10-K 1 a07-8969_110k.htm 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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:

Limited Partnership Units

(Title of each class)

American Stock Exchange

(Name of each exchange on which registered)

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

None

(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

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 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.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  o     Accelerated filer  o     Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £     No x

As of June 30, 2006, the aggregate market value of the registrant’s limited partnership units held by nonaffiliates of the registrant was $35,028,241, based on the closing price of the American Stock Exchange.  As of March 27, 2007, 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 2007 are incorporated by reference into Part III of this Form 10-K.

 




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

 

12

Item 2 - Properties

 

12

Item 3 - Legal Proceedings

 

19

Item 4 - Submission of Matters to a Vote of Security Holders

 

20

PART II

Item 5 - Market for Registrant’s Limited Partnership Units and Related Partner Matters

 

21

Item 6 - Selected Financial Data

 

23

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 7A - Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 8 - Financial Statements and Supplementary Data

 

47

Item 9 - Change in and Disagreements with Accountants on Accounting and Financial Disclosure

 

96

Item 9A - Controls and Procedures

 

96

Item 9B - Other Information

 

96

PART III

Item 10 - Directors and Executive Officers of the Registrant

 

97

Item 11 - Executive Compensation

 

97

Item 12 - Security Ownership of Certain Beneficial Owners and Management

 

97

Item 13 - Certain Relationships and Related Transactions

 

97

Item 14 - Principal Accountant Fees and Services

 

97

PART IV

Item 15 - Exhibits and Financial Statement Schedules

 

98

Signatures

 

102

 

 

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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 limited partnership in the State of Delaware in 2003 and was formed by the merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd. (the “Partnerships”), along with other real estate entities affiliated with their general partners, specifically Blankenbaker Business Center 1A and the NTS Private Group’s assets and liabilities.  The merger was completed on December 28, 2004 after a majority of each Partnership’s limited partners voted for the merger.  The Partnerships and Blankenbaker Business Center 1A were terminated by the merger and ceased to exist.  Concurrent with the merger, ORIG, LLC (“ORIG”), a Kentucky limited liability company, affiliated with the Partnerships’ general partners, contributed substantially all of its assets and liabilities to NTS Realty, including the NTS Private Group properties.  The merger was part of a court approved settlement of class action litigation involving the Partnerships.  Prior to the merger and contribution, we had no operations and a limited amount of assets.

At December 31, 2006, we own twenty-nine properties, comprised of nine multifamily properties; sixteen office and business centers; three retail properties; and one ground lease.  The properties are located in and around Louisville (17) and Lexington (1), Kentucky; Fort Lauderdale (3), Florida; Indianapolis (4), Indiana; Nashville (2), Tennessee; Richmond (1), Virginia; and Atlanta (1), Georgia.  Our office and business centers aggregate approximately 1.5 million square feet.  We own multifamily properties containing approximately 2,540 units and retail properties containing approximately 210,000 square feet of space, as well as one ground lease associated with a 120-space parking lot attached to one of our properties.

On December 29, 2004, the American Stock Exchange began to list our limited partnership units (the “Units”) for trading.  Our Units currently are listed on the American Stock Exchange under the trading symbol “NLP.”

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 American Stock Exchange.  Our limited partners have the power to elect these directors on an annual basis.

We do not have any employees.  On April 11, 2006, we entered into a management agreement with NTS Development Company (“NTS Development”), an affiliate of our general partners, whereby NTS Development oversees and manages the day-to-day operations of our properties.  The term of the management agreement is one year and provides that NTS Realty Capital is permitted to terminate the agreement on sixty days’ notice.  Under the agreement, NTS Development is responsible for managing each of our properties and in return will receive, in most cases, an annual fee equal to 5% of all gross collected revenues from our properties.  The construction supervision fees are paid in an amount equal to 5% of the costs incurred which relate to capital improvements.  These construction supervision fees are capitalized as part of land, buildings and amenities.  Also pursuant to the agreement, NTS Development Company 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.  NTS Development Company is reimbursed its actual costs for services rendered to NTS Realty.  NTS Development’s management fee is paid monthly.

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.  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.

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Employee costs are allocated amongst 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 charges from NTS Development Company for actual costs of employer 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 or 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 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.

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Competition

We compete with other entities both to locate suitable properties for acquisition, to locate purchasers for our properties and to locate tenants to rent space at each of our properties.  Although our business is competitive, it is not seasonal.  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.  Competition to acquire existing properties from institutional investors and other publicly traded real estate limited partnerships and real estate investment trusts has increased substantially in the past several years.  In many of our markets, institutional investors, owners and developers of properties compete vigorously to acquire, develop and lease space.  Many of these competitors have substantially more resources than we do.

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 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.  We are required to pay distributions on a quarterly basis, commencing in the first quarter of 2005, equal to 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; 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” is reduced by the amount of reserves as determined by us each quarter.  NTS Realty Capital will 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.

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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 and retail 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” is whether the properties are of the same nature or character.

Other Policies

On April 11, 2006, the board of directors of NTS Realty Capital, Inc., 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;

·                  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 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 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.

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Conflicts of Interest

Each of our general partners is controlled directly or indirectly by Mr. J.D. Nichols.  At December 31, 2006, Mr. Nichols beneficially owns approximately 57.41% of our 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.  In addition, affiliates of our general partners currently own vacant lots located adjacent to Blankenbaker Business Center I and Outlets Mall.  These affiliates may acquire additional properties in the future which are 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.  During approximately the last ten years, independent environmental consultants have conducted Phase I or similar environmental site assessments on a majority of the properties that we acquired in 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.

We make available, free of charge, through our website, and by responding to requests addressed to our investor relations department, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports.  These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC.  Our website address is www.ntsdevelopment.com.  The information contained on our website, or on other websites linked to our website, is not part of this document.

Item 1A - Risk Factors

Factors That May Affect Our Future Results

Cautionary Statements under the Private Securities Litigation Reform Act of 1995.

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 within the meaning of Section 27A of the Securities Act of 1933, as amended.  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 web site and in other material released to the public.

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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.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

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

As of December 31, 2006, Mr. J.D. Nichols and his affiliates owned, directly or indirectly, approximately 57.25% of the outstanding NTS Realty Holdings Limited Partnership Units.  To the extent Mr. Nichols and his affiliates vote in the same manner, their combined ownership may effectively give them the power to elect all of the directors and control the management, operations and affairs of NTS Realty Holdings Limited Partnership.  Their 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.  The size of their combined 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 shares over their current trading prices.

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 refinancing 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.

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 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 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.

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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:

·                  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.

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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.

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 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.

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We may invest in joint ventures, which add another layer of risk to our business.

We may acquire properties through joint ventures 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 may not perform;

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

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

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

·                  we and the joint venture partner 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.

Any disputes that may arise between joint venture partners 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.

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.

 

11

 

 




Item 1B - Unresolved Staff Comments

None.

Item 2 - Properties

General

As a result of the merger of the Partnerships with and into us and ORIG’s contribution of substantially all of its assets and liabilities, we own fee simple title to sixteen office buildings and business centers, nine multifamily properties, three retail properties and one ground lease.  Set forth below is a description of each property:

Office Buildings

·                  NTS Center, which was constructed in 1977, is an office complex with approximately 116,300 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were six tenants leasing office space aggregating approximately 89,900 square feet.  NTS Center’s tenants are professional service entities, principally in real estate and grocery chain management.  Two of these tenants individually lease more than 10% of NTS Center’s rentable area.  NTS Center was 77% occupied as of December 31, 2006.

·                  Plainview Center, which was constructed in 1983, is an office complex with approximately 96,800 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were seven tenants leasing office space aggregating approximately 85,000 square feet.  The tenants are professional service entities, principally in human resources consulting and victim notification services.  Two of these tenants individually lease more than 10% of Plainview Center’s net rentable area.  Plainview Center was 88% occupied as of December 31, 2006.

·                  Plainview Point Office Center Phases I and II, which were constructed in 1983, is an office center with approximately 57,300 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were six tenants leasing office space aggregating approximately 37,800 square feet.  The tenants are professional service entities, including a business school and an insurance company.  One of these tenants leases more than 10% of the rentable area at Plainview Point Office Center Phases I and II.  Plainview Point Office Center Phases I and II were 66% occupied as of December 31, 2006.

·                  Plainview Point Office Center Phase III, which was constructed in 1987, is an office center with approximately 61,700 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were twelve tenants leasing office space aggregating approximately 55,100 square feet.  The tenants are professional service entities, principally involved in insurance claim processing, social security program management and consulting services.  Three of these tenants individually lease more than 10% of Plainview Point Office Center Phase III.  Plainview Point Office Center Phase III was 89% occupied as of December 31, 2006.

·                  Anthem Office Center, which was constructed in 1995, is an office building with approximately 93,300 net rentable square feet in Louisville, Kentucky.  Anthem Office Center was vacant as of December 31, 2006.

·                  Atrium Center, which was constructed in 1984, is an office center with approximately 104,200 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were twelve tenants leasing office space aggregating approximately 86,500 square feet.  The tenants are professional service entities, principally involved in video and media monitoring services and educational services.  Two of these tenants individually lease more than 10% of Atrium Center’s net rentable area.  Atrium Center was 83% occupied as of December 31, 2006.

