10-Q 1 a13-13697_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2013

 

OR

 

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

 

For the transition period from                              to                            

 

Commission file number 001-32389

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-2111139

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

600 North Hurstbourne Parkway

 Suite 300

Louisville, Kentucky

 

40222

(Address of principal executive offices)

 

(Zip Code)

 

(502) 426-4800

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 9, 2013, there were 11,095,274 of the registrant’s limited partnership units outstanding.

 

 

 



Table of Contents

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

4

 

 

Item 1 — Financial Statements

4

Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012

4

Condensed Consolidated Statement of Equity as of June 30, 2013 (Unaudited)

4

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)

6

Notes to Condensed Consolidated Financial Statements

7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

34

Item 4 — Controls and Procedures

34

 

 

PART II — OTHER INFORMATION

34

 

 

Item 1 — Legal Proceedings

34

Item 1A — Risk Factors

35

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3 — Defaults Upon Senior Securities

35

Item 4 — Mine Safety Disclosures

35

Item 5 — Other Information

35

Item 6 — Exhibits

36

Signatures

39

 

2



Table of Contents

 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements included in this Quarterly Report on Form 10-Q, particularly those included in Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), constitute “forward-looking statements.” These forward-looking statements include discussion and analysis of our financial condition, including our ability to rent space on favorable terms, our ability to address debt maturities and fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our unit holders and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” and variations of these words and similar expressions are intended to identify forward-looking statements and indicate that it is possible that the event may not occur.  If these events do not occur, the result which we expected also may or may not occur in a different manner, which may be more or less favorable to us.  We do not undertake any obligation to update these forward-looking statements.

 

Any forward-looking statements included in MD&A, or elsewhere in this report, are not historical facts, but reflect the intent, belief or current expectations of our managing general partner based on its knowledge and understanding of the business and industry, the economy and other future conditions only as of the date of this report and may ultimately prove to be incorrect or false.  These statements are not guarantees of future performance, and we caution unit holders not to place undue reliance on forward-looking statements. Actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a number of factors, including, but not limited to, the factors listed and described under “Risk Factors” in our filings with the United States Securities and Exchange Commission (the “SEC”), particularly our most recent Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 22, 2013, as they may be revised or supplemented by us in subsequent reports on form 10-Q and other fillings with the SEC, which are incorporated herein by reference.

 

3


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

ASSETS:

 

 

 

 

 

Cash and equivalents

 

$

1,533,913

 

$

1,240,818

 

Cash and equivalents - restricted

 

2,967,307

 

4,021,586

 

Accounts receivable, net of allowance for doubtful accounts of $100,468 at June 30, 2013 and $81,163 at December 31, 2012, respectively

 

1,451,831

 

1,770,696

 

Land, buildings and amenities, net

 

278,100,026

 

285,383,595

 

Investments in and advances to joint ventures

 

5,321,615

 

4,977,948

 

Investment in and advances to tenant in common

 

407,421

 

 

Other assets

 

3,746,716

 

4,169,736

 

 

 

 

 

 

 

Total assets

 

$

293,528,829

 

$

301,564,379

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Mortgages and notes payable

 

$

261,347,334

 

$

264,772,316

 

Accounts payable and accrued expenses

 

3,035,943

 

4,931,794

 

Accounts payable and accrued expenses due to affiliates

 

349,005

 

336,688

 

Distributions payable

 

554,764

 

554,764

 

Security deposits

 

991,303

 

932,978

 

Other liabilities

 

5,555,793

 

4,399,016

 

Investments in and advances to tenants in common

 

1,235,585

 

1,806,948

 

 

 

 

 

 

 

Total liabilities

 

273,069,727

 

277,734,504

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 14)

 

 

 

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

Partners’ equity

 

15,259,723

 

18,093,842

 

Noncontrolling interests

 

5,199,379

 

5,736,033

 

 

 

 

 

 

 

Total equity

 

20,459,102

 

23,829,875

 

 

 

 

 

 

 

Total liabilities and equity

 

$

293,528,829

 

$

301,564,379

 

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Statement of Equity (1) as of June 30, 2013

(Unaudited)

 

 

 

(Unaudited)

 

 

 

General
Partner
Interests

 

Limited
Partners’
Interests

 

General 
Partner

 

Limited 
Partners

 

Noncontrolling
Interests

 

Total

 

EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial equity

 

714,491

 

10,667,117

 

$

3,131,381

 

$

46,750,444

 

$

-

 

$

49,881,825

 

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

9,952,176

 

9,952,176

 

Net loss prior years

 

-

 

-

 

(154,367 

)

(1,810,921

)

(3,475,143

)

(5,440,431

)

Consolidated net loss current year

 

-

 

-

 

(111,057

)

(1,613,535

)

(330,679

)

(2,055,271

)

Cash distributions declared to date

 

-

 

-

 

(1,864,822

)

(27,711,341

)

(946,975

)

(30,523,138

)

Retirement of limited partnership interests to date

 

-

 

(286,334

)

-

 

(1,356,059

)

-

 

(1,356,059

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances on June 30, 2013

 

714,491

 

10,380,783

 

$

1,001,135

 

$

14,258,588

 

$

5,199,379

 

$

20,459,102

 

 

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

 


(1) For the periods presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Accounting Standards Codification Topic 220 Comprehensive Income.

