owns approximately 60.7% of the outstanding NTS Realty Holdings Limited Partnership Units.  Mr. Nichols effectively has the power to elect all of the directors and control the management, operations and affairs of NTS Realty Holdings Limited Partnership.  His ownership may discourage someone from making a significant equity investment in NTS Realty Holdings Limited Partnership, even if we needed the investment to operate our business.  His holdings could be a significant factor in delaying or preventing a change of control transaction that other limited partners may deem to be in their best interests, such as a transaction in which the other limited partners would receive a premium for their Units over their current trading prices.

 

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Adverse economic conditions and disruptions in the function of credit markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to you.

 

The global financial markets are currently undergoing pervasive and fundamental disruptions.  The continuation or intensification of such volatility has had and may continue to have an adverse impact on the availability of credit to businesses, generally, and has resulted in and could lead to further weakening of the U.S. and global economies.  Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the current dislocations in the credit markets and general economic recovery. These current conditions, or similar conditions existing in the future, may have the following consequences:

 

·                                          the financial condition of our tenants may be adversely affected, which may result in us having to increase concessions, reduce rental rates or make capital improvements in order to maintain occupancy levels, or which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

 

·                                          economic recovery could falter or significant job losses may occur, either of which may decrease rental demand, causing market rental rates and property values to be negatively impacted;

 

·                                          our ability to borrow on terms and conditions that we find acceptable, or at all, may be affected, which could reduce our ability to pursue acquisition opportunities and refinance existing debt, reduce our returns from our acquisitions and increase our future interest expense;

 

·                                          any reduction in the values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and

 

·                                          the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold them.

 

Potential reforms to Fannie Mae and Freddie Mac could adversely affect our performance.

 

There is significant uncertainty surrounding the futures of Fannie Mae and Freddie Mac. Should Fannie Mae or Freddie Mac have their mandates changed or reduced, be disbanded or reorganized by the government or otherwise discontinue providing liquidity to our sector, it would significantly reduce our access to debt capital and/or increase borrowing costs and would significantly reduce our sales of assets and/or the values realized upon sale.  Disruptions in the floating rate tax-exempt bond market (where interest rates reset weekly) and in the credit market’s perception of Fannie Mae and Freddie Mac, which guarantee and provide liquidity for these bonds, have been experienced in the past and may be experienced in the future and could result in an increase in interest rates on these debt obligations.

 

Our cash flows and results of operations could be adversely affected if legal claims are brought against us and are not resolved in our favor.

 

Claims have been brought against us in various legal proceedings, which have not had, and are not expected to have, a material adverse effect on our business or financial condition.  Should claims be filed in the future, it is possible that our cash flows and results of operations could be affected, from time to time, by the negative outcome of one or more of such matters.

 

There is no assurance we will have net cash flow from operations from which to pay distributions.

 

Our partnership agreement requires us to distribute at least sixty-five percent (65%) of our “net cash flow from operations” to our limited partners.  There is no assurance that we will have any “net cash flow from operations” from which to pay distributions.  Our partnership agreement also permits our managing general partner to reinvest sales or refinance proceeds in new or existing properties or to create reserves to fund future capital expenditures.  Because “net cash flow from operations” is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any “net cash flow from operations” from which to pay distributions.

 

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Changes in market conditions could adversely affect the market price of our limited partnership units.

 

As with other publicly traded securities, the value of our limited partnership units depends on various market conditions that may change from time to time.  Among the market conditions that may affect the value of our limited partnership units are the following:

 

·                  the extent of investor interest in our securities;

 

·                  the general reputation of real estate and the attractiveness of our limited partnership units in comparison to other equity securities, including securities or other limited partnership units issued by other real estate-based companies;

 

·                  our underlying asset value;

 

·                  investor confidence in the stock and bond markets, generally;

 

·                  national economic conditions;

 

·                  changes in tax laws;

 

·                  our financial performance;

 

·                  changes in our credit ratings; and

 

·                  general stock and bond market conditions.

 

The market value of our limited partnership units is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions.  Consequently, our limited partnership units may trade at prices that are greater or less than our net asset value per limited partnership units.  If our future earnings or cash distributions are less than expected, it is likely that the market price of our limited partnership units will diminish.

 

We face possible risks associated with the physical effects of climate change.

 

We cannot predict with certainty whether climate change is occurring and, if so, at what rate.  However, the physical effects of climate change could have a material adverse effect on our properties, operations and business.  To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity and wide variations in temperatures from average.  Over time, these conditions could result in declining demand for office space or apartments in our buildings or our inability to operate the buildings at all.  Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy and increasing the cost of snow removal at our properties.  There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.

 

Competition for acquisitions may result in increased prices for properties.

 

We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities with other investors, and this competition may adversely affect us by subjecting us to the following risks:

 

·                  we may be unable to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and private REITs, institutional investment funds and other real estate investors; and

·                  even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price.

 

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Risks Related to Our Business and Properties

 

We may suffer losses at our properties that are not covered by insurance.

 

We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance covering all of our properties.  We believe the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage, our lenders’ requirements and industry practice.  None of the entities carry insurance for generally uninsured losses such as losses from riots, war, acts of God or mold.  Some of the policies, like those covering losses due to terrorism, earthquakes and floods, are insured subject to limitations involving large deductibles or co-payments and policy limits, which may not be sufficient to cover losses.  If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property.  In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if it was irreparably damaged.

 

Future terrorist attacks in the United States could harm the demand for and the value of our properties.

 

Future terrorist attacks in the U.S., such as the attacks that occurred in New York, Washington, D.C. and Pennsylvania on September 11, 2001, and other acts of terrorism or war could harm the demand for, and the value of, our properties.  A decrease in demand could make it difficult for us to renew or re-lease our properties at lease rates equal to, or above, historical rates.  Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss, or increased security costs, and the availability of insurance for these acts may be limited or costly.  To the extent that our tenants are impacted by future attacks, their ability to honor obligations under their existing leases with us could be adversely affected.

 

Our ability to pay distributions and the value of our properties and the Units are subject to risks associated with real estate assets and with the real estate industry in general.

 

Our ability to pay distributions depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements.  Events and conditions generally applicable to owners and operators of real property that are beyond our control that could impact our ability to pay distributions, the value of our properties and the value of the Units include:

 

·                  local oversupply, increased competition or reduction in demand for office, business centers or multifamily properties;

·                  inability to collect rent from tenants;

·                  vacancies or our inability to rent space on favorable terms;

·                  increased operating costs, including insurance premiums, utilities and real estate taxes;

·                  costs of complying with changes in governmental regulations;

·                  the relative illiquidity of real estate investments;

·                  changing market demographics; and

·                  inability to acquire and finance properties on favorable terms.

 

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or in increased defaults under existing leases, which could adversely affect our financial condition, results of operations, cash flow, the value of the Units and ability to satisfy our debt service obligations and to pay distributions.

 

We face significant competition, which may decrease the occupancy and rental rates of our properties.

 

We compete with several developers, owners and operators of commercial real estate, many of which own properties similar to ours.  Our competitors may be willing to make space available at lower prices than the space in our properties.  If our competitors offer space at rental rates below current market rates, we may lose potential tenants and be pressured to reduce our rental rates to retain an existing tenant when its lease expires.  As a result, our financial condition, results of operations, cash flow, the value of the Units and ability to satisfy our debt service obligations and to pay distributions could be adversely affected.

 

Our debt level reduces cash available for distribution and could expose us to the risk of default under our debt obligations.

 

Payments of principal and interest on borrowings could leave us with insufficient cash resources to operate our properties or to pay distributions.  Our level of debt could have significant adverse consequences, including:

 

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·                  cash flow may be insufficient to meet required principal and interest payments;

·                  we may be unable to borrow additional funds as needed or on favorable terms;

·                  we may be unable to refinance our indebtedness at maturity or the terms may be less favorable than the terms of our original indebtedness;

·                  we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

·                  we may default on our obligations and the lenders or mortgagees may foreclose on the properties securing their loans or receiving an assignment of rents and leases;

·                  we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and

·                  default under any one of the mortgage loans with cross default provisions could result in a default on other indebtedness.

 

If any one of these events were to occur, our financial condition, results of operations, cash flow, the value of the Units, our ability to satisfy our debt service obligations and to pay distributions could be adversely affected.  In addition, foreclosures could create taxable income, which would be allocated to all of the partners, but we may not be able to pay a cash distribution to the partners to pay the resulting taxes.

 

We could incur significant costs related to government regulation and private litigation over environmental matters.

 

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be held liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up any contamination at, or emanating from, that property.  These laws often impose liability, which may be joint and several, without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants.  The presence of contamination, or the failure to remediate contamination, may adversely affect the owner’s ability to sell, lease or develop the real estate or to borrow using the real estate as collateral.  In addition, the owner or operator of a site may be subject to claims by third parties based on personal injury, property damage or other costs, including costs associated with investigating or cleaning up the environmental contamination present at, or emanating from, a site.

 

These environmental laws also govern the presence, maintenance and removal of asbestos containing building materials, or “ACBM.”  These laws require that ACBM be properly managed and maintained, and may impose fines and penalties on building owners or operators who fail to comply with these requirements.  These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.  Some of our properties could contain ACBM.  We operate our properties under Operations and Maintenance Plans as required by our lenders.

 

Some of the properties in our portfolio contain or could have contained, or are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances.  These operations create a potential for the release of petroleum products or other hazardous or toxic substances.  For example, one of our properties currently has a service station located adjacent to it, and two of our properties are located on a former operating farm under which an underground tank was removed several years ago.

 

Recent news accounts suggest that there is an increasing amount of litigation over claims that mold or other airborne contaminants have damaged buildings or caused poor health.  We have, infrequently, discovered relatively small amounts of mold-related damage at a limited number of our properties, generally caused by one or more water intrusions, such as roof leaks, or plugged air conditioner condensation lines.  Mold and certain other airborne contaminants occur naturally and are present in some quantity in virtually every structure.  A plaintiff could successfully establish that mold or another airborne contaminant at one of our properties causes or exacerbates certain health conditions.  We generally have no insurance coverage for the cost of repairing or replacing elements of a building or its contents that are affected by mold or other environmental conditions, or for defending against this type of lawsuit.

 

We may incur significant costs complying with other regulations.

 

Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements.  If we fail to comply with these various requirements, we may be fined or have to pay private damage awards.  We believe that our properties materially comply with all applicable regulatory

 

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requirements.  These requirements could change in the future requiring us to make significant unanticipated expenditures that could adversely impact our financial condition, results of operations, cash flow, the value of the Units, our ability to satisfy our debt service obligations and to pay distributions.

 

We may invest in properties through joint ventures or as tenants in common, which add another layer of risk to our business.