12

 

 




·                  Springs Medical Office Center, which was constructed in 1988, is a medical office complex with approximately 100,600 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were eighteen tenants leasing office space aggregating approximately 78,300 square feet.  The tenants are professional service entities, principally involving physicians and medical services.  Four of these tenants individually lease more than 10% of Springs Medical Office Center’s net rentable area.  Springs Medical Office Center was 78% occupied as of December 31, 2006.  The Springs Medical Office Center was sold on February 12, 2007.(1)

·                  Springs Office Center, which was constructed in 1990, is an office center with approximately 126,000 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were eleven tenants leasing office space aggregating approximately 121,200 square feet.  The tenants are professional service entities, principally in food service purchasing and insurance.  Two of these tenants individually lease more than 10% of Springs Office Center’s net rentable area.  Springs Office Center was 96% occupied as of December 31, 2006.  The Springs Office Center was sold on February 12, 2007.(1)

·                  Sears Office Building, which was constructed in 1987, is an office building with approximately 66,900 net rentable square feet in Louisville, Kentucky.  Sears Office Building was vacant as of December 31, 2006.

Business Centers

The business center properties are a combination of office and warehouse space including bulk warehouse distribution facilities.  The office component is generally 40% or less of the square footage, with the warehouse portion being unfinished and used for storage, distribution or light assembly.  The following is a brief description of each of these business center properties:

·                  Blankenbaker Business Center I (formerly Blankenbaker Business Centers 1A and 1B), which was constructed in 1988, is a business center with approximately 160,700 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, one tenant was leasing all 160,700 square feet.  The tenant is a professional service entity in the insurance industry.  Blankenbaker Business Center I was 100% occupied as of December 31, 2006.(1)

·                  Blankenbaker Business Center II, which was constructed in 1988, is a business center with approximately 77,700 net rentable square feet in Louisville, Kentucky.  As of December 31, 2006, there were three tenants leasing space aggregating approximately 76,100 square feet.  The tenants are professional service entities, principally in pharmaceutical distribution and operations, woodworking shop and general office, electronics repairs and construction of communication towers.  All three tenants individually lease more than 10% of Blankenbaker Business Center II’s net rentable area.  Blankenbaker Business Center II was 98% occupied as of December 31, 2006.(1)

·                  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, 2006, 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, 2006.

·                  Lakeshore Business Center Phase I, which was constructed in 1986, is a business center with approximately 102,100 net rentable square feet in Fort Lauderdale, Florida.  As of December 31, 2006, there were twenty-five tenants leasing space aggregating approximately 77,000 square feet.  The tenants are professional service entities, principally in engineering, insurance and financial services and dental equipment suppliers.  Two 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 75% occupied as of December 31, 2006.


(1)             These properties’ assets and liabilities were classified as held for sale on our Balance Sheets.  The results of their operations were classified as discontinued operations in our Statement of Operations.

13

 

 




 

·                  Lakeshore Business Center Phase II, which was constructed in 1989, is a business center with approximately 96,300 net rentable square feet in Fort Lauderdale, Florida.  As of December 31, 2006, there were eighteen tenants leasing space aggregating approximately 82,900 square feet.  The tenants are 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 86% occupied as of December 31, 2006.

·                  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, 2006, there were four tenants leasing space aggregating all 38,900 square feet.  The tenants are professional service entities, principally insurance services, consulting services, real estate development and engineering.  All four 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, 2006.

·                  Peachtree Corporate Center, which was constructed in 1979, is a business park with approximately 192,000 net rentable square feet in Atlanta, Georgia.  As of December 31, 2006, there were forty-six tenants leasing space aggregating approximately 159,100 square feet.  The tenants are professional service entities, principally in sales-related services.  None of these tenants individually lease more than 10% of Peachtree’s net rentable area.  Peachtree was 83% occupied as of December 31, 2006.

Multifamily Properties

·                  Park Place Apartments (formerly Park Place Apartments Phases I, II and III), which was constructed in three phases, is a 464-unit luxury apartment complex located on a 42.5-acre tract in Lexington, Kentucky.  Phases I and II were constructed between 1987 and 1989 and Phase III was constructed in 2000.  As of December 31, 2006, the property was 94% occupied.

·                  The Willows of Plainview Apartments (formerly The Willows of Plainview Phases I and II and The Park at the Willows), which was constructed in three phases between 1985 and 1988, is a 310-unit luxury apartment complex located on a 19-acre tract in Louisville, Kentucky.  As of December 31, 2006, the property was 94% 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, 2006, the property was 97% occupied.

·                  The Lakes Apartments, which was purchased in 2005, is a 230-unit luxury apartment complex located on a 19.7-acre tract in Indianapolis, Indiana.  As of December 31, 2006, the property was 98% occupied.

·                  The Grove at Richland Apartments which was purchased in 2006, is a 292-unit luxury apartment complex located on a 10.5-acre tract in Nashville, Tennessee.  As of December 31, 2006, the property was 93% occupied.

·                  The Grove at Whitworth Apartments which was purchased in 2006, is a 301-unit luxury apartment complex located on 12.1-acre tract in Nashville, Tennessee.  As of December 31, 2006, the property was 99% occupied.

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

·                  Castle Creek Apartments, which was purchased in 2006, is a 276-unit luxury apartment complex located on a 13.8-acre tract in Indianapolis, Indiana.  As of December 31, 2006, the property was 93% occupied.

·                  Lake Clearwater Apartments which was purchased in 2006, is a 216-unit luxury apartment complex located on a 10.6-acre tract in Indianapolis, Indiana.  As of December 31, 2006, the property was 92% occupied.

14

 

 




Retail Properties

·                  Bed, Bath & Beyond, which was constructed in 1999, is an approximate 35,000 square foot facility in Louisville, Kentucky.  Bed, Bath & Beyond was 100% occupied as of December 31, 2006.

·                  Outlets Mall, which was constructed in 1983, is a 162,600 square foot mall in Louisville, Kentucky which as of December 31, 2006 was 100% occupied.  The property is occupied by Garden Ridge L.P.

·                  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, 2006, there were five tenants leasing space aggregating approximately 8,300 square feet.  The tenants who occupy Springs Station are professional service entities whose principal businesses are occupational therapy, staffing and retail jewelry.  Two of these tenants individually lease more than 10% of the net rentable area at Springs Station.  Springs Station was 69% occupied as of December 31, 2006.

Ground Lease

·                  We own the ground lease relating to a 120-space parking lot in Louisville, Kentucky and leased to ITT Educational Services, Inc.  The ITT Parking Lot is attached to Plainview Point Office Center Phases I and II.  The lease expires July 30, 2009.

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.

15

 

 




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,

 

 

 

2006

 

2005

 

2004

 

OFFICE BUILDING OCCUPANCY

 

 

 

 

 

 

 

NTS Center

 

76%

 

75%

 

74%

 

Plainview Center

 

87%

 

85%

 

80%

 

Plainview Point Office Center Phases I and II

 

66%

 

66%

 

73%

 

Plainview Point Office Center Phase III

 

87%

 

88%

 

74%

 

Anthem Office Center (2)

 

0%

 

67%

 

100%

 

Atrium Center

 

82%

 

72%

 

55%

 

Springs Medical Office Center

 

79%

 

87%

 

93%

 

Springs Office Center

 

97%

 

98%

 

97%

 

Sears Office Building (2)

 

0%

 

50%

 

100%

 

BUSINESS CENTER OCCUPANCY

 

 

 

 

 

 

 

Blankenbaker Business Center I

 

100%

 

100%

 

100%

 

Blankenbaker Business Center II

 

98%

 

83%

 

78%

 

Clarke American

 

100%

 

100%

 

100%

 

Lakeshore Business Center Phase I

 

67%

 

61%

 

71%

 

Lakeshore Business Center Phase II

 

87%

 

74%

 

77%

 

Lakeshore Business Center Phase III

 

87%

 

100%

 

91%

 

Peachtree Corporate Center

 

88%

 

93%

 

87%

 

MULTIFAMILY OCCUPANCY

 

 

 

 

 

 

 

Park Place Apartments

 

90%

 

91%

 

86%

 

The Willows

 

95%

 

86%

 

84%

 

Willow Lake Apartments

 

95%

 

85%

 

86%

 

The Lakes Apartments

 

97%

 

94%

 

N/A

 

The Grove at Richland

 

97%

 

N/A

 

N/A

 

The Grove at Whitworth

 

97%

 

N/A

 

N/A

 

The Grove at Swift Creek

 

95%

 

N/A

 

N/A

 

Castle Creek

 

96%

 

N/A

 

N/A

 

Lake Clearwater

 

91%

 

N/A

 

N/A

 

RETAIL OCCUPANCY

 

 

 

 

 

 

 

Bed, Bath & Beyond

 

100%

 

100%

 

100%

 

Outlets Mall

 

100%

 

100%

 

100%

 

Springs Station

 

89%

 

93%

 

97%

 

GROUND LEASE

 

 

 

 

 

 

 

ITT Parking Lot (1)

 

N/A

 

N/A

 

N/A

 


(1)             The ground lease expires July 30, 2009 and is leased by one tenant in Plainview Point Office Center Phases I and II.

(2)             These properties were vacant and unoccupied at December 31, 2006 and 2005.

16

 

 




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 as of December 31, 2006.