 

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Table of Contents

 

NTS Realty Holdings Limited Partnership

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended 
June 30,

 

Six Months Ended 
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

REVENUE:

 

 

 

 

 

 

 

 

 

Rental income

 

$

14,269,687

 

$

13,820,073

 

$

28,311,585

 

$

27,402,477

 

Tenant reimbursements

 

431,570

 

476,641

 

856,100

 

935,765

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

14,701,257

 

14,296,714

 

29,167,685

 

28,338,242

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Operating expenses

 

3,765,937

 

4,115,823

 

6,822,285

 

7,898,746

 

Operating expenses reimbursed to affiliates

 

1,554,765

 

1,516,082

 

3,092,855

 

3,060,378

 

Management fees

 

732,005

 

707,938

 

1,540,345

 

1,409,111

 

Property taxes and insurance

 

1,986,199

 

1,788,008

 

3,935,035

 

3,624,925

 

Professional and administrative expenses

 

677,685

 

186,251

 

1,610,182

 

437,992

 

Professional and administrative expenses reimbursed to affiliates

 

449,026

 

433,534

 

967,748

 

870,248

 

Depreciation and amortization

 

4,108,662

 

4,467,263

 

8,415,817

 

8,895,754

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

13,274,279

 

13,214,899

 

26,384,267

 

26,197,154

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

1,426,978

 

1,081,815

 

2,783,418

 

2,141,088

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

8,162

 

17,537

 

1,616,694

 

37,333

 

Interest expense

 

(3,433,832

)

(3,488,704

)

(6,853,041

)

(6,985,240

)

Loss on disposal of assets

 

(31,835

)

(65,970

)

(42,287

)

(164,315

)

Loss from investments in joint ventures

 

(5,477

)

(71,597

)

(46,839

)

(163,576

)

(Loss) income from investments in tenants in common

 

(207,680

)

(595,941

)

486,784

 

(1,009,726

)

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED NET LOSS

 

(2,243,684

)

(3,122,860

)

(2,055,271

)

(6,144,436

)

Net loss attributable to noncontrolling interests

 

(179,605

)

(256,959

)

(330,679

)

(551,204

)

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(2,064,079

)

$

(2,865,901

)

$

(1,724,592

)

$

(5,593,232

)

 

 

 

 

 

 

 

 

 

 

Loss allocated to limited partners

 

$

(2,099,200

)

$

(2,921,760

)

$

(1,922,920

)

$

(5,748,759

)

Net loss attributable to noncontrolling interests allocated to limited partners

 

(168,040

)

(240,412

)

(309,385

)

(515,709

)

 

 

 

 

 

 

 

 

 

 

NET LOSS ALLOCATED TO LIMITED PARTNERS

 

$

(1,931,160

)

$

(2,681,348

)

$

(1,613,535

)

$

(5,233,050

)

 

 

 

 

 

 

 

 

 

 

Loss per limited partnership unit

 

$

(0.21

)

$

(0.28

)

$

(0.19

)

$

(0.55

)

Net loss attributable to noncontrolling interests per limited partnership unit

 

(0.02

)

(0.02

)

(0.03

)

(0.05

)

 

 

 

 

 

 

 

 

 

 

NET LOSS PER LIMITED PARTNERSHIP UNIT

 

$

(0.19

)

$

(0.26

)

$

(0.16

)

$

(0.50

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partnership interests

 

10,380,783

 

10,380,783

 

10,380,783

 

10,380,783

 

 

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

 

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Table of Contents

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

 

 

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

OPERATING ACTIVITIES:

 

 

 

 

 

Consolidated net loss

 

$

(2,055,271

)

$

(6,144,436

)

Adjustments to reconcile consolidated net loss to net cash provided by operating activities:

 

 

 

 

 

Loss on disposal of assets

 

42,287

 

164,315

 

Depreciation and amortization

 

8,762,944

 

9,260,908

 

Loss from investments in joint ventures

 

46,839

 

163,576

 

(Income) loss from investments in tenants in common

 

(486,784

)

1,009,726

 

Changes in assets and liabilities:

 

 

 

 

 

Cash and equivalents — restricted

 

1,054,279

 

(850,830

)

Accounts receivable

 

318,865

 

64,160

 

Other assets

 

39,876

 

859,997

 

Accounts payable and accrued expenses

 

(1,895,851

)

(1,596,264

)

Accounts payable and accrued expenses due to affiliates

 

12,317

 

28,427

 

Security deposits

 

58,325

 

59,103

 

Other liabilities

 

1,156,777

 