 

We may acquire properties through joint ventures or as tenants in common, which could subject us to certain risks, which may not otherwise be present, if we made the investments directly.  These risks include:

 

·                  the potential that our joint venture partner or tenants in common may not perform;

·                  the joint venture partner or tenants in common may have economic or business interests or goals that are inconsistent with or adverse to our interests or goals;

·                  the joint venture partner or tenants in common may take actions contrary to our requests or instructions or contrary to our objectives or policies;

·                  the joint venture partner or tenants in common might become bankrupt or fail to fund its share of required capital contributions;

·                  we and the joint venture partner or tenants in common may not be able to agree on matters relating to the property; and

·                  we may become liable for the actions of our third-party joint venture partners or tenants in common.

 

Any disputes that may arise between joint venture partners or tenants in common and us may result in litigation or arbitration that would increase our expenses and prevent us from focusing our time and effort on the business of the joint venture.

 

We are dependent upon the economic climates of our markets—Atlanta, Ft. Lauderdale, Indianapolis, Lexington, Louisville, Memphis, Nashville, Orlando and Richmond.

 

Substantially all of our revenue is derived from properties located in: Atlanta, Ft. Lauderdale, Indianapolis, Lexington, Louisville, Memphis, Nashville, Orlando and Richmond.  A downturn in the economies of these markets, or the impact that a downturn in the overall national economy may have upon these economies, could result in reduced demand for office space or apartment rentals.  Because our portfolio consists primarily of apartments and commercial office space, a decrease in demand for these types of real estate in turn could adversely affect our results of operations.  Additionally, there are submarkets within our markets that are dependent upon a limited number of industries.  For example, most of our apartment communities are classified as luxury apartments and if a downturn affecting luxury rentals were to occur, as opposed to mid-level or efficiency apartments, our results of operations could be adversely affected.

 

Our expenditures may not decrease if our revenue decreases.

 

Many of the expenditures associated with owning and operating real estate, such as debt-service payments, property taxes, insurance, utilities, and employee wages and benefits, are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue.  Our expenditures also will be affected by inflationary increases, and certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period.  In the event of a significant decrease in demand, we may not be able to reduce the level of certain costs timely or at all.  Management also may be unable to offset any such increased expenditures with higher rental rates.  Any of our efforts to reduce operating costs or failure to make scheduled capital expenditures also could adversely affect the future growth of our business and the value of our properties.

 

From time to time we have made, and in the future we may seek to make, one or more material acquisitions, which may involve the expenditure of significant funds.

 

We regularly review potential transactions in order to maximize limited partner value and believe that currently there are available a number of acquisition opportunities that would be complementary to our business, given the current trends in the apartment industry.  In connection with our review of such transactions, we regularly engage in discussions with potential acquisition candidates, some of which are material.  Any future acquisitions could require the issuance of limited partnership units, the incurrence of debt, assumption of contingent liabilities or incurrence of significant expenditures, any of which could materially adversely impact our business, financial condition or results of operations. In addition, the financing required for such acquisitions may not be available on commercially favorable terms or at all.

 

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Covenants related to our indebtedness limit our operational flexibility and breaches of these covenants could materially adversely affect our business, results of operations and financial condition.

 

Our unsecured and secured debt and other indebtedness that we may incur in the future, require or will require us to comply with a number of customary financial and other covenants, including maintaining certain levels of debt service coverage, leverage ratio and tangible net worth requirements.  Our continued ability to incur indebtedness and operate in general is subject to compliance with these financial and other covenants, which limit our operational flexibility.  For example, mortgages on our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator.  Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee.  Additionally, defaults under the leases or operating agreements related to mortgaged properties, including defaults associated with the bankruptcy of the applicable tenant or tenants, may result in a default under the underlying mortgage and cross-defaults under certain of our other indebtedness.  Covenants that limit our operational flexibility as well as defaults under our debt instruments could materially adversely affect our business, results of operations and financial condition.

 

Tax Risks

 

Tax gain or loss on disposition of units could be different than expected.

 

If you sell your Units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those Units.  Prior distributions to you in excess of the total net taxable income you were allocated for a Unit, which decreased your tax basis in that Unit, will, in effect, become taxable income to you if the Unit is sold at a price greater than your tax basis in that Unit, even if the price is less than your original cost.  A substantial portion of the amount realized, whether or not representing gain, may be ordinary income.

 

If you are a tax-exempt entity, a mutual fund or a foreign person, you may experience adverse tax consequences from owning units.

 

Investment in Units by tax-exempt entities, including employee benefit plans and individual retirement accounts, regulated investment companies or mutual funds and non-U.S. persons raises issues unique to them.  For example, a significant amount of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to such a holder.  Very little of our income will be qualifying income to a regulated investment company.  Distributions to non-U.S. persons will be reduced by withholding tax at the highest marginal tax rate applicable to individuals, and non-U.S. holders will be required to file United States federal income tax returns and pay tax on their share of our taxable income.

 

We will treat each purchaser of units as having the same tax benefits without regard to the Units purchased.  The IRS may challenge this treatment, which could adversely affect the value of the units.

 

Because we cannot match transferors and transferees of Units, we will adopt certain positions that do not conform with all aspects of existing Treasury Regulations.  A successful IRS challenge to those positions could adversely affect the timing or amount of tax benefits available to you, the amount of gain from your sale of Units or result in audit adjustments to your tax returns.

 

You likely will be subject to state and local taxes in states where you do not live as a result of an investment in units.

 

In addition to federal income taxes, you likely will be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if you do not live in any of those jurisdictions.  You likely will be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions.  Further, you may be subject to penalties for failure to comply with those requirements.  You must file all required United States federal, state and local tax returns.  Our counsel has not rendered an opinion on the state or local tax consequences of an investment in the Units.

 

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ITEM 1B - UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2 - PROPERTIES

 

General

 

We own wholly, as a tenant in common with an unaffiliated third party or as a joint venture investment, 6 office buildings and business centers, 15 multifamily properties and 2 retail properties.  Set forth below is a description of each property:

 

Wholly-Owned Properties

 

Office Buildings and Business Centers

 

·                  NTS Center, which was constructed in 1977, is an office complex with approximately 124,800 net rentable square feet in Louisville, Kentucky.  As of December 31, 2010, there were 8 tenants leasing office space aggregating approximately 70,400 square feet, including 5,400 square feet which was leased but unoccupied.  NTS Center’s tenants are professional service entities, principally in real estate, secondary education and information services.  One of these tenants individually leases more than 10% of the net rentable area at NTS Center.  NTS Center was 56% occupied as of December 31, 2010.

 

·                  Clarke American, which was constructed in 2000, is a business center with approximately 50,000 net rentable square feet in Louisville, Kentucky.  As of December 31, 2010, one tenant was leasing all 50,000 square feet.  The tenant is a professional service entity in the check printing industry.  Clarke American was 100% occupied as of December 31, 2010.

 

·                  Lakeshore Business Center Phase I, which was constructed in 1986, is a business center with approximately 100,300 net rentable square feet in Fort Lauderdale, Florida.  As of December 31, 2010, there were 12 tenants leasing space aggregating approximately 78,500 square feet.  The tenants are professional service entities, principally in engineering, insurance and financial services, telecommunication and dental equipment suppliers.  Three of these tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase I.  Lakeshore Business Center Phase I was 78% occupied as of December 31, 2010.

 

·                  Lakeshore Business Center Phase II, which was constructed in 1989, is a business center with approximately 95,700 net rentable square feet in Fort Lauderdale, Florida.  As of December 31, 2010, there were 18 tenants leasing space aggregating approximately 75,200 square feet.  The tenants are governmental and professional service entities, principally in medical equipment sales, financial and engineering services and technology.  One of these tenants individually leases more than 10% of the net rentable area at Lakeshore Business Center Phase II.  Lakeshore Business Center Phase II was 79% occupied as of December 31, 2010.

 

·                  Lakeshore Business Center Phase III, which was constructed  in 2000, is a business center with approximately 38,900 net rentable square feet in Fort Lauderdale, Florida.  As of December 31, 2010, there were 4 tenants leasing space aggregating all 38,900 square feet.  The tenants are professional service entities, principally in insurance services, consulting services, real estate development and engineering.  Three of these tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase III.  Lakeshore Business Center Phase III was 100% occupied as of December 31, 2010.

 

·                  Peachtree Corporate Center, which was constructed in 1979, is a business park with approximately 197,000 net rentable square feet in Atlanta, Georgia.  As of December 31, 2010, there were 37 tenants leasing space aggregating approximately 142,600 square feet.  The tenants are professional service entities, principally in sales-related services.  None of these tenants individually leases more than 10% of the net rentable area at Peachtree Corporate Center.  Peachtree Corporate Center was 72% occupied as of December 31, 2010.

 

Multifamily Properties

 

·                  Park Place Apartments, which was constructed in three phases, is a 464-unit luxury apartment complex located on a 44.8-acre tract in Lexington, Kentucky.  Phases I and II were constructed between 1987

 

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and 1989, and Phase III was constructed in 2000.  As of December 31, 2010, the property was 98% occupied.

 

·                  The Willows of Plainview Apartments, which was constructed in three phases between 1985 and 1988, is a 310-unit luxury apartment complex located on two tracts of land totaling 19.1-acres in Louisville, Kentucky.  As of December 31, 2010, the property was 98% occupied.

 

·                  Willow Lake Apartments, which was constructed in 1985, is a 207-unit luxury apartment complex located on an 18-acre tract in Indianapolis, Indiana.  As of December 31, 2010, the property was 99% occupied.

 

·                  The Lakes Apartments, which was purchased in 2005 and constructed in 1997, is a 230-unit luxury apartment complex located on a 19.7-acre tract in Indianapolis, Indiana.  As of December 31, 2010, the property was 97% occupied.

 

·                  The Grove at Richland Apartments, which was purchased in 2006 and constructed in 1998, is a 292-unit luxury apartment complex located on a 10.5-acre tract in Nashville, Tennessee.  As of December 31, 2010, the property was 97% occupied.

 

·                  The Grove at Whitworth Apartments, which was purchased in 2006 and constructed in 1994, is a 301-unit luxury apartment complex located on 12.1-acre tract in Nashville, Tennessee.  As of December 31, 2010, the property was 97% occupied.

 

·                  The Grove at Swift Creek Apartments, which was purchased in 2006 and constructed in 2000, is a 240-unit luxury apartment complex located on a 32.9-acre tract in Richmond, Virginia.  As of December 31, 2010, the property was 91% occupied.

 

·                  Castle Creek Apartments, which was purchased in 2006 and constructed in 1999, is a 276-unit luxury apartment complex located on a 16-acre tract in Indianapolis, Indiana.  As of December 31, 2010, the property was 99% occupied.