Tenant

 


Total Leased
Square Feet

 


Annualized Base
Rent (1)

 

Percentage of
Annualized Base
Rent (1)

 


Lease
Expiration

 

Appriss, Inc (2)

 

70,687

 

$

955,919

 

2.62

%

07/31/07

 

Kroger Company (2)

 

58,820

 

790,324

 

2.16

%

06/30/08

 

Garden Ridge Corp. (2)

 

162,617

 

731,777

 

2.00

%

03/12/10

 

Clarke American Checks, Inc. (2)

 

50,000

 

512,500

 

1.40

%

08/31/10

 

Video Monitoring Services of America (2)

 

35,782

 

395,097

 

1.08

%

01/31/12

 

Bed, Bath & Beyond (2)

 

34,953

 

384,483

 

1.05

%

01/31/15

 

Coherent (3)

 

27,868

 

327,449

 

.90

%

12/31/08

 

University of Phoenix (2)

 

19,387

 

309,684

 

.85

%

08/31/11

 

ITT Educational Services (2)

 

28,675

 

305,819

 

.84

%

07/30/09

 

NTS Development Co. (2)

 

20,368

 

295,336

 

.81

%

03/31/08

 


(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

Indebtedness

The table below reflects the outstanding indebtedness from mortgages and notes payable for our properties as of December 31, 2006.  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, 2006, the Libor Rate was 5.31%.  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.

 

 

 

 

 

 

 

Balance on

 

Property

 

Interest Rate

 

Maturity Date

 

December 31, 2006

 

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

 

Libor + 2.50

%

01/01/08

 

$

13,494,000

 

NTS Realty Multifamily Properties I (2)

 

5.98

%

01/15/15

 

73,178,299

 

NTS Realty Multifamily Properties II (3)

 

5.35

%

01/15/15

 

32,994,574

 

NTS Realty I (4)

 

5.07

%

03/15/15

 

28,907,648

 

NTS Realty II (5)

 

Libor + 1.75

%

11/15/07

 

35,477,897

 

NTS Realty III

 

Libor + 1.75

%

08/24/07

 

16,878,031

 

Bed, Bath & Beyond (6)

 

9.00

%

08/01/10

 

2,626,870

 

Clarke American

 

8.45

%

11/01/15

 

2,723,982

 

Plainview Point Office Center Phase III (7)

 

8.375

%

12/01/10

 

2,717,182

 

The Lakes Apartments (8)

 

5.11

%

12/01/14

 

11,933,706

 

 

 

 

 

 

 

$

220,932,189

 


(1)             This note is guaranteed individually and severally by Mr. Nichols and Mr. Brian F. Lavin in the prorata amounts of 75% and 25%, respectively.

(2)             A balloon payment of $62,866,145 is due upon maturity.

(3)             A balloon payment of $28,300,138 is due upon maturity.

(4)             A balloon payment of $22,311,987 is due upon maturity.

(5)             A balloon payment of $35,477,897 is due upon maturity.

(6)             A balloon payment of $2,213,097 is due upon maturity.

(7)             A balloon payment of $2,243,300 is due upon maturity.

(8)             A balloon payment of $10,269,282 is due upon maturity.

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

17

 

 




Property Tax

The following table sets forth for each property that we own, the property tax rate and annual property taxes.

SCHEDULE OF ANNUAL PROPERTY TAX RATES AND TAXES - 2006


State

 


Property

 

Property
Tax Rate
(per $100)

 

Gross Amount
Annual Property
Taxes (1)

 

FL

 

Lakeshore Business Center Phase I

 

2.20

 

$

179,880

 

FL

 

Lakeshore Business Center Phase II

 

2.20

 

190,878

 

FL

 

Lakeshore Business Center Phase III

 

2.20

 

71,097

 

GA

 

Peachtree Corporate Center

 

3.21

 

105,579

 

IN

 

Willow Lake Apartments

 

2.91

 

268,808

 

IN

 

The Lakes Apartments

 

2.91

 

224,125

 

IN

 

Castle Creek Apartments

 

1.83

 

311,739

 

IN

 

Lake Clearwater Apartments

 

1.83

 

250,588

 

KY

 

Anthem Office Center

 

1.12

 

45,104

 

KY

 

Atrium Center

 

1.12

 

54,862

 

KY

 

Bed, Bath & Beyond

 

1.17

 

22,790

 

KY

 

Blankenbaker Business Center I

 

1.12

 

99,220

 

KY

 

Blankenbaker Business Center II

 

1.12

 

42,907

 

KY

 

Clarke American

 

1.12

 

31,818

 

KY

 

ITT Parking Lot

 

1.12

 

2,092

 

KY

 

NTS Center

 

1.12

 

68,780

 

KY

 

Outlets Mall

 

1.12

 

52,022

 

KY

 

The Willows of Plainview Apartments

 

1.12

 

125,160

 

KY

 

Park Place Apartments

 

1.03

 

225,767

 

KY

 

Plainview Center

 

1.12

 

31,106

 

KY

 

Plainview Point Office Center Phases I & II

 

1.12

 

19,412

 

KY

 

Plainview Point Office Center Phase III

 

1.12

 

30,561

 

KY

 

Sears Office Building

 

1.12

 

60,431

 

KY

 

Springs Medical Office Center

 

1.17

 

80,973

 

KY

 

Springs Office Center

 

1.17

 

96,906

 

KY

 

Springs Station

 

1.17

 

10,299

 

TN

 

The Grove at Richland Apartments

 

4.69

 

477,161

 

TN

 

The Grove at Whitworth Apartments

 

4.69

 

515,144

 

VA

 

The Grove at Swift Creek Apartments

 

1.04

 

188,848

 

 

 

 

 

 

 

$

3,884,057

 


(1)             Does not include any offset for property taxes reimbursed by tenants.  Property taxes in Jefferson County, Kentucky are discounted by approximately 2% if they are paid prior to the due date.  Discounts for early payment in other states generally provide no discount to the gross amount of property tax.

 

18

 

 




Item 3 - Legal Proceedings

On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the settlement agreement jointly filed by the general partners (the “Former General Partners”) of the Partnerships, along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) (the “California Litigation”) on December 5, 2003.  On October 26, 2006, the Superior Court entered an order holding that defendants had fulfilled their financial obligations required by the settlement.  No further proceedings are anticipated in connection with this case.

On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm, et al. v. J.D. Nichols, et al. (Case No. 03-CI-01740) (the “Kentucky Litigation”) against certain of the Former General Partners and several individuals and entities affiliated with us.  The complaint was amended on a number of occasions to add parties such as the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., and to add various claims seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, a declaratory judgment and injunctive relief.

The parties entered into a settlement agreement to pay $176,000 to plaintiffs in exchange for (1) tender by the plaintiffs of all their units in our entity; (2) mutual releases; and (3) dismissal with prejudice of the Kentucky Litigation.  Our portion of the settlement is approximately $141,000.  The terms and conditions of the settlement agreement have been performed and the Kentucky Litigation was dismissed with prejudice.

We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations.

19

 

 




Item 4 - Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2006.

20

 

 




PART II

Item 5 - Market for Registrant’s Limited Partnership Units and Related Partner Matters

Common Stock Market Prices and Distributions

Beginning December 29, 2004, our units were listed for trading on the American Stock Exchange (the “Exchange”) under the symbol NLP.  The approximate number of record holders of our units at December 31, 2006 was 2,079.

High and low unit prices on the Exchange for the period December 29, 2004 through December 31, 2004 were $5.50 to $5.00.  No distributions were declared or paid in 2004.

High and low unit prices on the Exchange for the period January 1, 2005 through December 31, 2005 were $6.18 to $4.80.  Quarterly distributions are determined based on current cash balances, cash flow being generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements.

High and low unit prices on the Exchange for the period January 1, 2006 through December 31, 2006 were $8.70 to $5.80.  Quarterly distributions are determined based on current cash balances, cash flow being generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements.

The following table sets forth the price range of our limited partnership units on the American Stock Exchange and distributions declared for each quarter during the three years ended December 31, 2006.

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

2006

 

 

 

 

 

 

 

 

 

High

 

$

8.70

 

$

7.65

 

$

7.75

 

$

7.42

 

Low

 

$

5.80

 

$

6.30

 

$

6.90

 

$

6.90

 

Distributions declared

 

$

1,138,161

 

$

1,138,161

 

$

1,138,161

 

$

2,276,322

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

High

 

$

6.18

 

$

5.70

 

$

5.31

 

$

6.11

 

Low

 

$

5.00

 

$

4.80

 

$

4.95

 

$

5.13

 

Distributions declared

 

$

1,138,161

 

$

1,138,161

 

$

1,138,161

 

$

2,276,321

 

 

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

High

 

$

N/A

 

$

N/A

 

$

N/A

 

$

5.50

 

Low

 

$

N/A

 

$

N/A

 

$

N/A

 

$

5.00

 

Distributions declared

 

$

N/A

 

$

N/A

 

$

N/A

 

$

N/A

 

 

We have a policy of paying regular distributions, although there is no assurance as to the payment of future distributions because they depend on 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 N, to the financial statements and discussed in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

21

 

 




On November 21, 2005, we announced that Mr. J.D. Nichols, Chairman of our managing general partner, adopted three pre-arranged trading plans to purchase our limited partnership units pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.  The plans authorized their administrator, PNC Investments, to purchase up to $922,000 of our limited partnership units from time to time, through no later than October 2006, on behalf of three entities controlled or established by Mr. Nichols.  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 three months ended December 31, 2006, the three entities controlled or established by Mr. Nichols purchased our limited partnership units as follows:

 

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 2006

 

9,341

 

$

7.33

 

130,691

 

(1

)

 

 

 

 

 

 

 

 

 

 

November 2006

 

0

 

$

0

 

130,691

 

(1

)

 

 

 

 

 

 

 

 

 

 

December 2006

 

0

 

$

0

 

130,691

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total

 

9,341

 

$

7.33

 

130,691

 

(1

)


(1)   A description of the maximum number of units that may be purchased under the trading plans is included in the narrative preceding this table.