1,202,746

 

 

 

 

 

 

 

Net cash provided by operating activities

 

7,054,603

 

4,221,428

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Additions to land, buildings and amenities

 

(1,136,715

)

(2,139,054

)

Investments in joint ventures

 

(390,506

)

(2,275,600

)

Investments in tenants in common

 

(612,000

)

-

 

 

 

 

 

 

 

Net cash used in investing activities

 

(2,139,221

)

(4,414,654

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Distributions to noncontrolling interest holders

 

(205,975

)

(222,500

)

Distributions from tenants in common

 

120,000

 

60,000

 

Revolving note payable, net

 

(1,247,313

)

3,303,880

 

Principal payments on mortgages payable

 

(2,177,669

)

(2,015,484

)

Additions to loan costs

 

(1,803

)

-

 

Cash distributions

 

(1,109,527

)

(1,109,527

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(4,622,287

)

16,369

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

 

293,095

 

(176,857

)

 

 

 

 

 

 

CASH AND EQUIVALENTS, beginning of period

 

1,240,818

 

1,165,137

 

 

 

 

 

 

 

CASH AND EQUIVALENTS, end of period

 

$

1,533,913

 

$

988,280

 

 

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

 

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Table of Contents

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The unaudited condensed consolidated financial statements included herein should be read in conjunction with NTS Realty Holdings Limited Partnership’s (“NTS Realty”) 2012 annual report on Form 10-K as filed with the Securities and Exchange Commission on March 22, 2013.  The Condensed Consolidated Balance Sheet as of December 31, 2012, has been derived from the audited consolidated financial statements of NTS Realty as of that date.  Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  In the opinion of NTS Realty Capital, Inc., our managing general partner (“NTS Realty Capital”), all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation have been made to the accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2013 and 2012.  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.  As used in this quarterly report on Form 10-Q, the terms “we,” “us,” or “our,” as the context requires, may refer to NTS Realty, its wholly-owned properties, properties held by wholly-owned subsidiaries, its interests in consolidated and unconsolidated joint venture investments or interests in properties held as a tenant in common with an unaffiliated third party.

 

Note 1 — Summary of Significant Accounting Policies

 

Organization and Distribution Policy

 

We are in the business of developing, constructing, owning and operating multifamily properties, commercial and retail real estate.  As of June 30, 2013, we owned wholly, as a tenant in common with an unaffiliated third party or through joint venture investments with both affiliated and unaffiliated third parties, 24 properties, comprised of 15 multifamily properties, 7 commercial properties and 2 retail properties.  The properties are located in and around Louisville (7) and Lexington (1), Kentucky; Fort Lauderdale (3) and Orlando (3), Florida; Indianapolis (4), Indiana; Memphis (1) and Nashville (2), Tennessee; Richmond (2), Virginia; and Atlanta (1), Georgia.  Our commercial properties aggregate approximately 736,000 square feet, which includes approximately 125,000 square feet at our property held as a joint venture with an unaffiliated third party, and our retail properties contain approximately 47,000 square feet.  We own multifamily properties containing 4,393 rental units, which includes 686 rental units at our properties held as a tenant in common with an unaffiliated third party.

 

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

 

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

 

We paid quarterly distributions of $0.05 per unit to limited partners on April 12, 2013 and July 12, 2013.

 

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Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of all wholly-owned properties and properties that are less than wholly-owned, but which we control or for which we are the primary beneficiary.  The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 Consolidation provides guidance on the identification and accounting for variable interest entities (“VIEs”).  We consolidate a VIE when we are determined to be the primary beneficiary based on the qualitative factors affecting:

 

·                  Our power to direct the activities of a variable interest entity that most significantly affect the variable interest entity’s economic performance; and

 

·                  Our obligation to absorb losses of the variable interest entity that could potentially be significant to the variable interest entity or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity.

 

Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements and other contractual arrangements, when determining the party with the controlling financial interest, as defined, by accounting standards.  There have been no changes during 2013 in conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE.  During the six months ended June 30, 2013, we did not provide financial or other support to a previously identified VIE that we were not previously contractually obligated to provide.  Our unconsolidated joint venture interests and our properties owned as a tenant in common with an unaffiliated third party are accounted for under the equity method.  Intercompany transactions and balances have been eliminated.

 

We own a joint venture investment with an unaffiliated third party in a commercial office building located in Louisville, Kentucky. The building, known as 600 North Hurstbourne, was developed by our affiliate, NTS Development Company.  This joint venture, Campus One, LLC, is a variable interest entity. We are not the primary beneficiary.  NTS Corporation through its subsidiaries, NTS Development Company and NTS Management Company, holds the right to receive significant benefits through its agreement as developer and manager, respectively.  Our interest in this variable interest entity is accounted for using the equity method.  Our ownership interest is reflected as investments in and advances to joint ventures on our condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012.