 

·                  Lake Clearwater Apartments, which was purchased in 2006 and constructed in 1999, is a 216-unit luxury apartment complex located on a 10.6-acre tract in Indianapolis, Indiana.  As of December 31, 2010, the property was 95% occupied.

 

·                  Parks Edge Apartments (formerly Shelby Farms Apartments), which was purchased in 2008 and constructed in two phases, is a 450-unit luxury apartment complex located on a 30.2-acre tract in Memphis, Tennessee. Phase I was constructed in 1997 and Phase II was constructed in 2007.  As of December 31, 2010, the property was 96% occupied.

 

·                  Lakes Edge Apartments, which was purchased in 2010 and constructed in 2000, is a 362-unit luxury apartment complex located on a 31.6-acre tract in Orlando, Florida.  As of December 31, 2010, the property was 91% occupied.

 

Retail Properties

 

·                  Bed, Bath & Beyond, which was constructed in 1999, is an approximately 35,000 square foot facility in Louisville, Kentucky.  As of December 31, 2010, one tenant was leasing all 35,000 square feet.  The tenant is a retail service entity principally in the sale of domestic merchandise and home furnishings.  Bed, Bath & Beyond was 100% occupied as of December 31, 2010.

 

·                  Springs Station, which was constructed in 2001, is a retail facility with approximately 12,000 net rentable square feet in Louisville, Kentucky.  As of December 31, 2010, there were 7 tenants leasing space aggregating all 12,000 square feet.  The tenants are professional service entities, principally in staffing, financial, medical equipment sales and political campaigns.  Three of these tenants individually lease more than 10% of the net rentable area at Springs Station.  Springs Station was 100% occupied as of December 31, 2010.

 

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Consolidated Joint Venture Properties

 

Multifamily Properties

 

·                  Golf Brook Apartments, which was purchased in 2009 and constructed between 1987 and 1988, is a 195-unit luxury apartment complex located on a 19.2-acre tract in Orlando, Florida.  As of December 31, 2010, the property was 96% occupied.  We own a 51% interest in this property.

 

·                  Sabal Park Apartments, which was purchased in 2009 and constructed in 1986, is a 162-unit luxury apartment complex located on a 14.3-acre tract in Orlando, Florida.  As of December 31, 2010, the property was 95% occupied.  We own a 51% interest in this property.

 

Unconsolidated Investment in Tenants In Common Properties

 

Multifamily Properties

 

·                  The Overlook at St. Thomas Apartments, which was purchased in 2007 and constructed in 1991, is a 484-unit luxury apartment complex located on a 24.9-acre tract in Louisville, Kentucky.  As of December 31, 2010, the property was 98% occupied.  We own a 60% tenant in common interest in this property.

 

·                  Creek’s Edge at Stony Point Apartments, which was purchased in 2007 and constructed in 2006, is a 202-unit luxury apartment complex located on a 26.3-acre tract in Richmond, Virginia.  As of December 31, 2010, the property was 88% occupied.  We own a 51% tenant in common interest in this property.

 

Property Under Construction

 

Office Building

 

·      Campus One LLC, which was formed in 2010, is constructing an approximately 125,000 square foot office building in Louisville, Kentucky.  First occupancy is expected in 2012. We own a 49% interest in this property.

 

Corporate Headquarters

 

Our executive offices are located at 10172 Linn Station Road, Suite 200, Louisville, Kentucky 40223, and our phone number is (502) 426-4800.

 

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Occupancy Rates

 

The table below sets forth the average occupancy rate for each of the past three years with respect to each of our properties.

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

COMMERCIAL BUILDING OCCUPANCY

 

 

 

 

 

 

 

NTS Center (1)

 

57

%

52

%

87

%

Clarke American

 

100

%

100

%

100

%

Lakeshore Business Center Phase I

 

82

%

89

%

86

%

Lakeshore Business Center Phase II

 

79

%

65

%

73

%

Lakeshore Business Center Phase III

 

100

%

100

%

100

%

Peachtree Corporate Center

 

71

%

76

%

82

%

COMMERCIAL PORTFOLIO OCCUPANCY

 

76

%

75

%

85

%

COMMERCIAL PORTFOLIO RENT PER OCCUPIED SQUARE FOOT, ANNUAL

 

$

12.15

 

$

11.50

 

$

12.15

 

 

 

 

 

 

 

 

 

MULTIFAMILY OCCUPANCY

 

 

 

 

 

 

 

Park Place Apartments

 

95

%

94

%

96

%

The Willows of Plainview Apartments

 

97

%

96

%

95

%

Willow Lake Apartments

 

98

%

94

%

96

%

The Lakes Apartments

 

96

%

93

%

94

%

The Grove at Richland Apartments

 

97

%

94

%

95

%

The Grove at Whitworth Apartments

 

97

%

93

%

94

%

The Grove at Swift Creek Apartments

 

91

%

88

%

88

%

Castle Creek Apartments

 

98

%

92

%

96

%

Lakes Edge Apartments

 

91

%

N/A

 

N/A

 

Lake Clearwater Apartments

 

96

%

93

%

95

%

Parks Edge Apartments

 

98

%

94

%

90

%

Golf Brook Apartments

 

93

%

93

%

N/A

 

Sabal Park Apartments

 

94

%

92

%

N/A

 

MULTIFAMILY PORTFOLIO OCCUPANCY

 

96

%

93

%

94

%

MULTIFAMILY PORTFOLIO RENT PER OCCUPIED UNIT, ANNUAL

 

$

11,090

 

$

11,102

 

$

11,263

 

 

 

 

 

 

 

 

 

RETAIL OCCUPANCY

 

 

 

 

 

 

 

Bed, Bath & Beyond

 

100

%

100

%

100

%

Springs Station

 

100

%

94

%

60

%

RETAIL PORTFOLIO OCCUPANCY

 

100

%

98

%

90

%

RETAIL PORTFOLIO RENT PER OCCUPIED SQUARE FOOT, ANNUAL

 

$

12.99

 

$

13.32

 

$

12.70

 

COMMERCIAL AND RETAIL PORTFOLIO OCCUPANCY

 

77

%

77

%

85

%

COMMERCIAL AND RETAIL PORTFOLIO RENT PER OCCUPIED SQUARE FOOT, ANNUAL

 

$

12.23

 

$

11.67

 

$

12.19

 

 

 

 

 

 

 

 

 

MULTIFAMILY UNCONSOLIDATED INVESTMENT IN TENANTS IN COMMON OCCUPANCY

 

 

 

 

 

 

 

The Overlook at St. Thomas Apartments

 

95

%

93

%

90

%

Creek’s Edge at Stony Point Apartments

 

94

%

91

%

87

%

MULTIFAMILY UNCONSOLIDATED INVESTMENT IN TENANTS IN COMMON OCCUPANCY

 

95

%

93

%

89

%

MULTIFAMILY UNCONSOLIDATED INVESTMENT IN TENANTS IN COMMON PORTFOLIO RENT PER OCCUPIED UNIT, ANNUAL

 

$

11,729

 

$

11,456

 

$

11,802

 

 


(1)          We believe the changes in average occupancy from period to period are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.  NTS Center was 56% occupied and 98% leased as of December 31, 2010.

 

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Tenant Information

 

We are not dependent upon any tenant for 10% or more of our revenues.  The loss of any one tenant should not have a material adverse effect on our business or financial performance.  The following table sets forth our ten largest tenants based on annualized base rent from continuing operations as of December 31, 2010.

 

Tenant

 

Total Leased
Square Feet

 

Annualized Base
Rent (1)

 

Percentage of
Annualized Base
Rent (1)

 

Lease
Expiration

 

Social Security Administration (3)

 

16,197

 

$

553,908

 

1.13

%

11/30/19

 

Clarke Checks (2)

 

50,000

 

475,000

 

0.97

%

08/31/15

 

EDI Telecom (3)

 

29,287

 

402,696

 

0.82

%

03/31/18

 

Bed, Bath & Beyond (2)

 

34,953

 

400,503

 

0.82

%

01/31/15

 

NTS Development Co (2)

 

22,270

 

307,400

 

0.63

%

3/31/13

 

John J. Kirlin, Inc. (3)

 

20,135

 

271,942

 

0.55

%

08/10/14

 

Patterson Dental Supply (3)

 

15,497

 

203,088

 

0.41

%

10/31/13

 

Kimley-Horn & Associates (3)

 

12,061

 

172,291

 

0.35

%

02/28/14

 

Reynolds, Smith and Hills, Inc. (3)

 

10,840

 

171,868

 

0.35

%

12/31/13

 

First American Default (2)

 

11,137

 

161,306

 

0.33

%

1/31/13

 

 


(1)          Annualized Base Rent means annual contractual rent.

(2)          A tenant of a Louisville, Kentucky property.

(3)          A tenant of a Fort Lauderdale, Florida property.

 

Lease Expirations

 

The following table sets forth the number of expiring leases, the total area in square feet covered by such leases, the annual rent represented by such leases and the percentage of gross annual rent represented by such leases for our commercial and retail properties.  We do not include the lease expirations for our multifamily properties as those lease contracts are typically for one year or less.

 

 

 

Number of Expiring
Leases

 

Square Feet of
Expiring Leases

 

Annual Rent of
Expiring Leases

 

Percentage of Gross
Annual Rent of Expiring
Leases

 

Expiration Year

 

 

 

 

 

 

 

 

 

2011

 

15

 

40,600

 

$

445,000

 

7.2

%

2012

 

20

 

75,000

 

852,000

 

13.9

%

2013

 

26

 

154,000

 

1,888,000

 

30.8

%

2014

 

13

 

61,700

 

740,000

 

12.1

%

2015

 

6

 

92,700

 

917,000

 

14.9

%

2016

 

2

 

8,600

 

55,000

 

0.9

%

2017

 

2

 

17,400

 

280,000

 

4.6

%

2018

 

1

 

29,300

 

406,000

 

6.6

%

2019

 

1

 

16,200

 

554,000

 

9.0

%

Thereafter

 

-

 

-

 

-

 

-

 

Total

 

86

 

495,500

 

$

6,137,000

 

100

%

 

Indebtedness

 

The tables below reflect our outstanding indebtedness from mortgages and notes payable for our properties owned wholly, through a wholly-owned subsidiary, as a consolidated joint venture investment or as an unconsolidated investment in tenants in common as of December 31, 2010.  Properties that are not encumbered by mortgages or notes are not listed below.  Some of our mortgages and notes bear interest in relation to the Libor Rate.  As of December 31, 2010, the Libor Rate was 0.26%.  The Libor Rate is a variable rate of interest that is adjusted from time to time based on interest rates set by London financial institutions.