22

 

 




Item 6 - Selected Financial Data

The following table sets forth our selected financial data for 2006 and 2005 as well as prior years selected historical combined condensed financial and operating data as if NTS-Properties III, NTS-Properties IV, NTS-Properties V, a Maryland limited partnership, NTS-Properties VI, a Maryland limited partnership, NTS-Properties VII, Ltd. (the “Partnerships”) and NTS Private Group were combined on a historical basis.  The combined financial information is presented to provide a basis for discussion.  This historical combined presentation reflects adjustments to the actual historical data to: 1) include a previously unconsolidated joint venture (Blankenbaker Business Center 1A); 2) eliminate the equity investment and minority interests in wholly combined joint ventures in the historical financial information of the applicable partnership; and 3) include any debt used by ORIG and its related interest cost to acquire interests in the Partnerships which was assumed by NTS Realty in the merger.

We have derived the statement of operations and balance sheet data for the years ended December 31, 2006 and 2005 from our audited financial statements.  We have derived the statement of operations data for the period from January 1, 2004 to December 27, 2004 from our audited financial statements and the audited financial statements of the Partnerships and the NTS Private Group.  We have derived our statement of operations and balance sheet data for the years ended December 31, 2003 and 2002 from the audited financial statements of the Partnerships and the NTS Private Group.  We have derived the combined condensed statement of operations data consisting of interest expense relating to ORIG’s debt from the unaudited financial statements of ORIG for each of the three years ended December 31, 2004.  In the opinion of management, our unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such date and for such periods under U.S. generally accepted accounting principles.

23

 

 




SUMMARY STATEMENT OF OPERATIONS AND BALANCE SHEET DATA

 

 

 

 

 

 

 

Period Ended

 

 

 

 

 

 

 

Years Ended December 31,

 

December 27,

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

STATEMENT OF OPERATIONS DATA

 

 

 

 

 

 

 

 

 

 

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

36,371,113

 

$

20,932,565

 

$

20,115,169

 

$

20,514,076

 

$

19,706,928

 

Tenant reimbursements

 

1,809,065

 

1,771,447

 

1,628,211

 

1,803,445

 

2,374,347

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

38,180,178

 

22,704,012

 

21,743,380

 

22,317,521

 

22,081,275

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliate

 

13,020,858

 

8,209,938

 

7,488,851

 

6,247,322

 

5,300,102

 

Management fees

 

1,933,264

 

995,353

 

1,165,105

 

1,196,548

 

1,191,219

 

Property taxes and insurance

 

4,345,234

 

2,365,046

 

1,937,587

 

2,266,626

 

1,990,807

 

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

 

3,499,623

 

4,077,411

 

4,780,493

 

3,492,609

 

1,839,469

 

Depreciation and amortization

 

13,992,731

 

6,214,919

 

5,830,601

 

6,036,897

 

6,185,807

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

36,791,710

 

21,862,667

 

21,202,637

 

19,240,002

 

16,507,404

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

1,388,468

 

841,345

 

540,743

 

3,077,519

 

5,573,871

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

164,986

 

382,710

 

1,581,692

 

309,342

 

270,243

 

Interest expense and interest expense reimbursed to affiliate

 

(11,363,481

)

(5,540,291

)

(8,343,296

)

(6,240,575

)

(8,268,441

)

Loss on disposal of assets

 

(169,479

)

(476,725

)

(26,329

)

(10,178

)

(155,583

)

Settlement charge

 

-

 

-

 

(2,896,259

)

-

 

(129,690

)

Income from investment in joint venture

 

-

 

953,300

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(9,979,506

)

(3,839,661

)

(9,143,449

)

(2,863,892

)

(2,709,600

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net

 

1,144,335

 

1,801,274

 

(1,399,340

)

1,662,686

 

2,341,739

 

Gain on sale of discontinued operations

 

49,950,486

 

270,842

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

41,115,315

 

$

(1,767,545

)

$

(10,542,789

)

$

(1,201,206

)

$

(367,861

)

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared

 

$

5,690,804

 

$

5,690,804

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per limited partnership unit

 

$

0.50

 

$

0.50

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA (end of year)

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and amenities, net

 

$

275,504,920

 

$

119,745,821

 

$

121,016,180

 

$

84,063,273

 

$

87,739,282

 

Total assets

 

309,251,401

 

187,808,823

 

166,547,424

 

129,831,524

 

141,020,277

 

Mortgages and notes payable

 

220,932,189

 

138,012,832

 

112,799,938

 

109,258,373

 

122,391,250

 

 

 

24

 

 




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”) as if the Partnerships, ORIG and the NTS Private Group were combined on a historical basis for the period ended December 27, 2004.  The combined financial information is presented to provide a basis for discussion.  See Part II, Item 6 - Selected Financial Data for a description of certain assumptions made in the combined presentation for 2004.

The following discussion should be read in conjunction with the historical and proforma financial statements 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 disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.

Impairment and Valuation

Statement of Financial Accounting Standards (‘‘SFAS’’) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,’’ specifies circumstances in which certain long-lived assets must be reviewed for impairment.  If 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.

The merger and property acquisition were accounted for using the purchase method of accounting in accordance with SFAS No. 141 ‘‘Business Combinations.’’  NTS Realty was treated as the purchasing entity.  For the merger, the portion of each partnership’s assets and liabilities acquired from unaffiliated third parties was adjusted to reflect its fair market value.  That portion owned by affiliates of the general partners of the Partnerships was reflected at historical cost.  The assets and liabilities contributed by NTS Private Group were adjusted to reflect their fair market value, except for that portion owned by Mr. Nichols which was reflected at historical cost due to his common control over the contributing entities.

25

 

 




In accordance with SFAS No. 141, we have allocated the purchase price of each acquired investment property among land, buildings and improvements, other intangibles, including acquired above market leases, acquired below market leases and acquired in place lease origination cost which is the market cost avoidance of executing the acquired leases.  Allocation of the purchase price is an area that requires complex judgments and significant estimates.  We used the information contained in a third-party appraisal as the primary basis for allocating the purchase price between land and buildings.  A pro rata portion of the purchase price was allocated to the value of avoiding a lease-up period for acquired in-place leases.  The value of in-place leases is amortized to expense over the remaining initial term of the respective leases.  A portion of the purchase price was allocated to the estimated lease origination cost based on estimated lease execution costs for similar leases and considered various factors including geographic location and size of leased space.  We then evaluated acquired leases based upon current market rates at the acquisition date and various other factors including geographic location, size and the location of leased space within the property, tenant profile and the credit risk of the tenant in determining whether the acquired lease is above or below market.  After acquired leases were determined to be at, above or below market, we allocated a pro rata portion of the purchase price to any acquired above or below market lease based upon the present value of the difference between the contractual lease rate and the estimated market rate.  We also consider an allocation of purchase price to in-place leases that have a customer relationship intangible value.  The characteristics we consider in allocating these values include the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with the tenant and the tenant’s credit quality and expectations of lease renewals.  We did not have any tenants with whom we have identified a developed relationship that we believe had any intangible value.

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 a lease.  Due to the impact of “straight-lining,” on a historical combining basis, cash collected for rent exceeded rental income by approximately $168,000 for the year ended December 31, 2006.  Rental income exceeded the cash collected for rent by approximately $63,000 and $145,000 for the years ended December 31, 2005 and 2004.  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 ninety days and tenants with outstanding balances due for a period less than ninety days but that we believe are potentially uncollectible.

Recognition of Lease Termination Income

 We recognize lease termination income upon receipt of the income.  We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.

Cost Capitalization and Depreciation Policies

We review all expenditures and capitalize any item exceeding $2,500 deemed to be an upgrade or a tenant 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 lives 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.  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.

26

 

 




Liquidity and Capital Resources

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

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Operating activities

 

$

6,800,743

 

$

7,327,456

 

$

7,882,465

 

Investing activities

 

(57,725,040

)

(26,104,202

)

(2,129,478

)

Financing activities

 

45,543,229

 

21,612,209

 

(4,516,844

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and equivalents

 

$

(5,381,068

)

$

2,835,463

 

$

1,236,143

 

 

Cash Flow from Operating Activities

Net cash provided by operating activities decreased from approximately $7,327,000 for the year ended December 31, 2005 to approximately $6,801,000 for the year ended December 31, 2006.  The decrease is primarily due to the operations of acquired properties (The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, Castle Creek Apartments, Lake Clearwater Apartments and The Lakes Apartments) net of discontinued operations of Golf Brook Apartments and Sabal Park Apartments sold in February 2006 and Commonwealth Business Center Phases I and II sold in May 2006.