 

On October 31, 2012, we entered into a joint venture investment agreement with an unaffiliated third party to invest in a commercial office building totaling approximately 125,000 square feet at 700 N. Hurstbourne Parkway on the ShelbyHurst property in Louisville, Kentucky, adjacent to our 600 N. Hurstbourne property.  The building is being developed by our affiliate, NTS Development Company, with construction expected to be completed in late 2014 to early 2015. The building will be managed by an affiliate of NTS Development Company.  We are obligated to contribute approximately $2.6 million, for a 49% ownership interest.  We intend to fund our share of this investment with cash on hand, cash from operations or borrowing on new or existing debt.  At June 30, 2013, we had funded approximately $0.3 million of this commitment.  On July 1, 2013, the joint venture entered into a $16.5 million construction financing agreement with a bank. We are a guarantor under this agreement and are proportionately liable for this obligation, limited to our 49% ownership interest.  The joint venture expects to invest a total of $22.0 million in the construction of the building and completion of tenant space.

 

This joint venture, Campus Two, LLC, is a variable interest entity.  We are not the primary beneficiary.  NTS Corporation through its subsidiaries, NTS Development Company and NTS Management Company, holds the right to receive significant benefits through its agreement as developer and manager, respectively.  NTS Development Company is responsible for the development of the building on time and within budget.  The development fee for these services is 2% of the projected costs.  NTS Management Company is responsible for leasing and managing the building and is entitled to earn leasing commissions, management fees, construction management fees, asset management fees and a disposition fee for its services.  Our interest in this variable interest entity is accounted for using the equity method.  Our ownership interest is reflected as investments in and advances to joint ventures on our condensed consolidated balance sheet as of June 30, 2013 and December 31, 2012.

 

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Fair Value of Financial Instruments

 

FASB ASC Topic 820 Fair Value Measurements and Disclosures requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.  FASB ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement.

 

FASB ASC Topic 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

 

·                  Level 1:  Quoted market prices in active markets for identical assets or liabilities.

 

·                  Level 2:  Observable market based inputs or unobservable inputs that are corroborated by market data.

 

·                  Level 3:  Unobservable inputs that are not corroborated by market data.

 

We did not have any material financial assets or liabilities that are required to be recorded at fair value as of June 30, 2013 or December 31, 2012.

 

Financial Instruments

 

FASB ASC Topic 825 Financial Instruments requires disclosures about fair value of financial instruments in both interim and annual financial statements.

 

Certain of our assets and liabilities are considered financial instruments.  Fair value estimates, methods and assumptions are set forth below.

 

The book values of cash and equivalents, cash and equivalents - restricted, trade receivables and trade payables are considered representative of their respective fair values because of the immediate or short-term maturity of these financial instruments.

 

Deferred compensation plans: Our Officer and Director Plans as of June 30, 2013 and December 31, 2012 reflected liabilities of approximately $1.0 million and $0.9 million, respectively, the fair market value of 136,327 and 132,022 units, respectively, and are included in our other liabilities using Level 1 measurement. Compensation expense for the Officer and Director Plans for the six months ended June 30, 2013 and 2012 totaled approximately $29,000 and $18,000, respectively.

 

Mortgages and notes payable: As of June 30, 2013 and December 31, 2012, we determined the estimated fair values of our mortgages and notes payable using Level 2 measurement were approximately $278.1 million and $293.1 million, respectively, by discounting expected future cash payments utilizing a discount rate equivalent to the rate at which similar instruments would be originated at the reporting date.

 

Note 2 — Going Private Proposal

 

On December 27, 2012, NTS Realty and NTS Realty Capital entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NTS Merger Parent, LLC (“Parent”), an entity controlled by our founder and Chairman, J.D. Nichols, and our President and Chief Executive Officer, Brian F. Lavin, and NTS Merger Sub, LLC (“Merger Sub”, and together with Mr. Nichols, Mr. Lavin, Parent and certain of their respective affiliates, the “Purchasers”), a wholly-owned subsidiary of Parent. Upon consummation of the transactions proposed in the Merger Agreement, Merger Sub would merge with and into NTS Realty and NTS Realty would continue as the surviving entity (the “Merger”).

 

If the Merger Agreement is adopted by our limited partners and the Merger is consummated, all of our Units, other than Units owned by the Purchasers, will be canceled and converted automatically into the right to receive a cash payment equal to $7.50 per Unit (the “Merger Consideration”). Immediately prior to the effective time of the Merger, the compensation deferred by each non-employee director of NTS Realty Capital and represented by phantom units pursuant to the Director Plan will be issued to such non-employee director as Units

 

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and will be converted automatically into and thereafter represent the right to receive the Merger Consideration. In connection with the foregoing, an aggregate amount of $610,185 is expected to be paid to the non-employee directors of NTS Realty Capital. Consummation of the Merger is subject to certain conditions, including among others,

 

·                  approval of the Merger Agreement and the Merger by the holders of a majority of our Units, voting together as a single class;

 

·                  approval of the Merger Agreement and the Merger by the holders of a majority of our outstanding Units not owned by the Purchasers; and

 

·                  receipt by the Purchasers of financing pursuant to a debt commitment letter, which has been obtained from an unaffiliated financing source on commercially standard terms (the “Commitment Letter”), that is sufficient to pay the Merger Consideration and related expenses of the transaction.