 

19



Table of Contents

 

Wholly-Owned Properties and Consolidated Joint
Venture Properties

 

Interest
Rate

 

Maturity
Date

 

Balance as of
December 31, 2010

 

Lakeshore Business Center Phases I, II and III (1)

 

Libor + 3.50

%

06/01/11

 

$

14,994,000

 

Clarke American (2)

 

8.45

%

11/01/15

 

1,748,859

 

The Lakes Apartments (3)

 

5.11

%

12/01/14

 

11,177,410

 

Parks Edge Apartments (4)

 

6.03

%

09/01/18

 

26,328,500

 

Castle Creek Apartments (5)

 

5.40

%

01/01/20

 

13,729,051

 

The Grove at Richland Apartments (6)

 

5.40

%

01/01/20

 

26,677,537

 

The Grove at Swift Creek Apartments (7)

 

5.40

%

01/01/20

 

16,643,819

 

The Grove at Whitworth Apartments (8)

 

5.40

%

01/01/20

 

27,344,476

 

Lake Clearwater Apartments (9)

 

5.40

%

01/01/20

 

11,253,969

 

Park Place Apartments (10)

 

5.40

%

01/01/20

 

30,259,244

 

Willow Lake Apartments (11)

 

5.40

%

01/01/20

 

10,814,283

 

The Willows of Plainview Apartments (12)

 

5.40

%

01/01/20

 

17,705,980

 

Lakes Edge Apartments (15)

 

Libor + 3.00

%

04/01/11

 

24,500,000

 

Golf Brook Apartments (13)

 

Libor + 3.33

%

07/01/16

 

14,625,000

 

Sabal Park Apartments (14)

 

Libor + 3.50

%

07/01/16

 

9,600,000

 

NTS Realty I (16)

 

Libor + 3.50

%

06/01/11

 

6,026,602

 

NTS Realty II (17)

 

Libor + 2.50

%

05/31/11

 

4,442,146

 

 

 

 

 

 

 

$

267,870,876

 

 

 

 

 

 

 

 

 

Unconsolidated Investment in Tenants In Common
Properties

 

 

 

 

 

 

 

The Overlook at St. Thomas Apartments (18)

 

5.72

%

04/11/17

 

$

34,279,148

 

Creek’s Edge at Stony Point Apartments (19)

 

5.99

%

11/15/17

 

$

22,446,017

 

 


(1)

This note is guaranteed individually and severally by Mr. Nichols and Mr. Brian F. Lavin. A balloon payment of $14,873,074 is due upon maturity.

(2)

This loan fully amortizes upon maturity.

(3)

A balloon payment of $10,313,012 is due upon maturity.

(4)

A balloon payment of $23,148,594 is due upon maturity.

(5)

A balloon payment of $11,646,720 is due upon maturity.

(6)

A balloon payment of $22,631,265 is due upon maturity.

(7)

A balloon payment of $14,119,395 is due upon maturity.

(8)

A balloon payment of $23,197,045 is due upon maturity.

(9)

A balloon payment of $9,547,040 is due upon maturity.

(10)

A balloon payment of $25,669,720 is due upon maturity.

(11)

A balloon payment of $9,174,043 is due upon maturity.

(12)

A balloon payment of $15,020,454 is due upon maturity.

(13)

A balloon payment of $12,993,378 is due upon maturity.

(14)

A balloon payment of $8,555,385 is due upon maturity.

(15)

A balloon payment of $24,502,213 is due upon maturity.

(16)

A balloon payment of $6,041,712 is due upon maturity.

(17)

A balloon payment of $4,452,365 is due upon maturity.

(18)

A balloon payment of $30,492,392 is due upon maturity. We are proportionately liable for this mortgage, limited to 60%, our interest as a tenant in common of this property.

(19)

A balloon payment of $20,100,323 is due upon maturity. We are jointly and severally liable for this mortgage. We own a 51% interest as a tenant in common of this property.

 

Our mortgages may be prepaid, but are generally subject to a yield-maintenance premium.

 

Property Tax

 

The following table sets forth for each property that we own wholly, as a tenant in common with an unaffiliated third party or through joint venture investments, the property tax rate and annual property taxes.

 

20



Table of Contents

 

SCHEDULE OF ANNUAL PROPERTY TAX RATES AND TAXES-2010

 

State

 

Property

 

Property
Tax Rate
(per $100)

 

Gross Amount
Annual Property
Taxes (1)

 

FL

 

Lakeshore Business Center Phase I

 

2.05

 

$

181,204

 

FL

 

Lakeshore Business Center Phase II

 

2.05

 

183,684

 

FL

 

Lakeshore Business Center Phase III

 

2.05

 

75,879

 

FL

 

Golf Brook Apartments

 

1.57

 

219,775

 

FL

 

Sabal Park Apartments

 

1.57

 

155,731

 

FL

 

Lakes Edge Apartments

 

2.01

 

476,434

 

GA

 

Peachtree Corporate Center

 

3.41

 

117,720

 

IN

 

Willow Lake Apartments

 

2.18

 

293,993

 

IN

 

The Lakes Apartments

 

2.18

 

326,257

 

IN

 

Castle Creek Apartments

 

1.75

 

473,096

 

IN

 

Lake Clearwater Apartments

 

1.75

 

379,128

 

KY

 

Bed, Bath & Beyond

 

1.22

 

27,195

 

KY

 

Clarke American

 

1.17

 

37,961

 

KY

 

NTS Center

 

1.17

 

79,179

 

KY

 

The Willows of Plainview Apartments

 

1.17

 

159,514

 

KY

 

Park Place Apartments

 

1.10

 

285,164

 

KY

 

Springs Station

 

1.22

 

21,027

 

KY

 

The Overlook at St. Thomas Apartments

 

1.02

 

428,499

 

TN

 

Parks Edge Apartments

 

7.22

 

1,002,518

 

TN

 

The Grove at Richland Apartments

 

4.13

 

431,565

 

TN

 

The Grove at Whitworth Apartments

 

4.13

 

478,636

 

VA

 

The Grove at Swift Creek Apartments

 

0.95

 

188,969

 

VA

 

Creek’s Edge at Stony Point Apartments

 

1.20

 

309,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,332,128

 

 


(1)          Does not include any offset for property taxes reimbursed by tenants.  Property taxes in Jefferson County, Kentucky; Fayette County, Kentucky; City of Jeffersontown, Kentucky; and the City of St. Matthews, Kentucky, are discounted by approximately 2% if they are paid prior to the due date.  Payments made prior to the due date in other states generally provide no discount to the gross amount of property tax.

 

ITEM 3 - LEGAL PROCEEDINGS

 

None.

 

ITEM 4 - RESERVED

 

21



Table of Contents

 

PART II

 

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Stock Market Prices and Distributions

 

Beginning December 29, 2004, our Units were listed for trading on the American Stock Exchange under the symbol NLP.  Beginning December 1, 2008, our Units ceased trading on the American Stock Exchange and now trade on the NYSE Amex under the symbol NLP.  The NYSE Amex is the successor to the American Stock Exchange.  The approximate number of record holders of our Units at December 31, 2010 was 2,078.

 

High and low Unit prices for the period January 1, 2010 through December 31, 2010 were $5.60 to $3.25, respectively.  Quarterly distributions are determined based on current cash balances, cash flow generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements.

 

High and low Unit prices for the period January 1, 2009 through December 31, 2009 were $5.51 to $2.95, respectively.  Quarterly distributions are determined based on current cash balances, cash flow generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements.

 

The following table sets forth the price range of our limited partnership units on the NYSE Amex and distributions declared for each quarter during the years ended December 31, 2010 and 2009.

 

 

 

Three Months Ended

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

2010

 

 

 

 

 

 

 

 

 

High

 

$

5.60

 

$

5.50

 

$

4.19

 

$

4.39

 

Low

 

$

4.20

 

$

3.33

 

$

3.25

 

$

3.25

 

Distributions declared

 

$

569,038

 

$

569,038

 

$

569,038

 

$

569,038

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

High

 

$

4.45

 

$

4.44

 

$

5.51

 

$

5.50

 

Low

 

$

2.95

 

$

3.01

 

$

3.12

 

$

3.55

 

Distributions declared

 

$

569,038

 

$

569,038

 

$

569,038

 

$

569,038

 

 

We have a policy of paying regular distributions, although there is no assurance as to the payment of future distributions because they depend on, among other things, our future earnings, capital requirements and financial condition.  In addition, the payment of distributions is subject to the restrictions described in Part II, Item 8, Note 2, Section O, to the financial statements and discussed in Part II, Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

On December 1, 2010, two entities created or controlled by Mr. Nichols commenced pre-arranged trading plans to purchase limited partnership units of NTS Realty pursuant to Rule 10b5-1 under the Act.  The trading plans are substantially similar to those previously announced by us in 2009 and 2008.  Each of the plans authorize its administrator, Wells Fargo Investments, LLC, to purchase approximately $26,000 and $52,000, respectively, of NTS Realty’s limited partnership units from time to time through no later than November 30, 2011.  Under the terms of the plans, Mr. Nichols has no discretion or control over the timing, effectuation or the amount of each purchase.

 

During the year ended December 31, 2010, 73,850 Units were purchased by the entities created or controlled by Mr. Nichols pursuant to the trading plans announced on December 1, 2009.  The table below summarizes activity pursuant to these plans for the quarterly period ended December 31, 2010.

 

22



Table of Contents

 

Period

 

Total Number of
Units Purchased

 

Average Price Paid
Per Unit

 

Total Number of
Units Purchased as
Part of Publicly
Announced Plans or
Programs

 

Maximum Number
(or Approximate
Dollar Value) of Units
That May Yet Be
Purchased Under the
Plans or Programs

 

October 2010

 

1,500

 

$

3.61

 

476,591

(2)

 

(1)

 

 

 

 

 

 

 

 

 

 

November 2010

 

5,750

 

$

3.85

 

482,341

(2)

 

(1)

 

 

 

 

 

 

 

 

 

 

December 2010

 

-

 

$

N/A

 

482,341

(2)

 

(1)

 

 

 

 

 

 

 

 

 

 

Total

 

7,250

 

$

3.80

 

482,341

(2)

 

(1)

 


(1)          A description of the maximum amount that may be used to purchase our units under the trading plans is included in the narrative preceding this table.

 

(2)          Represents the total number of our limited partnership units that have been purchased pursuant to the trading plans by entities created or controlled by Mr. Nichols, pursuant to the current or any previous publicly announced plan or program by trading plans.

 

23



Table of Contents

 

ITEM 6 - SELECTED FINANCIAL DATA

 

The following table sets forth our selected financial data for 2010, 2009, 2008, 2007 and 2006.  We have derived the consolidated statement of operations and consolidated balance sheet data for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 from our audited financial statements.