Net cash provided by operating activities decreased from approximately $7,882,000 for the year ended December 31, 2004 to approximately $7,327,000 for the year ended December 31, 2005.  The decrease is primarily due to cash used to pay accounts payable.

Cash Flow from Investing Activities

Net cash flow used in investing activities increased from approximately $26,104,000 for the year ended December 31, 2005 to approximately $57,725,000 for the year ended December 31, 2006.  The increase was primarily due to the 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, Castle Creek Apartments and Lake Clearwater Apartments.  The increase is partially offset by the sale of Golf Brook Apartments and Sabal Park Apartments sold in February 2006 and Commonwealth Business Center Phases I and II sold in May 2006.

Net cash flow used in investing activities increased from approximately $2,129,000 for the year ended December 31, 2004 to approximately $26,104,000 for the year ended December 31, 2005.  The increase was primarily due to the acquisition of The Lakes Apartments in August 2005 as well as increased capital expenditures, which included tenant and vacant suite renovations and common area improvements at our commercial properties, roof replacements at our multifamily, retail and commercial properties and HVAC replacements and access control system upgrades at our commercial and multifamily properties.

Cash Flow from Financing Activities

Net cash provided by financing activities increased from approximately $21,612,000 for the year ended December 31, 2005 to approximately $45,543,000 for the year ended December 31, 2006.  The change was primarily the result of loan proceeds obtained in 2006 used to fund our apartment acquisitions.

Net cash flow used in financing activities was approximately $4,517,000 for the year ended December 31, 2004.  Net cash flow provided by financing activities was approximately $21,612,000 for the year ended December 31, 2005.  The change was primarily the result of $42,100,000 in loan proceeds obtained during 2005.  The increase is partially offset by the payoff of the note payable of approximately $14,987,000 as well as principal payments incurred for each of our mortgages and notes payable.

27

 

 




Future Liquidity

Our future liquidity depends significantly on our properties’ occupancy remaining at a level which allows us to makes for 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 greatly impaired.  In the next twelve months, we intend to operate the properties in a similar manner to their operation in recent years.  Cash reserves, which consist of unrestricted cash as shown on our balance sheet, were approximately $28,000 on December 31, 2006.  As part of the merger, we refinanced approximately $94.0 million of debt with approximately $104.0 million of new debt.  The refinancing, among other things, lowered interest rates and extended the amortization schedules.  The refinancing of this debt allowed us to generate cash flow to pay capital expenditures, principal and interest expenses from mortgages and notes payable, deferred fees and expenses to NTS Development Company and quarterly distributions to our limited partners pursuant to our distribution policy.

We made quarterly distributions of $.10 per unit to our limited partners on April 14, 2006, July 14, 2006 and October 13, 2006 and a quarterly distribution of $.20 per unit to our limited partners on January 16, 2007.

We do not anticipate a significant impact to our liquidity as a result of the vacancy at the Sears Office Building and Anthem Office Center.  However, we may incur significant expenses if and when we enter into lease agreements for these properties.

We expect to incur capital expenditures of approximately $7.7 million funded by borrowings on our debt during the next twelve months primarily for tenant origination costs necessary to continue leasing our properties.  This discussion of future liquidity details our material commitments.  We anticipate seeking renewal or refinancing of our notes payable coming due in the next twelve months.

Our borrowing base limitation has been reduced to approximately $22,448,000 due to the sale of Commonwealth Business Center Phases I and II.

On April 11, 2006, pursuant to the terms of the settlement agreement with respect to the class action litigation involving the Partnerships, the independent directors of our managing general partner approved an amended and restated management agreement with NTS Development Company, our affiliate.  The independent directors engaged a nationally recognized real estate expert to assist them in their review of the existing management agreement.  The amended and restated management agreement became effective as of December 29, 2005.  The resulting disposition fees of approximately $928,000, construction supervision fees of approximately $243,000 and commercial leasing fees of approximately $497,000 for the year ended December 31, 2006, may reasonably be expected to have a significant and material continuing impact on our future liquidity.

Joint Venture Investment

On September 12, 2005, we entered into a joint venture investment with an unaffiliated third-party investor to acquire an approximately $16.0 million mortgage loan secured by real property and improvements.  We contributed $200,000 as capital and held a 45% interest in the joint venture, which we accounted for using the equity method.  We loaned the joint venture $1.8 million on a note receivable with an interest rate of 8%, which was due on December 31, 2011, with interest payable on each December 31.  We also loaned the joint venture approximately $7.0 million on a $7.2 million note receivable due on September 30, 2006, and bearing interest monthly, of LIBOR plus 1.75%.  This investment in and notes receivable from the joint venture were funded with borrowings on our revolving note payable to a bank.

The unaffiliated third-party investor contributed $400,000 as capital and held a 55% interest in the joint venture.  The investor also loaned the joint venture $3.6 million on a note receivable with an interest rate of 8%, which was due on December 31, 2011.  The principal repayments on the $1.8 million and $3.6 million notes were subordinate to the repayment of the balance due on the $7.2 million note.

In December 2005, the joint venture liquidated and ceased to exist.  As a result of the liquidation, we received approximately $953,000 in joint venture income.

28

 

 




Property Transactions

On August 24, 2005, we closed on a $20.0 million line of credit from PNC Bank, National Association.  We used a portion of the proceeds from the line of credit to pay the purchase price for The Lakes Apartments, pending permanent financing.  We intend to use the line of credit to assist in future acquisitions and other working capital needs.  The line of credit was increased to $24.0 million in March 2006.

On August 26, 2005, we closed on our Agreement of Sale with Great Lakes Property Group Trust to purchase The Lakes Apartments, located adjacent to Willow Lake Apartments, in Indianapolis, Indiana.  The Lakes is a 230-unit luxury multifamily property which includes amenities such as a fitness center, car wash, swimming pool and lighted tennis court.

On September 13, 2005, we announced that we entered into an agreement to sell the Sears Office Building, one of our office buildings located in Jefferson County, Kentucky, to an unaffiliated local nonprofit corporation for $5.6 million.

On September 30, 2005, we announced that we entered into separate agreements to sell Golf Brook Apartments and Sabal Park Apartments, our multifamily properties located in Orlando, Florida, to an unaffiliated Florida corporation.  We agreed to receive an aggregate purchase price of approximately $71.5 million for the properties at closing.

On November 1, 2005, we announced that we entered into two agreements to purchase two multifamily properties located in Nashville, Tennessee and one multifamily property located in Chesterfield County, Virginia from an unaffiliated Delaware limited partnership.  Subject to the terms and conditions of the agreements, we agreed to pay approximately $117.2 million for the properties.  The properties in Nashville consist of apartment complexes with 292 units and 301 units, respectively, while the Chesterfield County property has 240 units.

On December 9, 2005, we announced that we were notified by the prospective purchaser of the Sears Office Building, one of our office buildings located in Jefferson County, Kentucky, that such purchaser was not able to fulfill its obligations under the purchase agreement it entered into with us and, thus, terminated the agreement.

On February 2, 2006, we closed on our agreements to sell Golf Brook Apartments and Sabal Park Apartments, our multifamily properties located in Orlando, Florida, to an unaffiliated Florida corporation for a purchase price of approximately $71.5 million, resulting in a gain of approximately $48.3 million.

On February 3, 2006, we closed on our two agreements to purchase two multifamily properties located in Nashville, Tennessee and one agreement to purchase a multifamily property in Chesterfield County, Virginia for a purchase price totaling approximately $117.2 million (a portion of which was satisfied by the assumption of a mortgage loan with a then current outstanding balance of approximately $33.4 million).  The Tennessee properties are commonly known as The Grove at Richland and The Grove at Whitworth, while the Virginia property is commonly known as The Grove at Swift Creek.

On February 7, 2006, we announced that we entered into an agreement to purchase two multifamily properties located in Indianapolis, Indiana.  These properties are commonly known as Castle Creek Apartments and Lake Clearwater Apartments.  Castle Creek has 276 units and Lake Clearwater has 216 units.  Subject to the terms and conditions of the agreement, we have agreed to pay a purchase price totaling approximately $50.0 million.

On March 6, 2006, we announced that we entered into an agreement to sell Commonwealth Business Center Phases I and II, two of our business centers located in Jefferson County, Kentucky, to an unaffiliated Kentucky limited liability company for $7.1 million.

On March 23, 2006, we closed on our agreement to purchase the two multifamily properties located in Indianapolis, Indiana, using a bank loan of approximately $42.5 million, guaranteed by the partnership, and an advance on our line of credit for the balance.

On May 18, 2006, we closed on our agreement to sell Commonwealth Business Center Phases I and II, two of our business centers located in Jefferson County, Kentucky, to an unaffiliated Kentucky limited liability company for a sale price of $7.1 million, resulting in a gain of approximately $1.7 million.  As a results of this sale, our borrowing base on the $24.0 million line of credit has been reduced to approximately $22,448,000.

29

 

 




On August 17, 2006, we announced that on August 16, 2006 we entered into an agreement to sell Blankenbaker Business Centers I and II, two business centers located in Louisville, Kentucky, to an unaffiliated individual for a total of $21.6 million.

On September 15, 2006, we announced that we were notified by the prospective purchaser of Blankenbaker Business Centers I and II, two of our business centers located in Louisville, Kentucky, that such purchaser was unable to fulfill his obligations under the purchase agreement and, thus terminated the agreement.