 

The Merger Agreement may be terminated by either the Purchasers or us (by action of the special committee of the board of directors of NTS Realty Capital) if the merger has not been consummated by September 30, 2013 (the “Termination Date”) or if the special committee has effected a change in recommendation by, among other possible actions, approving, recommending or entering into an agreement with respect to an alternative transaction involving a substantial portion of our equity interests or assets.

 

Also on December 27, 2012, we entered into a Voting and Support Agreement (the “Support Agreement”) with the Purchasers in which they have agreed to vote their Units in favor of approving the Merger Agreement and the Merger. As of the date hereof, the Purchasers collectively own of record Units representing approximately 59% of the aggregate voting power entitled to vote on approval of the Merger Agreement.

 

At this point in time, it is not realistic that the Merger and related transactions will be completed by the Termination Date, and while there can be no assurance that the Merger Agreement will be extended beyond the Termination Date, the terms of the Merger Agreement allow for an extension of the Termination Date upon the mutual agreement of the parties.  There can also be no assurance that the Merger Agreement will be approved by the unitholders, that the Purchasers will receive sufficient financing or that the Merger will be consummated on the terms described herein or at all.

 

Note 3 — Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Note 4 — Real Estate Transactions

 

Acquisitions

 

FASB ASC Topic 805 Business Combinations requires the acquiring entity in a business combination to measure the assets acquired, liabilities assumed (including contingencies) and any noncontrolling interests at their fair values on the acquisition date.  The statement also requires that acquisition-related transaction costs be expensed as incurred and acquired research and development value be capitalized.  In addition, acquisition-related restructuring costs are to be capitalized.

 

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

 

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are recorded for the portion of the equity in a subsidiary not attributable to us.

 

FASB ASC Topic 360 Property, Plant, and Equipment specifies circumstances in which certain long-lived assets must be reviewed for impairment.  If this review indicates 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 other factors, 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.  Application of this standard for the three and six months ended June 30, 2013 and 2012, did not result in an impairment loss.

 

During the six months ended June 30, 2013 and 2012, we did not acquire any properties.

 

Dispositions

 

During the six months ended June 30, 2013 and 2012, we did not dispose of any properties.

 

Note 5 — Concentration of Credit Risk

 

We own and operate through wholly-owned subsidiaries, as a tenant in common with an unaffiliated third party or through joint venture investments with both affiliated and unaffiliated third parties, multifamily, commercial and retail properties in Louisville and Lexington, Kentucky; Fort Lauderdale and Orlando, Florida; Indianapolis, Indiana; Memphis and Nashville, Tennessee; Richmond, Virginia; and Atlanta, Georgia.

 

Our financial instruments that are exposed to concentrations of credit risk consist of cash and equivalents and cash and equivalents - restricted.  We maintain our cash accounts primarily with banks located in Kentucky.

 

Note 6 — Cash and Equivalents

 

Cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less.  We have a cash management program, which provides for the overnight investment of excess cash balances.  Under an agreement with a bank, excess cash is invested in a mutual fund for U.S. government and agency securities each night.

 

Note 7 — Cash and Equivalents - Restricted

 

Cash and equivalents - restricted represents cash on hand and short-term, highly liquid investments with initial maturities of three months or less which have been escrowed with certain mortgage companies and banks for property taxes, insurance and tenant improvements in accordance with certain loan and lease agreements and certain security deposits.

 

Note 8 — Property and Depreciation

 

Land, buildings and amenities are stated at cost.  Costs directly associated with the acquisition, development and construction of a project are capitalized.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally 5-30 years for land improvements, 7-30 years for buildings and improvements and 5-30 years for amenities.  Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease. Depreciation expense for the three months ended June 30, 2013 and 2012 was approximately $4.1 million and $4.5 million, respectively.  Depreciation expense for the six months ended June 30, 2013 and 2012 was approximately $8.4 million and $8.9 million, respectively.

 

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Note 9 Investments in and Advances to Joint Ventures

 

We own a joint venture interest in and operate the following properties:

 

·                  600 North Hurstbourne: Approximately 125,000 square foot office building in Louisville, Kentucky.  At June 30, 2013, we had funded approximately $5.3 million for our 49% ownership interest as a joint venture with an unaffiliated third party.

 

·                  700 North Hurstbourne: Office building under construction in Louisville, Kentucky.  We are obligated to contribute approximately $2.6 million, for a 49% ownership interest as a joint venture with an unaffiliated third party.  At June 30, 2013, we had funded approximately $0.3 million of this commitment.