 

SUMMARY OF CONSOLIDATED STATEMENT OF OPERATIONS AND BALANCE SHEET DATA

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

STATEMENT OF OPERATIONS DATA

 

 

 

 

 

 

 

 

 

 

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

45,997,593

 

$

42,730,803

 

$

39,141,215

 

$

35,115,717

 

$

31,687,637

 

Tenant reimbursements

 

1,901,333

 

1,787,103

 

1,775,192

 

1,708,710

 

1,650,809

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

47,898,926

 

44,517,906

 

40,916,407

 

36,824,427

 

33,338,446

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliate

 

18,208,032

 

15,572,095

 

13,778,917

 

12,230,857

 

11,384,726

 

Management fees

 

2,365,301

 

2,205,739

 

2,033,277

 

1,852,302

 

1,691,740

 

Property taxes and insurance

 

6,043,391

 

6,494,311

 

5,629,338

 

4,740,804

 

3,996,469

 

Professional and administrative expenses and professional and administrative expenses reimbursed to affiliate

 

2,669,501

 

2,707,216

 

2,878,772

 

3,143,436

 

3,499,623

 

Depreciation and amortization

 

17,973,060

 

17,304,344

 

14,696,081

 

13,214,123

 

12,712,163

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

47,259,285

 

44,283,705

 

39,016,385

 

35,181,522

 

33,284,721

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

639,641

 

234,201

 

1,900,022

 

1,642,905

 

53,725

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income and interest and other income reimbursed to affiliate

 

240,438

 

293,462

 

405,673

 

60,826

 

97,402

 

Interest expense and interest expense reimbursed to affiliate

 

(12,893,896

)

(16,191,885

)

(11,353,202

)

(11,223,533

)

(10,549,466

)

Loss on disposal of assets

 

(233,287

)

(207,482

)

(168,419

)

(66,052

)

(146,254

)

Loss from investment in joint venture

 

(1,407

)

-

 

-

 

-

 

-

 

Loss from investments in tenants in common

 

(1,901,809

)

(2,137,128

)

(2,377,927

)

(1,608,295

)

-

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS

 

(14,150,320

)

(18,008,832

)

(11,593,853

)

(11,194,149

)

(10,544,593

)

Discontinued operations, net

 

31,039

 

337,692

 

433,306

 

1,657,363

 

1,709,422

 

Gain on sale of discontinued operations

 

1,783,282

 

-

 

18,910,133

 

13,482,291

 

49,950,486

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED NET (LOSS) INCOME

 

(12,335,999

)

(17,671,140

)

7,749,586

 

3,945,505

 

41,115,315

 

Net loss attributable to noncontrolling interest

 

(939,606

)

(491,553

)

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(11,396,393

)

$

(17,179,587

)

$

7,749,586

 

$

3,945,505

 

$

41,115,315

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared

 

$

2,276,152

 

$

2,276,152

 

$

3,528,036

 

$

4,552,304

 

$

5,690,804

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per limited partnership unit

 

$

0.20

 

$

0.20

 

$

0.31

 

$

0.40

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA (end of year)

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and amenities, net

 

$

313,513,669

 

$

296,699,646

 

$

278,847,073

 

$

280,045,077

 

$

300,325,681

 

Total assets

 

328,565,643

 

321,581,865

 

294,115,079

 

297,456,867

 

309,251,401

 

Mortgages and notes payable

 

267,870,876

 

246,088,305

 

203,561,669

 

209,321,147

 

220,932,189

 

 

24



Table of Contents

 

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This section provides our Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘‘MD&A”).

 

The following discussion should be read in conjunction with the financial statements and supplementary data appearing in Part II, Item 8.

 

Critical Accounting Policies

 

General

 

A critical accounting policy is one that would materially affect 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 U.S. generally accepted accounting principles (‘‘GAAP’’).  GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates.  The following disclosures discuss judgments known to management pertaining to trends, events or uncertainties 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.

 

Impairment and Valuation

 

Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (“ASC”) Topic 360 Property, Plant, and Equipment specifies circumstances in which certain long-lived assets must be reviewed for impairment.  If this review indicates that 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, interest rates and recent appraisals when available.  The capitalization rate used to determine property valuation is based on among others, 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.  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.

 

Acquisitions

 

Upon acquisition of wholly-owned properties or joint venture investments that are less than wholly-owned, but which we control or for which we are the primary beneficiary, the assets and liabilities purchased are recorded at their fair market value at the date of the acquisition using the acquisition method in accordance with FASB ASC Topic 805 Business Combinations.  We recognize the net tangible and identified intangible assets based on fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities.  The intangible assets recorded are amortized over the weighted average lease lives.  We identify any above or below market leases or customer relationship intangibles that exist at the acquisition date.  We recognize mortgages and other liabilities at fair market value at the date of the acquisition.  We utilize an independent appraiser to assess fair value based on estimated cash flow projections for the tangible assets acquired that utilize discount and capitalization rates deemed appropriate and available market information.

 

We adopted FASB ASC Topic 805 Business Combinations on January 1, 2009, which requires us to expense acquisition costs as incurred.

 

Recognition of Rental Income

 

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

 

25



Table of Contents

 

a lease.  Due to the impact of “straight-lining” on a historical consolidating basis, cash collected for rent exceeded rental income by approximately $0.1 million for the year ended December 31, 2010.  Rental income exceeded the cash collected for rent by approximately $0.3 million for the years ended December 31, 2009 and 2008.  If rental income 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 sixty days and tenants with outstanding balances due for a period less than sixty 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 $2,500 deemed to be a capital improvement with an expected useful life greater than one year.  Land, buildings and amenities are stated at cost.  Depreciation expense is computed using the straight-line method over the estimated useful life of the assets.  Buildings and improvements have estimated useful lives between 7-30 years, land improvements have estimated useful lives between 5-30 years and amenities have estimated useful lives between 5-30 years.  Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease.  Acquired above and below market leases are amortized on a straight-line basis over the life of the related leases as an adjustment to rental income.  Acquired in-place lease origination cost is amortized over the life of the lease as a component of amortization expense.

 

Liquidity and Capital Resources

 

Our most liquid asset is our cash and equivalents, which consist of cash and short-term investments, but do not include any restricted cash.  Operating income generated by the properties is the primary source from which we generate cash.  Other sources of cash include the proceeds from our revolving notes payable.  Our main uses of cash relate to capital expenditures, required payments of mortgages and notes payable, distributions and property taxes.

 

The following table summarizes our approximate sources (uses) of cash flow for the years ended December 31, 2010, 2009 and 2008.

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Operating activities

 

$

3,084,000

 

$

96,000

 

$

7,866,000

 

Investing activities

 

(33,615,000

)

(32,681,000

)

1,414,000

 

Financing activities

 

19,477,000

 

43,819,000

 

(10,125,000

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and equivalents

 

$

(11,054,000

)

$

11,234,000

 

$

(845,000

)

 

Cash Flow from Operating Activities

 

Net cash provided by operating activities increased to approximately $3.1 million from $0.1 million for the years ended December 31, 2010 and 2009, respectively.  The increase of approximately $3.0 million was primarily related to an increase in cash provided by results of operations of approximately $3.3 million, a decrease in cash used to pay property taxes of $2.1 million and a decrease in cash used to fund lender held escrows of approximately $1.6 million.  The change was partially offset by issuing a note receivable of approximately $3.0 million.  In addition, more cash was used to satisfy accounts

 

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payable and accounts payable due to affiliate of approximately $1.1 million which was offset by a $0.6 million decrease in prepaid insurance and leasing commissions.

 

Net cash provided by operating activities decreased to approximately $0.1 million from $7.9 million for the years ended December 31, 2009 and 2008, respectively.  The decrease of approximately $7.8 million was primarily related to cash used for prepayment penalties of approximately $3.8 million, property taxes of approximately $1.5 million, lender held cash escrows of approximately $0.8 million, prepaid insurance of approximately $0.3 million and approximately $0.9 million of loan costs, all related to the December 17, 2009, debt refinancing.  We also used approximately $0.9 million to fund lender held cash escrows related to the acquisitions of Golf Brook Apartments and Sabal Park Apartments (June 2009), referred to as our “2009 acquisitions”.

 

Cash Flow from Investing Activities

 

Net cash used in investing activities increased to approximately $33.6 million compared to approximately $32.7 million for the years ended December 31, 2010 and 2009, respectively.  The increase of approximately $0.9 million was primarily due to an increase in cash used for acquisitions of approximately $4.8 million, a decrease in proceeds from notes receivable of $2.5 million, an increase in cash used for  additions to land, buildings and amenities of approximately $0.6 million and to fund our investment in joint venture of approximately $0.3 million. This change was offset by proceeds from the sale of our Outlet Mall retail property (March 2010) and the sale of our Sears Office Building (June 2010) of $7.3 million.

 

Net cash used in investing activities was approximately $32.7 million for the year ended December 31, 2009 compared to cash provided by investing activities of approximately $1.4 million for the year ended December 31, 2008.  The change of approximately $34.1 million was primarily due to no sales of discontinued operations in 2009, while there were proceeds from the sales of discontinued operations of approximately $50.0 million in 2008, primarily from the sale of the Office Portfolio.  This change was primarily offset by less cash used in acquisitions (approximately $32.2 million was used in our 2009 acquisitions, while approximately $41.0 million was used in the 2008 acquisition of Parks Edge Apartments (June 2008), referred to as our “2008 acquisition”) and less cash used for additions to land, buildings and amenities of approximately $0.1 million. In addition, in 2008, we loaned $3.5 million to the purchaser of the Office Portfolio, with $2.5 million of that balance being repaid in 2009.

 

Cash Flow from Financing Activities

 

Net cash provided by financing activities decreased to approximately $19.5 million compared to approximately $43.8 million for the years ended December 31, 2010 and 2009, respectively.  The decrease of approximately $24.3 million was primarily due to a decrease in mortgage payable proceeds of approximately $156.0 million, a decrease in contributions from noncontrolling interest holders of approximately $5.4 million and an increase in cash used for distributions to noncontrolling interest holders of approximately $0.1 million.  This change was partially offset by a decrease in cash used to pay down our mortgages payable of approximately $126.5 million, an increase in cash provided by our revolving notes payable, net of payments of approximately $8.8 million and a decrease in cash used for additions to loan costs of approximately $1.9 million.

 

Net cash provided by financing activities increased to approximately $43.8 million for the year ended December 31, 2009, compared to cash used in financing activities of approximately $10.1 million for the year ended December 31, 2008.  Our 2009 activity included proceeds from mortgages payable for our 2009 acquisitions and our December 17, 2009 refinancing of approximately $180.5 million along with contributions from noncontrolling interest holders of approximately $5.6 million, which were partially offset by the payoff of mortgages by our December 17, 2009 refinancing totaling approximately $128.1 million, principal payments on mortgages of approximately $3.4 million, payments on our revolving note payable of approximately $6.5 million, additions to loan cost pertaining to refinancing of approximately $2.1 million and cash distributions of approximately $2.3 million.