On September 18, 2006, the board of directors of our managing general partner authorized management to sell Blankenbaker Business Center I and II, Springs Medical Office Center and Springs Office Center at specified minimum prices.

On December 8, 2006, we announced that we entered into an agreement with The Northwestern Life Insurance Company to purchase, together with an unaffiliated partner, a multifamily property located in Louisville, Kentucky known as The Overlook at St. Thomas (“The Overlook”).  Subject to the terms and conditions of the agreement, we agreed to an aggregate purchase price of $46.0 million to acquire The Overlook.  This is a 484-unit apartment community offering amenities such as a fitness center, indoor and outdoor swimming pools, two lighted tennis courts and custom home features.

On February 13, 2007, we announced that we completed the sale of Springs Medical Office Center and Springs Office Center, two office buildings located in Louisville, Kentucky, to MRI Springs Portfolio, LLC, an unaffiliated Delaware limited liability company.  We received $28.9 million in connection with the sale, resulting in a gain of approximately $14.8 million.

On March 14, 2007, we announced that we completed the purchase of The Overlook, a multifamily property located in Louisville, Kentucky, with an unaffiliated co-owner.  We and our co-owner paid an aggregate purchase price of $46.0 million to acquire The Overlook using funds obtained from a $36.0 million mortgage loan and from the sale of our two office properties in February 2007.

We anticipate using substantially all of the proceeds from the sale of our properties for reinvestment in the properties we have agreed to purchase.  Additional sales of properties and financing likely will be required to purchase future properties.  There are significant and potentially material financial risks associated with our ability to execute certain transactions.  The sale and reinvestment are expected to qualify for the “like-kind” exchange investment rules pursuant to Section 1031 of the Internal Revenue Code.  We expect this to minimize any taxable gain to our unit holders as a result of the sale and reinvestment transactions.

We have presented separately as discontinued operations in all periods the results of operations for Golf Brook Apartments, Sabal Park Apartments, Commonwealth Business Center Phases I and II, Blankenbaker Business Center I and II, Springs Medical Office Center, and Springs Office Center.

30

 

 




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, 2006, 2005 and 2004.

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

REVENUE:

 

 

 

 

 

 

 

Rental income

 

$

6,653,099

 

$

12,169,451

 

$

11,130,817

 

Tenant Reimbursements

 

387,836

 

425,010

 

756,552

 

 

 

 

 

 

 

 

 

Total revenue

 

7,040,935

 

12,594,461

 

11,887,369

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliate

 

2,056,845

 

4,163,368

 

4,084,343

 

Management fees

 

343,521

 

675,107

 

663,895

 

Property taxes and insurance

 

523,738

 

1,074,703

 

1,042,854

 

Depreciation and amortization

 

1,015,339

 

2,390,754

 

2,408,602

 

 

 

 

 

 

 

 

 

Total operating expenses

 

3,939,443

 

8,303,932

 

8,199,694

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATING INCOME

 

3,101,492

 

4,290,529

 

3,687,675

 

 

 

 

 

 

 

 

 

Interest and other income

 

7,114

 

65,197

 

26,726

 

Interest expense

 

(1,887,518

)

(2,369,354

)

(5,065,617

)

Loss on disposal of assets

 

(76,753

)

(185,098

)

(48,124

)

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS, NET

 

$

1,144,335

 

$

1,801,274

 

$

(1,399,340

)

 

Hurricane Wilma

On October 23, 2005, Hurricane Wilma (the “Hurricane”) struck the peninsula of Florida.  Our properties in Fort Lauderdale, Florida were damaged by this storm.  The commercial properties involved are the Lakeshore Business Center Phases I, II and III.  While these properties are covered by insurance, the deductible for hurricane damage is two percent (2%) of the insured value.  For Lakeshore Business Center Phases I, II and III, these amounts are approximately $190,000, $185,000 and $84,000, respectively.  We do not expect to receive any insurance reimbursements as our repair costs have not exceeded these deductible amounts.  As of December 31, 2006 and 2005, our cost to repair our properties totaled approximately $6,000 and $324,000, respectively, which was included in our operating expenses.

Merger/Settlement Charge

 Our Statement of Operations includes a noncash charge in 2004 for our estimate related to the settlement of the California Litigation  with a corresponding credit to Partners’ Equity.  The noncash charge was approximately $2.9 million.  Our earnings in 2004 were negatively impacted by this noncash charge.  However, there was no effect on our liquidity because Mr. Nichols, his spouse and Mr. Lavin funded the settlement payment.

 

31

 

 




RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 AS COMPARED TO DECEMBER 31, 2005,
AS COMPARED TO DECEMBER 31, 2004

This section includes our actual results of operations for the years ended December 31, 2006 and 2005 and describes our results of operations for the year ended December 31, 2004 as if it were combined with our predecessors’ operations without adjustment.  The combined financial information is presented to provide a basis for discussion.  As of December 31, 2006, we owned sixteen office and business centers, nine multifamily properties, three retail properties and one ground lease.  We generate substantially all of our operating income from property operations.

Our net income (losses) for each of the three years ended December 31, 2006 were approximately $41,115,000, ($1,768,000), and ($10,543,000), respectively.  The net income for the year ended December 31, 2006 was primarily due to the sale of Golf Brook Apartments and Sabal Park Apartments sold in February 2006 and Commonwealth Business Center Phases I and II sold in May 2006.   In addition, rental income increased due the acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments (February 2006), Castle Creek Apartments and Lake Clearwater Apartments (March 2006) and The Lakes Apartments (August 2005).  The net loss for year December 31, 2005 was negatively impacted by continued legal fees related to the class action litigation.  The net loss for 2004 was primarily the result of the mortgage prepayment penalties paid in 2004, the non-cash settlement charge and the effects of continuing legal and professional expenses related to the merger and the class action litigation.

Rental Income and Tenant Reimbursements

Rental income and tenant reimbursements from continuing operations for the years ended December 31, 2006 and 2005 were approximately $38,180,000 and $22,704,000, respectively.  The increase of approximately $15,476,000, or 68%, was primarily the result of acquiring The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments (February 2006), Castle Creek Apartments and Lake Clearwater Apartments (March 2006) and The Lakes Apartments (August 2005).

Rental income and tenant reimbursements from continuing operations for the years ended December 31, 2005 and 2004 were approximately $22,704,000 and $21,743,000, respectively.  The increase of approximately $961,000, or 4%, was primarily the result of acquiring The Lakes Apartments (August 2005).  This acquisition increased rental income approximately $688,000.  In addition, it increased the average occupancy at our multifamily properties.

Operating Expenses and Operating Expenses Reimbursed to Affiliate

Operating expenses from continuing operations for the years ended December 31, 2006 and 2005 were approximately $8,491,000 and $5,606,000, respectively.  The increase of approximately $2,885,000, or 51%, was primarily due to the 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, Castle Creek Apartments and Lake Clearwater Apartments and the August 2005 acquisition of The Lakes Apartments.

Operating expenses from continuing operations for the years ended December 31, 2005 and 2004 were approximately $5,606,000 and $4,801,000, respectively.  The increase of approximately $805,000, or 17%, was primarily the result of the acquisition of The Lakes Apartments in August 2005, as well as damage from Hurricane Wilma at Lakeshore Business Center Phases I, II and III.

Operating expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2006 and 2005 were approximately $4,530,000 and $2,604,000, respectively.  The increase of $1,926,000, or 74%, was primarily due to the 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, Castle Creek Apartments and Lake Clearwater Apartments and the 2005 acquisition of The Lakes Apartments.

Operating expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2005 and 2004 were approximately $2,604,000 and $2,688,000, respectively.  The decrease of $84,000, or 3%, was primarily due to decreased personnel costs at our commercial properties.

32

 

 




Operating 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 property management, leasing, maintenance, security and other services necessary to manage and operate our business.

Management Fees

Management fees from continuing operations for the years ended December 31, 2006 and 2005 were approximately $1,933,000 and $995,000, respectively.  The increase of $938,000, or 94%, was primarily due to the 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, Castle Creek Apartments, and Lake Clearwater Apartments, and the August 2005 acquisition of The Lakes Apartments.  In addition, the increase is also due to a change in the management fee calculation pursuant to the terms of our agreement with NTS Development Company.

Management fees from continuing operations for the years ended December 31, 2005 and 2004 were approximately $995,000 and $1,165,000, respectively.  The decrease of approximately $170,000, or 15% was primarily due to a change in the management fee calculation pursuant to the terms of our agreement with NTS Development Company.

Pursuant to our amended and restated management agreement, NTS Development Company receives property management fees equal to 5% of the gross collected revenue from our properties.  Management fees are calculated as a percentage of cash collections, however, for revenue reporting purposes 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, 2006 and 2005 were approximately $4,345,000 and $2,365,000, respectively.  The increase of $1,980,000, or 84%, was primarily due to the February 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, the March 2006 acquisitions of Castle Creek Apartments and Lake Clearwater Apartments, and the August 2005 acquisition of The Lakes Apartments.