 

Presented below are the summarized balance sheets and statements of operations for these properties:

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Summarized Balance Sheets

 

 

 

 

 

Land, buildings and amenities, net

 

$

17,733,515

 

$

16,381,730

 

Other, net

 

4,184,880

 

3,364,752

 

Total assets

 

$

21,918,395

 

$

19,746,482

 

 

 

 

 

 

 

Mortgage payable and other liabilities

 

$

11,057,956

 

$

9,587,404

 

Equity

 

10,860,439

 

10,159,078

 

Total liabilities and equity

 

$

21,918,395

 

$

19,746,482

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

 

Summarized Statements of Operations

 

 

 

 

 

 

 

 

 

Revenue

 

$

607,976

 

$

287,588

 

$

1,158,370

 

$

332,839

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

50,999

 

$

(91,582

)

$

25,929

 

$

(257,339

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,176

)

$

(146,117

)

$

(95,589

)

$

(333,829

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to investments in joint ventures

 

$

(5,477

)

$

(71,597

)

$

(46,839

)

$

(163,576

)

 

 

 

 

 

 

 

 

 

 

Contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

600 North Hurstbourne

 

$

182,256

 

$

1,589,600

 

$

182,256

 

$

2,275,600

 

 

 

 

 

 

 

 

 

 

 

700 North Hurstbourne

 

$

98,000

 

$

-

 

$

208,250

 

$

-

 

 

Note 10 — Investments in and Advances to Tenants in Common

 

We own a tenant in common interest in and operate the following properties:

 

·                  The Overlook at St. Thomas Apartments: 484-unit luxury apartment complex in Louisville, Kentucky.  We own a 60% interest as a tenant in common with an unaffiliated third party.

 

·                  Creek’s Edge at Stony Point Apartments: 202-unit luxury apartment complex in Richmond, Virginia.  We own a 51% interest as a tenant in common with an unaffiliated third party.

 

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Presented below are the summarized balance sheets and statements of operations for these properties:

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Summarized Balance Sheets

 

 

 

 

 

Land, buildings and amenities, net

 

$

51,957,634

 

$

53,388,802

 

Other, net

 

2,785,139

 

1,036,366

 

Total assets

 

$

54,742,773

 

$

54,425,168

 

 

 

 

 

 

 

Mortgages payable and other liabilities

 

$

54,154,488

 

$

55,597,106

 

Equity

 

588,285

 

(1,171,938

)

Total liabilities and equity

 

$

54,742,773

 

$

54,425,168

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

 

Summarized Statements of Operations

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,527,726

 

$

2,352,976

 

$

5,040,794

 

$

4,688,029

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

431,389

 

$

(234,792

)

$

1,064,221

 

$

(159,335

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(370,835

)

$

(1,056,264

)

$

760,223

 

$

(1,808,632

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to investments in tenants in common

 

$

(207,680

)

$

(595,941

)

$

486,784

 

$

(1,009,726

)

 

 

 

 

 

 

 

 

 

 

Contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Overlook at St. Thomas Apartments

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Creek’s Edge at Stony Point Apartments

 

$

-

 

$

-

 

$

1,200,000

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Overlook at St. Thomas Apartments

 

$

100,000

 

$

100,000

 

$

200,000

 

$

100,000

 

 

 

 

 

 

 

 

 

 

 

Creek’s Edge at Stony Point Apartments

 

$

-

 

$

-

 

$

-

 

$

-

 

 

The continuing net losses of The Overlook at St. Thomas Apartments reduced our investment to zero.  Subsequent to our investment being reduced to zero, we recognized losses in excess of our investments and recorded the resulting liability on our unaudited condensed consolidated balance sheets at June 30, 2013 and December 31, 2012. The continuing net losses of Creek’s Edge at Stony Point Apartments reduced our investment to zero at December 31, 2012.  Subsequent to our investment being reduced to zero, we recognized losses in excess of our investments and recorded the resulting liability on our unaudited condensed consolidated balance sheet at December 31, 2012. During the six months ended June 30, 2013, we recognized a capital contribution and recorded the resulting asset on our unaudited condensed consolidated balance sheet at June 30, 2013.

 

Note 11 — Mortgages and Notes Payable

 

Mortgages and notes payable consist of the following:

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Revolving note payable to a bank for $10.0 million, with interest payable in monthly installments at a variable rate based on LIBOR one-month rate plus 2.50%, currently 2.69%, due September 30, 2013

 

$

7,036,901

 

$

8,284,214

 

 

 

 

 

 

 

Note payable to an insurance company in monthly installments of principal and interest, bearing fixed interest at 2.99%, maturing October 28, 2013

 

42,701

 

105,951

 

 

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(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Mortgage payable to a bank in monthly installments of principal and interest, bearing interest at a variable rate based on LIBOR one-month rate plus 3.50%, currently 3.69%, due September 1, 2014, secured by certain land, buildings and amenities with a carrying value of $16,055,728. The mortgage is guaranteed by Mr. Nichols and Mr. Lavin

 