 

Future Liquidity

 

Our future liquidity depends significantly on our properties’ occupancy remaining at a level which allows us to make debt payments and have adequate working capital, currently and in the future.  If occupancy were to fall below that level and remain at or below that level for a significant period of time, our ability to make payments due under our debt agreements and to continue paying daily operational costs would be materially impaired.  In the next twelve months, we intend to operate the properties in a similar manner to their operation in recent years.  Cash

 

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reserves, which consist of unrestricted cash as shown on our balance sheet, were approximately $0.2 million on December 31, 2010.

 

We expect to meet our short-term liquidity requirements for normal operating expenses from cash generated by operations.  In addition, we anticipate generating proceeds from borrowing activities, property sales and/or equity offerings to provide funds for payment of certain debts and obligations.  We expect to incur capital costs related to leasing space and making improvements to properties and expect to meet these obligations with the use of funds held in escrow by lenders, proceeds from property sales and/or borrowing activities.

 

We have approximately $53.0 million of consolidated and unconsolidated secured debt maturing during the next 12 months.  It is our intention to extend, repay or refinance this debt at market terms available at the time of the maturities.  We are in active discussions with several lenders to address this maturing debt.  We believe that we will be able to refinance these debts; however, there is no assurance that we will obtain terms similar to those of the expiring debt and we may have to incur interest rates that are higher than the rates on the expiring debt.  The result of higher interest rates would have a negative impact on our results of operations and ability to pay distributions.  Further, as part of any refinancing, we may be required to pledge additional assets as collateral and may not be able to achieve the same loan to value ratios on our secured indebtedness.  If we are unable to refinance this debt for any reason, we must either pay the remaining balance or borrow additional money to pay off the maturing loan.  We may not, however, be able to obtain a new loan, or the terms of the new loan, such as the interest rate or payment schedule, may not be as favorable as the terms of the maturing loan.  Additionally, due to the amount of available cash on hand, expected cash generated by operating activities and funds available to us from existing sources of borrowings, there can be no assurance as to our ability to obtain funds necessary to repay the amounts due during the next 12 months.  Thus, we may be forced to sell a property at an unfavorable price to pay off the maturing loan or agree to less favorable loan terms.

 

We made quarterly distributions of $0.05 per unit to our limited partners of record on April 16, 2010, July 16, 2010, October 15, 2010, and January 14, 2011, respectively.  We pay distributions, if and when, authorized by our managing general partner using proceeds from advances drawn on our revolving note payable to a bank.

 

Pursuant to lease agreements signed on or before December 31, 2010, we are obligated to incur expenditures of approximately $1.3 million, primarily for renovations and tenant origination costs necessary to continue leasing our properties.  We expect to fund these expenditures by cash on hand, cash generated by operations or borrowings on our debt during the next twelve months.  This discussion of future liquidity details our material commitments. We anticipate repaying, seeking renewal or refinancing of our notes and mortgages payable coming due in the next twelve months.

 

The aggregate availability on our revolving notes payable was approximately $7.7 million as of December 31, 2010.

 

We intend to seek a renewal of our expiring $10.0 million and $8.2 million revolving notes payable to a bank that mature in the next twelve months, but can offer no assurance that we will be successful in doing so, or that favorable terms of renewal can be obtained.

 

We expect to receive $1.0 million on or before May 1, 2011 and $3.5 million on or before November 10, 2011, to satisfy our unaffiliated notes receivable.

 

On October 28, 2010, we entered into a joint venture investment agreement with an unaffiliated third party to invest in a commercial office building totaling approximately 125,000 square feet.  The building will be developed on land leased under a 65 year ground lease.  The building is being developed by our affiliate, NTS Development Company, with construction expected to be completed in late 2011 or early 2012.  The building will be managed by an affiliate of NTS Development Company.  We are obligated to contribute $4.9 million, for a 49% ownership interest.  We intend to fund our share of this investment with proceeds from our recent property sales, cash on hand, cash from operations or borrowings on new or existing debt.  The joint venture has entered into a $10.5 million construction financing agreement with a bank.  The joint venture expects to invest a total of $20.5 million in the construction of the building and completion of tenant space.

 

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Property Transactions

 

Acquisitions

 

During the years ended December 31, 2010, 2009 and 2008, we made the following property acquisitions either wholly or through investments in joint ventures:

 

Wholly-Owned Properties-Multifamily

 

Location

 

Units

 

Our Ownership

 

Date of Purchase

 

Purchase Price

 

Lakes Edge Apartments (1)

 

Orlando, FL

 

362

 

100

%

December, 2010

 

$

37,075,000

 

Parks Edge Apartments (2)

 

Memphis, TN

 

450

 

100

%

June, 2008

 

$

41,000,000

 

 

Consolidated Joint Venture Properties-
Multifamily

 

Location

 

Units

 

Our Ownership

 

Date of Purchase

 

Purchase Price

 

Golf Brook Apartments (3)

 

Orlando, FL

 

195

 

51

%

June, 2009

 

$

19,500,000

 

Sabal Park Apartments (4)

 

Orlando, FL

 

162

 

51

%

June, 2009

 

$

13,000,000

 

 


(1)          Financed by a $24.5 million mortgage payable to a bank and $8.2 million on our revolving notes payable.

(2)          Financed by a $26.3 million mortgage payable to a bank.

(3)          Financed by a $14.6 million mortgage payable to Federal Home Loan Mortgage Corporation.  Our ownership percentage at December 31, 2010, was 51%.

(4)          Financed by a $9.6 million mortgage payable to Federal Home Loan Mortgage Corporation.  Our ownership percentage at December 31, 2010, was 51%.

 

Dispositions

 

During the years ended December 31, 2010, 2009 and 2008 we made the following property dispositions:

 

Wholly-Owned Properties-Commercial

 

Square Feet

 

Our Ownership

 

Date of Sale

 

Outlet Mall (1)

 

162,600

 

100

%

March, 2010

 

Sears Office Building (2)

 

66,900

 

100

%

June, 2010

 

Atrium Center (3)

 

104,286

 

100

%

May, 2008

 

Blankenbaker Business Center I (3)

 

160,689

 

100

%

May, 2008

 

Blankenbaker Business Center II (3)

 

77,408

 

100

%

May, 2008

 

Anthem Office Center (3)

 

85,305

 

100

%

May, 2008

 

Plainview Center (3)

 

98,000

 

100

%

May, 2008

 

Plainview Point Office Center Phase I and II (3)

 

57,301

 

100

%

May, 2008

 

Plainview Point Office Center Phase III (3)

 

61,680

 

100

%

May, 2008

 

ITT Parking Lot (3)

 

N/A

 

100

%

May, 2008

 

 


(1)          Gain of approximately $0.5 million.

(2)          Gain of approximately $1.2 million.

(3)          Aggregate gain of approximately $18.9 million.

 

We may engage in transactions structured as “like-kind exchanges” of property to obtain favorable tax treatment under Section 1031 of the Internal Revenue Code.  If we are able to structure an exchange of properties as a “like-kind exchange,” then any gain we realize from the exchange would not be recognized for federal income tax purposes.  The test for determining whether exchanged properties are of “like-kind” is whether the properties are of the same nature or character.

 

On December 22, 2010, proceeds of approximately $3.6 million from the sale of our Sears Office Building, were used to fund our Lakes Edge Apartments acquisition in accordance with Section 1031 of the Internal Revenue Code.

 

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We have presented separately as discontinued operations in all periods the results of operations for the following properties:

 

Property 

 

Location

 

Status

 

Outlet Mall

 

Louisville, KY

 

Sold 2010

 

Sears Office Building

 

Louisville, KY

 

Sold 2010

 

Atrium Center

 

Louisville, KY

 

Sold 2008

 

Blankenbaker Business Center I

 

Louisville, KY

 

Sold 2008

 

Blankenbaker Business Center II

 

Louisville, KY

 

Sold 2008

 

Anthem Office Center

 

Louisville, KY

 

Sold 2008

 

Plainview Center

 

Louisville, KY

 

Sold 2008

 

Plainview Point Office Center Phase I and II

 

Louisville, KY

 

Sold 2008

 

Plainview Point Office Center Phase III

 

Louisville, KY

 

Sold 2008

 

ITT Parking Lot

 

Louisville, KY

 

Sold 2008

 

 

These assets and liabilities held for sale have been separately identified on our balance sheet at December 31, 2009.  No assets or liabilities were classified as held for sale on our balance sheet at December 31, 2010.

 

The components of discontinued operations are outlined below and include the results of operations for the respective periods in which we owned such assets during the years ended December 31, 2010, 2009 and 2008.

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

REVENUE:

 

 

 

 

 

 

 

Rental income

 

$

145,568

 

$

731,777

 

$

3,013,773

 

Tenant reimbursements

 

-

 

24,393

 

189,462

 

 

 

 

 

 

 

 

 

Total revenue

 

145,568

 

756,170

 

3,203,235

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliate

 

89,664

 

156,668

 

951,621

 

Management fees

 

4,229

 

39,638

 

146,265

 

Property taxes and insurance

 

27,097

 

54,034

 

264,675

 

Depreciation and amortization

 

-

 

221,164

 

285,064

 

 

 

 

 

 

 

 

 

Total expenses

 

120,990

 

471,504

 

1,647,625

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATING INCOME

 

24,578

 

284,666

 

1,555,610

 

 

 

 

 

 

 

 

 

Interest and other income

 

6,953

 

134,877

 

8,806

 

Interest expense

 

(492

)

(81,851

)

(1,131,110

)

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS, NET

 

$

31,039

 

$

337,692

 

$

433,306

 

 

The components of long-lived assets held for sale at December 31, 2009 consisted primarily of land, buildings and amenities and other assets for the properties being sold.  The components of long-lived liabilities held for sale at December 31, 2009 consisted primarily of accounts payable and accrued expenses, accounts payables and accrued expenses due to affiliate and other liabilities on the properties being sold.

 

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RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2010 AS COMPARED TO DECEMBER 31, 2009

AS COMPARED TO DECEMBER 31, 2008

 

This section includes our actual results of operations for the years ended December 31, 2010, 2009 and 2008.  As of December 31, 2010, we owned wholly, as a tenant in common with an unaffiliated third party, or through joint venture investments with an unaffiliated third party, 6 commercial properties, 15 multifamily properties and 2 retail properties.  We generate substantially all of our operating income from property operations.