Property taxes and insurance from continuing operations for the years ended December 31, 2005 and 2004 were approximately $2,365,000 and $1,937,000, respectively.  The increase of approximately $428,000, or 22%, was primarily due to our multifamily properties as a result of reduced periodic expense in 2004 due to adjustments to the accrued tax liability for the reduction of the tax assessments at Willow Lake Apartments, as well as the acquisition of The Lakes Apartments in August 2005.

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

Professional and administrative expenses from continuing operations for the years ended December 31, 2006 and 2005 were approximately $1,922,000 and $2,661,000, respectively.  The decrease of $739,000, or 28% was primarily due to decreased legal and professional fees related to the merger and class action litigation.  Professional and administrative expenses for the year ended December 31, 2006 included approximately $0 and $434,000 in merger and litigation expenses, respectively.  The 2006 litigation expense includes approximately $141,000 for settlement of the shareholder litigation filed in Kentucky.  Professional and administrative expenses for the year ended December 31, 2005 included approximately $322,000 and $760,000 in merger and litigation expenses, respectively.

Professional and administrative expenses from continuing operations for the years ended December 31, 2005 and 2004 were approximately $2,661,000 and $3,669,000, respectively.  The decrease of approximately $1,008,000, or 27%, was primarily due to decreased legal and professional fees in relation to the merger and class action litigation.  The decrease was partially offset by increased audit, tax and consulting fees.

Professional and administrative expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2006 and 2005 were approximately $1,578,000 and $1,417,000, respectively.  The increase of approximately $161,000, or 11%, was primarily due to increased personnel costs, which were a result of our apartment acquisitions.

33

 

 




Professional and administrative expenses reimbursed to affiliate from continuing operations for the years ended December 31, 2005 and 2004 were approximately $1,417,000 and $1,111,000, respectively.  The increase of approximately $306,000, or 28%, was primarily due to increased personnel costs.

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 consisted of the following:

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Finance

 

$

400,000

 

$

385,000

 

$

298,000

 

Accounting

 

824,000

 

635,000

 

485,000

 

Investor Relations

 

227,000

 

197,000

 

153,000

 

Human Resources

 

18,000

 

14,000

 

73,000

 

Overhead

 

109,000

 

186,000

 

102,000

 

 

 

 

 

 

 

 

 

Total

 

$

1,578,000

 

$

1,417,000

 

$

1,111,000

 

 

Depreciation and Amortization

Depreciation and amortization expense from continuing operations for the years ended December 31, 2006 and 2005 was approximately $13,993,000 and $6,215,000, respectively.  The increase of $7,778,000, or 125%, was primarily due to the February 2006 acquisitions of The Grove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove at Whitworth Apartments, the March 2006 acquisitions of Castle Creek Apartments and Lake Clearwater Apartments, and the August 2005 acquisition of The Lakes Apartments.

Depreciation and amortization from continuing operations for the years ended December 31, 2005 and 2004 was approximately $6,215,000 and $5,831,000, respectively.  The increase of approximately $384,000, or 7%, was primarily due to the acquisition of The Lakes Apartments in August 2005 and was also due to the amortization of intangible assets, partially offset by the revision of our fixed asset lives subsequent to our acquisition of them for all our properties.

Interest and Other Income

Interest and other income from continuing operations for the years ended December 31, 2006 and 2005 was approximately $165,000 and $383,000, respectively.  The decrease of $218,000, or 57%, was primarily the result of decreased interest earned on investments.

Interest and other income from continuing operations for the years ended December 31, 2005 and 2004 was approximately $383,000 and $1,582,000, respectively.  The decrease of approximately $1,199,000, or 76%, was primarily the result of a $1,500,000 settlement payment received from NTS Development Company in 2004 in relation to the class action litigation settlement.  The decrease was partially offset by interest received on the sweep account as well as the investment in the joint venture.

Interest Expense

Interest expense from continuing operations for the years ended December 31, 2006 and 2005 was approximately $11,363,000 and $5,540,000, respectively.  The increase of $5,823,000, or 105%, was primarily due to additional loan proceeds obtained for our apartment acquisitions.

Interest expense from continuing operations for the years ended December 31, 2005 and 2004 was approximately $5,540,000 and $8,343,000, respectively.  The decrease of approximately $2,803,000, or 34%, was primarily the result of prepayment penalties and the disposing of loan costs not fully amortized as the result of early prepayment of debt at some of the commercial and multifamily properties, as well as lowered interest rates due to the refinancing of approximately $94.0 million of debt in 2004.  The decrease was partially offset by additional loan proceeds obtained in December 2004 and the first, third and fourth quarters of 2005.

34

 

 




Loss on Disposal of Assets

Loss on disposal of assets from continuing operations for the years ended December 31, 2006, 2005 and 2004 can be attributed to assets that were not fully depreciated at the time of replacement, spread amongst the majority of our properties.  The 2006 replacements include heating and air conditioning units, common area renovations, stairwell upgrades, access control upgrades, roof replacements, and tenant improvements, amongst others. The 2005 replacements included heating and air conditioning units, common area renovations, stairwell upgrades, access control upgrades, roof replacements, lighting upgrades and fire sprinkler replacements, amongst others.

Income from Investment in Joint Venture

Income from investment in joint venture from continuing operations for the year ended December 31, 2005 can be attributed to the investment with an unaffiliated third-party investor which liquidated and ceased to exist in December 2005.

Discontinued Operations, Net

Discontinued operations, net for the years ended December 31, 2006 and 2005 were approximately $1,144,000 and $1,801,000, respectively.  The decreases of $657,000, or 36% was primarily due to the sale of Golf Brook Apartments and Sabal Park Apartments on February 2, 2006 and Commonwealth Business Center Phases I and II on May 18, 2006.

Discontinued operations, net for the years ended December 31, 2005 and 2004 were approximately $1,801,000 and $(1,399,000), respectively.  The increase of approximately $3,200,000 was primarily due to the prepayment penalty incurred in 2004 at Sabal Park Apartments due to early repayment of debt.

Gain on Sale of Discontinued Operations

Gain on sale of discontinued operations for the year ended December 31, 2006 was approximately $49,950,000 due to the sale of Golf Brook Apartments and Sabal Park Apartments on February 2, 2006 and the sale of Commonwealth Business Center Phases I and II on May 18, 2006.

Gain on sale of discontinued operations for the year ended December 31, 2005 can be attributed to the sale of 1.92 acres of land at Outlets Mall.  There were no gains on sales of assets in 2004.

35

 

 




Contractual Obligations and Commercial Commitments

The following table represents our obligations and commitments to make future payments as of December 31, 2006 under contracts, such as debt and lease agreements, and under contingent commitments, such as debt guarantees.

 

 

 

Payment Due by Period

 

 

 

Total

 

Within
One Year

 

One - Three
Years

 

Three - Five
Years

 

After Five
Years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

Mortgages and notes payable

 

$

220,932,189

 

$

55,406,698

 

$

19,328,431

 

$

10,971,206

 

$

135,225,854

 

Capital lease obligations

 

-

 

-

 

-

 

-

 

-

 

Operating leases (1)

 

-

 

-

 

-

 

-

 

-

 

Other long-term obligations (2)

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

220,932,189

 

$

55,406,698

 

$

19,328,431

 

$

10,971,206

 

$

135,225,854

 


(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.

 

 

 

Total

 

Amount of Commitment Expiration Per Period

 

 

 

Amounts
Committed

 

Within
One Year

 

One - Three
Years

 

Three - Five
Years

 

After Five
Years

 

Other Commercial Commitments

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

Standby letters of credit and guarantees

 

-

 

-

 

-

 

-

 

-

 

Other commercial commitments (1)

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial commitments

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 


(1)   We do not, as a practice, enter into long-term purchase commitments for commodities or services.  We may from time to time agree to “fee for service arrangements” which are for a term of greater than one year.

36

 

 




PREDECESSORS’ RESULTS OF OPERATIONS

The following describes each of our predecessors’ results of operations on a historical basis for the period ended December 27, 2004.

NTS PROPERTIES III

  NTS-Properties III (referred to in this discussion as “we,” “us” or “our”) owned three commercial properties.  We generated almost all of our net operating income from property operations.

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Total revenues

 

$

3,811,008

 

Operating expenses and operating expenses reimbursed to affiliate

 

1,148,072

 

Depreciation and amortization

 

1,051,918

 

Total interest expense

 

(1,104,216

)

Net (loss) income

 

(253,950

)

 

Rental income and tenant reimbursements generated by our properties were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

NTS Center

 

$

1,106,207

 

Plainview Center

 

1,340,769

 

Peachtree Corporate Center

 

1,364,032

 

 

The occupancy levels at our properties were as follows:

 

 

 

December 27,

 

 

 

2004

 

NTS Center

 

75

%

Plainview Center

 

83

%

Peachtree Corporate Center

 

90

%

 

The average occupancy levels at our properties were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

NTS Center

 

74

%

Plainview Center

 

80

%

Peachtree Corporate Center

 

87

%

 

The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the period ended December 27, 2004.

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Operating activities

 

$

1,284,744

 

Investing activities

 

(189,422

)

Financing activities

 

(422,845

)

 

 

 

 

Net increase in cash and equivalents

 

$

672,477

 

 

37

 

 




NTS-PROPERTIES IV

NTS-Properties IV (referred to in this discussion as “we,” “us” or “our”) owned two commercial properties, one multifamily property and had investments in five joint venture properties.  We generated almost all of our net operating income from property operations.  In order to evaluate our overall portfolio, management analyzed the operating performance of the properties based on operating segments, which included commercial and multifamily operations.  The financial information of the operating segments was prepared consistent with the basis and manner in which our management internally disaggregated financial information for the purpose of decision making.