19,980,602

 

20,196,602

 

 

 

 

 

 

 

Mortgage payable to an insurance company in monthly installments of principal and interest, bearing fixed interest at 8.45%, maturing November 1, 2015, secured by certain land, buildings and amenities with a carrying value of $1,618,858

 

949,871

 

1,123,399

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.11%, maturing December 1, 2014, secured by certain land, buildings and amenities with a carrying value of $9,977,486

 

10,618,596

 

10,737,113

 

 

 

 

 

 

 

Mortgage payable to a bank in monthly installments of principal and interest, bearing fixed interest at 6.03%, maturing September 1, 2018, secured by certain land, buildings and amenities with a carrying value of $28,709,366

 

25,793,744

 

25,954,857

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing interest at a variable rate based on LIBOR one-month rate plus 3.33%, currently 3.52%, maturing July 1, 2016, secured by certain land, buildings and amenities with a carrying value of $15,701,846

 

14,098,892

 

14,241,632

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing interest at a variable rate based on LIBOR one-month rate plus 3.50%, currently 3.69%, maturing July 1, 2016, secured by certain land, buildings and amenities with a carrying value of $10,282,062

 

9,265,072

 

9,356,127

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $17,612,346

 

13,236,691

 

13,341,798

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $31,837,317

 

25,720,809

 

25,925,048

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $16,788,764

 

16,046,927

 

16,174,350

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $30,632,612

 

26,363,829

 

26,573,174

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $15,200,456

 

10,850,371

 

10,936,529

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $20,032,429

 

29,174,066

 

29,405,726

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $8,712,806

 

10,426,454

 

10,509,246

 

 

 

 

 

 

 

Mortgage payable to Federal Home Loan Mortgage Corporation in monthly installments of principal and interest, bearing fixed interest at 5.40%, maturing January 1, 2020, secured by certain land, buildings and amenities with a carrying value of $11,624,676

 

17,070,996

 

17,206,550

 

 

 

 

 

 

 

Mortgage payable to an insurance company with interest payable in monthly installments until June 1, 2013, thereafter payable in monthly installments of principal and interest, bearing fixed interest at 5.09%, maturing May 1, 2018, secured by certain land, buildings and amenities with a carrying value of $32,246,852

 

24,670,812

 

24,700,000

 

 

 

 

 

 

 

Total mortgages and notes payable

 

$

261,347,334

 

$

264,772,316

 

 

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Our $10.0 million revolving note payable to a bank is due September 30, 2013.  As of June 30, 2013, our availability to draw on our revolving note payable was approximately $3.0 million.

 

Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of our mortgages and notes payable on June 30, 2013, was approximately $278.1 million, which was determined using Level 2 measurement.

 

Interest paid for the six months ended June 30, 2013 and 2012 was approximately $6.7 million and $6.8 million, respectively.

 

All but one of our mortgages may be prepaid.  Mortgages where prepayment is permitted are generally subject to either a yield-maintenance premium or defeasance.  Certain mortgages and notes payable contain covenants and requirements that we maintain specified debt limits and ratios related to our debt balances and property values.  We complied with all covenants and requirements at June 30, 2013.  We anticipate renewing or refinancing our mortgages and notes payable coming due within the next twelve months.

 

Mortgages payable for our unconsolidated tenants in common properties consist of the following:

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Mortgage payable to a bank in monthly installments of principal and interest, bearing fixed interest at 5.72%, maturing April 11, 2017, secured by certain land, buildings and amenities with a carrying value of $30,430,593 (1)

 

$

32,873,802

 

$

33,174,478

 

 

 

 

 

 

 

Mortgage payable to an insurance company in monthly installments of principal and interest, bearing fixed interest at 5.99%, maturing November 15, 2017, secured by certain land, buildings and amenities with a carrying value of $21,527,040 (2)

 

$

20,470,783

 

$

21,830,408

 

 


(1) We are proportionately liable for this mortgage, limited to our 60% interest as a tenant in common.

(2) We are jointly and severally liable under this mortgage.

 

Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of our mortgages payable for our unconsolidated tenants in common properties at June 30, 2013, was approximately $58.4 million, which was determined using Level 2 measurement.

 

Mortgages payable for our unconsolidated joint venture properties consist of the following:

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

Construction mortgage payable to a bank for $10.5 million with interest payable in monthly installments, bearing interest at a variable rate based on LIBOR one-month rate plus 2.40%, currently 2.59%, maturing December 14, 2014, secured by certain buildings and amenities with a carrying value of $16,475,841 (3)

 

$

9,803,363

 

$

9,032,551

 

 

 

 

 

 

 

Construction mortgage payable to a bank for $16.5 million with interest payable in monthly installments, bearing interest at a variable rate based on LIBOR one-month rate plus 2.40%, currently 2.59%, maturing July 1, 2017, secured by certain buildings and amenities under construction (4)

 

$

-

 

$

-

 

 


(3)  We are a guarantor of this construction loan made to Campus One, LLC.  We are proportionately liable for the $10.5 million obligation, limited to our 49% ownership interest.