 

Net (loss) income from the three years ended December 31, 2010, 2009 and 2008 was approximately ($11.4) million, ($17.2) million and $7.7 million.  The change in net loss for the year ended December 31, 2010 as compared to 2009, was primarily due to a $3.3 million decrease in interest expense, a $1.8 million increase in gain on sale of discontinued operations, a $0.3 million decrease in discontinued operations, net, and a $0.4 million increase in net loss attributable to noncontrolling interests.  There were no other material offsetting changes in net loss for the years ended December 31, 2010 and 2009.  Our decrease in net income for the year ended December 31, 2009 as compared to 2008, was primarily due to an  $18.9 million decrease in our gain on sale of discontinued operations, an increase of $4.8 million in interest expense and a decrease in operating income of approximately $1.7 million primarily related to our acquisitions of Golf Brook Apartments and Sabal Park Apartments (June 2009), referred to as our “2009 acquisitions” and our  acquisition of Parks Edge Apartments (June 2008), referred to as our “2008 acquisition”, partially offset by an increase of approximately $0.5 million in net loss attributable to noncontrolling interests as the result of the 2009 acquisitions.  There were no other material offsetting changes in net (loss) income for the years ended December 31, 2009 and 2008.

 

Rental Income and Tenant Reimbursements

 

Rental income and tenant reimbursements from continuing operations for the years ended December 31, 2010 and 2009 were approximately $47.9 million and $44.5 million, respectively.  The increase of $3.4 million, or 8%, was primarily the result of a $2.9 million increase in rental income across the multifamily segment primarily related to our 2009 acquisitions and an overall increase in occupancy in the multifamily segment. In addition, there was a $0.5 million increase in rental income and tenant reimbursements across the commercial segment primarily related to an increase in occupancy at Lakeshore Business Center Phase II.  There were no other material offsetting changes in rental income and tenant reimbursements for the years ended December 31, 2010 and 2009.

 

Rental income and tenant reimbursements from continuing operations for the years ended December 31, 2009 and 2008 were approximately $44.5 million and $40.9 million, respectively.  The increase of $3.6 million, or 9%, was primarily the result of a $4.8 million increase in rental income from our 2009 and 2008 acquisitions, which was partially offset by a $0.5 million decrease in rental income primarily related to the increase in rental concessions at our multifamily properties located in Tennessee and a $0.6 million decrease in occupancy related to Kroger’s departure from NTS Center in October 2008.  There were no other material offsetting changes in rental income and tenant reimbursements for the years ended December 31, 2009 and 2008.

 

Operating Expenses and Operating Expenses Reimbursed to Affiliate

 

Operating expenses from continuing operations for the years ended December 31, 2010 and 2009 were approximately $12.9 million and $10.7 million, respectively.  The increase of $2.2 million, or 21%, was primarily the result of a $1.0 million increase in operating expenses from our 2009 acquisitions and a $1.1 million increase in operating expense across the remaining multifamily segment primarily related to increased repairs and maintenance. There were no other material offsetting changes in operating expenses for the years ended December 31, 2010 and 2009.

 

Operating expenses from continuing operations for the years ended December 31, 2009 and 2008 were approximately $10.7 million and $9.4 million, respectively.  The increase of $1.3 million, or 14%, was primarily the result of a $1.6 million increase in operating expenses from our 2009 and 2008 acquisitions, $0.2 million increase in bad debt expense and repairs and maintenance across the commercial segment and $0.1 million increase in landscaping and utilities at Park Place Apartments.  The increase was partially offset by a $0.6 million decrease in repairs and maintenance at Willow Lake Apartments and The Willows of Plainview Apartments.  There were no other material offsetting changes in operating expenses for the years ended December 31, 2009 and 2008.

 

Operating expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2010 and 2009 were approximately $5.3 million and $4.9 million, respectively.  The increase of $0.4 million, or 8%,

 

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was primarily the result of a $0.3 million increase in operating expenses reimbursed to affiliate from our 2009 acquisitions and a $0.1 million increase in operating expenses reimbursed to affiliate from our acquisition of Lakes Edge Apartments (December 2010).  There were no other material offsetting changes in operating expenses reimbursed to affiliate for the years ended December 31, 2010 and 2009.

 

Operating expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2009 and 2008 were approximately $4.9 million and $4.4 million, respectively.  The increase of $0.5 million, or 11%, was primarily the result of our 2009 and 2008 acquisitions, which was partially offset by a $0.1 million decrease in operating expenses reimbursed to affiliate across the remaining multifamily segment.  There were no other material offsetting changes in operating expenses reimbursed to affiliate for the years ended December 31, 2009 and 2008.

 

We do not have any employees.  Pursuant to our collective management agreements, NTS Development Company employs the individuals who provide services necessary to operate our properties and conduct our business.  NTS Development Company provides employees that may also perform services for other properties and business enterprises.  In the situation where a particular employee benefits multiple operations, the employee’s cost is proportionately charged out to the entity receiving the services.  We only reimburse charges from NTS Development Company for actual costs of employee services incurred for our benefit. The cost of services provided to us by NTS Development Company’s employees are classified in our condensed consolidated statements of operations as operating expenses reimbursed to affiliate.  The services provided by others are classified as operating expenses.

 

Operating expenses reimbursed to affiliate are for 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.

 

Operating expenses reimbursed to affiliate from continuing operations consisted approximately of the following:

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Property

 

$

3,649,000

 

$

3,370,000

 

$

2,875,000

 

Multifamily leasing

 

683,000

 

627,000

 

544,000

 

Administrative

 

887,000

 

824,000

 

907,000

 

Other

 

45,000

 

32,000

 

51,000

 

 

 

 

 

 

 

 

 

Total

 

$

5,264,000

 

$

4,853,000

 

$

4,377,000

 

 

Management Fees

 

Management fees from continuing operations for the years ended December 31, 2010 and 2009 were approximately $2.4 million and $2.2 million, respectively.  The increase of $0.2  million, or 9%, was primarily the result of our 2009 acquisitions of approximately $0.1 million with the remaining fluctuation spreading across the remaining multifamily segment. There were no other material offsetting changes in management fees for the years ended December 31, 2010 and 2009.

 

Management fees from continuing operations for the years ended December 31, 2009 and 2008 were approximately $2.2 million and $2.0 million, respectively.  The increase of $0.2 million, or 10%, was primarily the result of our 2009 and 2008 acquisitions.  There were no other material offsetting changes in management fees for the years ended December 31, 2009 and 2008.

 

Pursuant to various management agreements, NTS Development  receives property management fees equal to 5% of the gross collected revenue from our properties.  This includes our wholly-owned properties, our consolidated joint venture properties and properties owned by our wholly-owned subsidiaries.  NTS Development receives property management fees from our unconsolidated properties owned as a tenant in common with an unaffiliated third party equal to 3.5% of their gross collected revenue under separate management agreements.  We were the beneficiary of a preferential ownership interest, disproportionately greater than our initial cash investment in each property owned as a tenant in common with an unaffiliated third party.  NTS Development has agreed to accept a lower management fee for the properties we own as a tenant in common with an unaffiliated third party in exchange for a larger potential disposition fee.  Disposition fees of up to 6% of the gross sales price may be paid to NTS Development for the sale of one of our properties owned as a tenant in common with an unaffiliated third

 

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party.  Management fees are calculated as a percentage of cash collections and are recorded on the accrual basis.  As a result, the fluctuations in revenue between years will differ from the fluctuations of management fee expense.

 

Property Taxes and Insurance

 

Property taxes and insurance from continuing operations for the years ended December 31, 2010 and 2009 were approximately $6.0 million and $6.5 million, respectively.  The decrease of $0.5 million, or 8%, was primarily due to a decrease of $0.7 million in property taxes at our Indianapolis, IN apartment properties due to lower property tax assessments and rates.  The decrease was partially offset by $0.1 million in increased property taxes on our 2009 acquisitions and $0.1 million in increased property insurance on our Lakeshore Business Center properties.  There were no other material offsetting changes in property taxes and insurance for the years ended December 31, 2010 and 2009.

 

Property taxes and insurance from continuing operations for the years ended December 31, 2009 and 2008 were approximately $6.5 million and $5.6 million, respectively.  The increase of $0.9 million, or 16%, was primarily due to a $1.0 million increase in property taxes and insurance from our 2009 and 2008 acquisitions and a $0.4 million increase in property taxes at Willow Lake Apartments due to higher property tax assessments.  The increases were partially offset by a $0.5 million decrease in property taxes at The Lakes Apartments, Castle Creek Apartments and Lake Clearwater Apartments.  There were no other material offsetting changes in property taxes and insurance for the years ended December 31, 2009 and 2008.

 

Professional and Administrative Expenses and Professional and Administrative Expenses Reimbursed to Affiliate

 

Professional and administrative expenses from continuing operations for each of the years ended December 31, 2010 and 2009 were approximately $1.0 million and $1.1 million, respectively.  The decrease of $0.1 million, or 9%, was primarily the result of an overall decrease in legal and professional fees.  There were no other material offsetting changes in professional and administrative expenses for the years ended December 31, 2010 and 2009.

 

Professional and administrative expenses from continuing operations for each of the years ended December 31, 2009 and 2008 were approximately $1.1 million and $1.3 million, respectively.  The decrease of $0.2 million, or 15%, was primarily the result of an overall decrease in legal and professional fees.  There were no other material offsetting changes in professional and administrative expenses for the years ended December 31, 2009 and 2008.

 

Professional and administrative expenses reimbursed to affiliate from continuing operations for each of the years ended December 31, 2010 and 2009 were approximately $1.6 million.  There were no material offsetting changes in professional and administrative expenses reimbursed to affiliate for the years ended December 31, 2010 and 2009.

 

Professional and administrative expenses reimbursed to affiliate from continuing operations for each of the years ended December 31, 2009 and 2008 were approximately $1.6 million.  There were no material offsetting changes in professional and administrative expenses reimbursed to affiliate for the years ended December 31, 2009 and 2008.

 

We do not have any employees.  Pursuant to our collective management agreements, NTS Development Company employs the individuals who provide services necessary to operate our properties and conduct our business.  NTS Development Company provides employees that may also perform services for other properties and business enterprises.  In the situation where a particular employee benefits multiple operations, the employee’s cost is proportionately charged out to the entity receiving the services.  We only reimburse charges from NTS Development Company for actual costs of employee services incurred for our benefit. The cost of services provided to us by NTS Development Company’s employees are classified in our consolidated statements of operations as professional and administrative expenses reimbursed to affiliate.  The services provided by others are classified as professional and administrative expenses.

 

Professional and administrative expenses reimbursed to affiliate 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.