The following table of segment data is provided:

 

 

 

Period Ended December 27, 2004

 

 

 

Multifamily

 

Commercial

 

Partnership

 

Total

 

Total revenues

 

$

1,049,296

 

$

497,725

 

$

-

 

$

1,547,021

 

Operating expenses and operating expenses reimbursed to affiliate

 

476,779

 

259,483

 

-

 

736,262

 

Depreciation and amortization

 

205,319

 

165,057

 

3,363

 

373,739

 

Total interest expense

 

(536,784

)

-

 

-

 

(536,784

)

Income (loss) from continuing operations

 

(319,369

)

9,152

 

(620,321

)

(930,538

)

Discontinued operations, net

 

-

 

290,138

 

-

 

290,138

 

Net (loss) income

 

(319,369

)

299,290

 

(620,321

)

(640,400

)

 

Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase I

 

$

687,926

 

Plainview Point Office Center Phases I and II

 

$

497,725

 

The Willows of Plainview Phase I

 

$

1,049,296

 

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (9.70%)

 

$

1,111,361

 

Golf Brook Apartments (3.97%)

 

$

2,953,352

 

Plainview Point Office Center Phase III (4.96%)

 

$

736,596

 

Blankenbaker Business Center 1A (29.61%)

 

$

949,011

 

Lakeshore Business Center Phase I (10.92%)

 

$

1,465,488

 

Lakeshore Business Center Phase II (10.92%)

 

$

1,407,525

 

Lakeshore Business Center Phase III (10.92%)

 

$

600,429

 

 

The occupancy levels at our properties and joint ventures were as follows:

 

 

 

December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase I

 

53

%

Plainview Point Office Center Phases I and II

 

66

%

The Willows of Plainview Phase I

 

80

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (9.70%)

 

74

%

Golf Brook Apartments (3.97%)

 

98

%

Plainview Point Office Center Phase III (4.96%)

 

91

%

Blankenbaker Business Center 1A (29.61%)

 

100

%

Lakeshore Business Center Phase I (10.92%)

 

66

%

Lakeshore Business Center Phase II (10.92%)

 

75

%

Lakeshore Business Center Phase III (10.92%)

 

100

%

 

38

 

 




The average occupancy levels at our properties and joint ventures were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase I

 

82

%

Plainview Point Office Center Phases I and II

 

73

%

The Willows of Plainview Phase I

 

86

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (9.70%)

 

80

%

Golf Brook Apartments (3.97%)

 

96

%

Plainview Point Office Center Phase III (4.96%)

 

74

%

Blankenbaker Business Center 1A (29.61%)

 

100

%

Lakeshore Business Center Phase I (10.92%)

 

71

%

Lakeshore Business Center Phase II (10.92%)

 

77

%

Lakeshore Business Center Phase III (10.92%)

 

91

%

 

The following table illustrates our cash flows used in or provided by operating activities, investing activities and financing activities:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Operating activities

 

$

451,170

 

Investing activities

 

12,088

 

Financing activities

 

(566,573

)

 

 

 

 

Net decrease in cash and equivalents

 

$

(103,315

)

 

NTS-PROPERTIES V

NTS-Properties V, a Maryland limited partnership (referred to in this discussion as “we,” “us” or “our”) owned one commercial property and had investments in four joint venture properties.  We generated almost all of our net operating income from property operations.  In order to evaluate our overall portfolio, management analyzed the operating performance of the properties based on operating segments, which included commercial and multifamily operations.  The financial information of the operating segments was prepared consistent with the basis and manner in which our management internally disaggregated financial information for the purpose of decision making.

The following table of segment data is provided:

 

 

 

Period Ended December 27, 2004

 

 

 

Multifamily

 

Commercial

 

Partnership

 

Total

 

Total revenues

 

$

1,111,361

 

$

3,473,442

 

$

-

 

$

4,584,803

 

Operating expenses and operating expenses reimbursed to affiliate

 

531,975

 

1,199,836

 

-

 

1,731,811

 

Depreciation and amortization

 

258,567

 

920,405

 

15,074

 

1,194,046

 

Total interest expense

 

(704,842

)

(1,248,511

)

(93,326

)

(2,046,679

)

Loss from continuing operations

 

(548,923

)

(753,960

)

(605,376

)

(1,908,259

)

Discontinued operations, net

 

-

 

(23,048

)

-

 

(23,048

)

Net loss

 

(548,923

)

(777,008

)

(605,376

)

(1,931,307

)

 

39

 

 




Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase II

 

$

402,877

 

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (90.30%)

 

$

1,111,361

 

Lakeshore Business Center Phase I (81.19%)

 

$

1,465,488

 

Lakeshore Business Center Phase II (81.19%)

 

$

1,407,525

 

Lakeshore Business Center Phase III (81.19%)

 

$

600,429

 

 

The occupancy levels at our properties and joint ventures were as follows:

 

 

 

December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase II

 

56

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (90.30%)

 

74

%

Lakeshore Business Center Phase I (81.19%)

 

66

%

Lakeshore Business Center Phase II (81.19%)

 

75

%

Lakeshore Business Center Phase III (81.19%)

 

100

%

 

The average occupancy levels at our properties and joint ventures were as follows:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

Commonwealth Business Center Phase II

 

60

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

The Willows of Plainview Phase II (90.30%)

 

80

%

Lakeshore Business Center Phase I (81.19%)

 

71

%

Lakeshore Business Center Phase II (81.19%)

 

77

%

Lakeshore Business Center Phase III (81.19%)

 

91

%

 

The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:

 

 

 

Period Ended
December 27,

 

 

 

2004

 

Operating activities

 

$

463,347

 

Investing activities

 

(417,350

)

Financing activities

 

78,059

 

 

 

 

 

Net increase in cash and equivalents

 

$

124,056

 

 

 

40

 

 




NTS-PROPERTIES VI

NTS-Properties VI, a Maryland limited partnership (referred to in this discussion as “we,” “us” or “our”) owned four multifamily properties and had investments in two joint venture properties.  We generated almost all of our net operating income from property operations.  In order to evaluate our overall portfolio, management analyzed the operating performance of the properties based on operating segments, which included commercial and multifamily operations.  The financial information of the operating segments was prepared consistent with the basis and manner in which our management internally disaggregated financial information for the purpose of decision making.

The following table of segment data is provided:

 

 

Period Ended December 27, 2004

 

 

 

Multifamily

 

Commercial

 

Partnership

 

Total

 

Total revenues

 

$

5,158,377

 

$

736,596

 

$

-

 

$

5,894,973

 

Operating expenses and operating expenses reimbursed to affiliate

 

2,032,244

 

337,778

 

-

 

2,370,022

 

Depreciation and amortization

 

1,513,466

 

225,704

 

78,771

 

1,817,941

 

Total interest expense

 

(1,276,438

)

(22,272

)

(884,263

)

(2,182,973

)

(Loss) income from continuing operations

 

(291,932

)

46,396

 

(1,729,324

)

(1,974,860

)

Discontinued operations, net

 

(10,569

)

-

 

-

 

(10,569

)

Net (loss) income

 

(302,501

)

46,396

 

(1,729,324

)

(1,985,429

)

 

Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

 

Sabal Park Apartments

 

$

1,954,657

 

Willow Lake Apartments

 

$

2,054,065

 

Park Place Apartments Phase I

 

$

1,583,409

 

Park Place Apartments Phase III

 

$

1,520,903

 

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

 

Golf Brook Apartments (96.03%)

 

$

2,953,352

 

Plainview Point Office Center Phase III (95.04%)

 

$

736,596

 

 

The occupancy levels at our properties and joint ventures were as follows:

 

 

December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

 

Sabal Park Apartments

 

99

%

Willow Lake Apartments

 

87

%

Park Place Apartments Phase I

 

86

%

Park Place Apartments Phase III

 

85

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

 

Golf Brook Apartments (96.03%)

 

98

%

Plainview Point Office Center Phase III (95.04%)

 

91

%

 

41




The average occupancy levels at our properties and joint ventures were as follows:

 

 

Period Ended
December 27,

 

 

 

2004

 

Wholly-Owned Properties

 

 

 

 

Sabal Park Apartments

 

96

%

Willow Lake Apartments

 

86

%

Park Place Apartments Phase I

 

83

%

Park Place Apartments Phase III

 

90

%

 

 

 

 

Joint Venture Properties (Ownership % on December 27, 2004)

 

 

 

 

Golf Brook Apartments (96.03%)

 

96

%

Plainview Point Office Center Phase III (95.04%)

 

74

%

 

The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:

 

 

Period Ended
December 27,

 

 

 

2004

 

Operating activities

 

$

1,665,653

 

Investing activities

 

(770,830

)

Financing activities

 

(358,174

)

 

 

 

 

Net increase in cash and equivalents

 

$

536,649

 

 

NTS-PROPERTIES VII

NTS-Properties VII, Ltd. (referred to in this discussion as “we,” “us” or “our”) owned two multifamily properties and had investments in one joint venture property.  We generated almost all of our net operating income from property operations.