 

Professional and administrative expenses reimbursed to affiliate from continuing operations consisted approximately of the following:

 

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Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Finance

 

$

417,000

 

$

364,000

 

$

388,000

 

Accounting

 

765,000

 

724,000

 

765,000

 

Investor relations

 

259,000

 

282,000

 

294,000

 

Human resources

 

15,000

 

13,000

 

20,000

 

Overhead

 

184,000

 

212,000

 

152,000

 

 

 

 

 

 

 

 

 

Total

 

$

1,640,000

 

$

1,595,000

 

$

1,619,000

 

 

Depreciation and Amortization

 

Depreciation and amortization from continuing operations for the years ended December 31, 2010 and 2009 was approximately $18.0 million and $17.3 million, respectively.  The increase of $0.7 million, or 4%, was primarily due to our 2009 acquisitions of approximately $0.8 million offset by decreased amortization expense of $0.2 million at Parks Edge Apartments and decreased depreciation expense of $0.1 million at The Lakes Apartments.  There were no other material offsetting changes in depreciation and amortization for the years ended December 31, 2010 and 2009.

 

Depreciation and amortization from continuing operations for the years ended December 31, 2009 and 2008 was approximately $17.3 million and $14.7 million, respectively.  The increase of $2.6 million, or 18%, was primarily due to our 2009 and 2008 acquisitions.  There were no other material offsetting changes in depreciation and amortization for the years ended December 31, 2009 and 2008.

 

Interest and Other Income

 

Interest and other income from continuing operations for the years ended December 31, 2010 and 2009 was approximately $0.2 million and $0.3 million, respectively.  The decrease of $0.1 million, or 33%, was primarily the result of a decrease in interest income earned on our notes receivable.  There were no other material offsetting changes in interest and other income for the years ended December 31, 2010 and  2009.

 

Interest and other income from continuing operations for the years ended December 31, 2009 and 2008 was approximately $0.3 million and $0.4 million, respectively.  The decrease of $0.1 million, or 25%, was primarily the result of a decrease in miscellaneous income from a prior tenant at NTS Center and a decrease in interest income earned on our notes receivable offset by an increase in interest earned on property tax refunds and miscellaneous charges in our multifamily segment.  There were no other material offsetting changes in interest and other income for the years ended December 31, 2009 and  2008.

 

Interest Expense

 

Interest expense from continuing operations for the years ended December 31, 2010 and 2009 was approximately $12.9 million and $16.2 million, respectively.  The decrease of $3.3 million, or 20%, was primarily the result of a decrease of $3.8 million in prepayment premiums and approximately $0.6 million of unamortized loan costs related to the debt refinancing on December 17, 2009, a decrease of approximately $0.2 million on our revolving line of credit to a bank and a decrease of approximately $0.1 million on our interest rate swap.  The decrease is offset by increased interest expense of $1.1 million on additional borrowings related to the December 17, 2009 debt refinancing and $0.4 million on borrowings to fund our 2009 acquisitions. There were no other material offsetting changes in interest expense for the years ended December 31, 2010 and 2009.

 

Interest expense from continuing operations for the years ended December 31, 2009 and 2008 was approximately $16.2 million and $11.4 million, respectively.  The increase of $4.8 million, or 42%, was primarily the result of $3.8 million in prepayment premiums and approximately $0.6 million of unamortized loan costs related to the debt refinancing on December 17, 2009.  The remaining increase of $0.4 million is the result of interest expense related to mortgages from our 2008 and 2009 acquisitions offset by decreased interest expense related to the  interest rate swap and a decrease in the interest expense on our variable rate debt.  There were no other material offsetting changes in interest expense for the years ended December 31, 2009 and 2008.

 

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Loss on Disposal of Assets

 

The loss on disposal of assets from continuing operations for the years ended December 31, 2010, 2009 and 2008 can be attributed to assets that were not fully depreciated at the time of replacement, spread amongst the commercial and multifamily properties for items such as heating and air conditioning systems, tenant improvements, appliances, clubhouse renovations, mailboxes, roof replacements and signage.

 

Loss From Investment in Tenants in Common

 

Loss from investment in tenants in common for the years ended December 31, 2010, 2009 and 2008 includes net operating losses attributable to our investments in tenants in common with an unaffiliated third party acquired in 2007.  The properties are The Overlook at St. Thomas Apartments and Creek’s Edge at Stony Point Apartments.  There were no other material offsetting changes in loss from investments in tenants in common for the years ended December 31, 2010, 2009 and 2008.

 

Discontinued Operations, Net

 

Net income from discontinued operations for the years ended December 31, 2010, 2009 and 2008 were approximately $31,000, $0.3 million and $0.4 million, respectively.  Discontinued operations, net, for the years ended December 31, 2010, 2009 and 2008 include the operating results for the properties previously sold as listed below.

 

Property 

 

Location

 

Status

Outlet Mall

 

Louisville, KY

 

Sold 2010

Sears Office Building

 

Louisville, KY

 

Sold 2010

Atrium Center

 

Louisville, KY

 

Sold 2008

Blankenbaker Business Center I

 

Louisville, KY

 

Sold 2008

Blankenbaker Business Center II

 

Louisville, KY

 

Sold 2008

Anthem Office Center

 

Louisville, KY

 

Sold 2008

Plainview Center

 

Louisville, KY

 

Sold 2008

Plainview Point Office Center Phase I and II

 

Louisville, KY

 

Sold 2008

Plainview Point Office Center Phase III

 

Louisville, KY

 

Sold 2008

ITT Parking Lot

 

Louisville, KY

 

Sold 2008

 

Gain on Sale of Discontinued Operations

 

Gain on sale of discontinued operations for the year ended December 31, 2010 was approximately $1.8 million due to the sale of the Sears Office Building in June 2010 and the sale of Outlet Mall in March 2010.

 

Gain on sale of discontinued operations for the year ended December 31, 2008 was approximately $18.9 million due to the sale of the Office Portfolio in May 2008.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likey to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Impact of Inflation

 

Most of our commercial and retail tenant leases require payment of their share of a building’s operating expenses. Certain commercial and retail tenant leases are subject to a floor or cap on their share of controllable operation expenses.  These factors limit the impact of inflation on our operations.

 

Contractual Obligations and Commercial Commitments

 

The following table represents our obligations and commitments to make future payments as of December 31, 2010, under contracts, such as debt and lease agreements including principal and interest, and under contingent commitments, such as debt guarantees.

 

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Payment Due by Period

 

 

 

Total

 

Within 
One Year

 

One-Three 
Years

 

Three-Five 
Years

 

After Five 
Years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

Mortgages and notes payable

 

$

 359,096,133

 

$

 65,228,218

 

$

 30,299,993

 

$

 39,721,653

 

$

 223,846,269

 

Capital lease obligations

 

-

 

-

 

-

 

-

 

-

 

Operating leases (1)

 

-

 

-

 

-

 

-

 

-

 

Other long-term obligations (2)

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

 359,096,133

 

$

 65,228,218

 

$

 30,299,993

 

$

 39,721,653

 

$

 223,846,269

 

 


(1)        We are party to numerous small operating leases for office equipment such as copiers, postage machines and fax machines, which represent an insignificant obligation.

(2)        We are party to several annual maintenance agreements with vendors for such items as outdoor maintenance, pool service and security systems, which represent an insignificant obligation.

 

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk exposure with regard to financial instruments is expected to be our exposure to changes in interest rates.  We refinanced substantially all of our debt subsequent to our merger with instruments which bear interest at a fixed rate, with the exception of approximately $74.2 million bearing interest at variable rates.  We anticipate that a hypothetical 100 basis point increase in interest rates would increase interest expense on our variable rate debt by approximately $0.7 million annually.

 

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ITEM 8 — CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors
NTS Realty Holdings Limited Partnership

Louisville, KY

 

We have audited the accompanying consolidated balance sheets of NTS Realty Holdings Limited Partnership (Partnership) as of December 31, 2010 and 2009, and the related consolidated statements of operations, partners’ equity and cash flows for the years then ended.  The Partnership’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s  internal control over financial reporting.  Accordingly, we express no such opinion.  Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and 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 the Partnership as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ BKD, LLP

 

Louisville, Kentucky

 

March 30, 2011

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors
NTS Realty Holdings Limited Partnership

 

We have audited the accompanying consolidated statements of operations, partners’ equity and cash flows of NTS Realty Holdings Limited Partnership (the “Company”) for the year ended December 31, 2008.  Our audit also included the financial statement schedule III listed in the Index at Part IV, Item 15(2).  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule III based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of NTS Realty Holdings Limited Partnership for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule III, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

 

/s/ Ernst & Young LLP

 

Louisville, Kentucky

 

March 30, 2009

 

 

Except for the items restated for the Company’s reclassification of the Outlet Mall and Sears Office Building from continuing operations to discontinued operations as described in Note 2 as to which the date is

 

March 29, 2010

 

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

 Consolidated Balance Sheets as of December 31, 2010 and 2009

 

 

 

2010

 

2009

 

ASSETS:

 

 

 

 

 

Cash and equivalents

 

$

180,053

 

$

11,233,735

 

Cash and equivalents - restricted

 

2,272,598

 

2,227,744

 

Accounts receivable, net of allowance for doubtful accounts of $397,627 and $203,359 at December 31, 2010 and 2009, respectively

 

1,558,987

 

1,646,142

 

Land, buildings and amenities, net

 

313,513,669

 

291,151,198

 

Long-lived assets held for sale

 

-

 

5,549,932

 

Investment in and advances to joint venture

 

292,593

 

-

 

Investment in and advances to tenants in common

 

2,123,137

 

4,174,947

 

Other assets

 

8,624,606

 

5,598,167

 

 

 

 

 

 

 

Total assets

 

$

328,565,643

 

$

321,581,865

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Mortgages and notes payable

 

$

267,870,876

 

$

246,088,305

 

Accounts payable and accrued expenses

 

2,718,912

 

2,875,643

 

Accounts payable and accrued expenses due to affiliate

 

300,812

 

634,930

 

Distributions payable

 

569,038

 

569,038

 

Security deposits

 

911,816

 

856,384

 

Long-lived liabilities held for sale

 

-

 

72,321

 

Other liabilities

 

4,026,749

 

3,754,653

 

 

 

 

 

 

 

Total liabilities

 

276,398,203

 

254,851,274

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 9)

 

 

 

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

Partners’ equity

 

47,961,173

 

61,633,718

 

Noncontrolling interest

 

4,206,267

 

5,096,873

 

 

 

 

 

 

 

Total equity

 

52,167,440

 

66,730,591

 

 

 

 

 

 

 

Total liabilities and equity

 

$

328,565,643

 

$

321,581,865

 

 

The accompanying notes to financial statements are an integral part of these statements.

 

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NTS REALTY HOLDINGS LIMITED PARTNERSHIP

 Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008

 

 

 

2010

 

2009

 

2008

 

REVENUE:

 

 

 

 

 

 

 

Rental income

 

$

45,997,593

 

$

42,730,803

 

$

39,141,215

 

Tenant reimbursements

 

1,901,333

 

1,787,103

 

1,775,192

 

 

 

 

 

 

 

 

 

Total revenue

 

47,898,926

 

44,517,906

 

40,916,407