(4)  We are a guarantor of this construction loan made to Campus Two, LLC on July 1, 2013. We are proportionately liable for the$16.5 million obligation, limited to our 49% ownership interest.

 

Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of our mortgages payable for our unconsolidated joint venture properties at June 30, 2013, was approximately $9.8 million, which was determined using Level 2 measurement.

 

On August 8, 2013 Campus One, LLC refinanced its $10.5 million construction mortgage payable with a new mortgage payable to a life insurance company for $17.3 million bearing fixed interest at 4.35% and maturing September 1, 2028.

 

Note 12 — Accounts Payable and Accrued Expenses Due to Affiliates

 

Accounts payable and accrued expenses due to affiliates includes amounts owed to NTS Development Company and/or its affiliate, NTS Management Company, (collectively referred to as “NTS Development”), for

 

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reimbursement of salary and overhead expenses and fees for services rendered as provided for in our various management agreements.

 

Note 13 — Related Party Transactions

 

Pursuant to our various management agreements, NTS Development receives fees for a variety of services performed for our benefit.  NTS Development also receives fees under separate management agreements for each of our consolidated joint venture properties, our unconsolidated joint venture properties, our properties owned as a tenant in common with an unaffiliated third party and our properties owned by our eight wholly-owned subsidiaries financed through Federal Home Loan Mortgage Corporation (“FHLMC”).  Property management fees are paid in an amount equal to 5% of the gross collected revenue from our wholly-owned properties, consolidated and unconsolidated joint venture properties and properties owned by our eight wholly-owned subsidiaries financed through FHLMC.  Property management fees are paid in an amount equal to 3.5% of the gross collected revenue from our unconsolidated properties owned as a tenant in common with an unaffiliated third party.  We are the beneficiary of a preferential ownership interest, disproportionately greater than our initial cash investment in each property owned as a tenant in common with an unaffiliated third party.  Construction supervision fees are generally paid in an amount equal to 5% of the costs incurred which relate to capital improvements and significant repairs.  NTS Development receives commercial leasing fees equal to 4% of the gross rental amount for new leases and 2% of the gross rental amount for new leases in which a broker is used and for renewals or extensions.  Disposition fees are paid to NTS Development in an amount of 1% to 4% of the aggregate sales price of a property pursuant to our management agreements and up to a 6% fee upon disposition on our properties owned as a tenant in common with an unaffiliated third party under separate management agreements.  NTS Development has agreed to accept a lower management fee for the properties we own as a tenant in common with an unaffiliated third party in exchange for a larger potential disposition fee.  NTS Development is reimbursed its actual costs for services rendered to NTS Realty.

 

Employee costs are allocated among NTS Realty, other affiliates of our managing general partner and for the benefit of third parties so that a full time employee can be shared by multiple entities.  Each employee’s services, which are dedicated to a particular entity’s operations, are allocated as a percentage of each employee’s costs to that entity.  We only reimburse charges from NTS Development for actual costs of employee services incurred for our benefit.  Many business enterprises employ individuals serving on their behalf and record their associated employment costs as salaries, employment taxes and benefits in their respective statements of operations.  The cost of services provided to us by NTS Development’s employees are classified in our condensed consolidated statements of operations as professional and administrative expenses reimbursed to affiliates.

 

We were charged the following amounts pursuant to our various agreements with NTS Development for the three and six months ended June 30, 2013 and 2012.  These charges include items which have been expensed as operating expenses reimbursed to affiliates or professional and administrative expenses reimbursed to affiliates and items that have been capitalized as other assets or as land, buildings and amenities.

 

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Table of Contents

 

 

 

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

Property management fees

 

$

732,000

 

$

708,000

 

 

 

 

 

 

 

Operating expenses reimbursement - property

 

1,063,000

 

1,008,000

 

Operating expenses reimbursement - multifamily leasing

 

189,000

 

201,000

 

Operating expenses reimbursement - administrative

 

274,000

 

272,000

 

Operating expenses reimbursement - other

 

29,000

 

35,000

 

 

 

 

 

 

 

Total operating expenses reimbursed to affiliates

 

1,555,000

 

1,516,000

 

 

 

 

 

 

 

Professional and administrative expenses reimbursed to affiliates

 

449,000

 

433,000

 

 

 

 

 

 

 

Construction supervision and leasing fees

 

37,000

 

26,000

 

 

 

 

 

 

 

Total related party transactions

 

$

2,773,000

 

$

2,683,000

 

 

 

 

 

 

 

Total related party transactions with our investments in tenants in common

 

$

343,000

 

$

363,000

 

 

 

 

 

 

 

Total related party transactions with our investments in joint ventures (1)

 

$

136,000

 

$

306,000

 

 

 

 

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Property management fees

 

$

1,540,000

 

$

1,409,000

 

 

 

 

 

 

 

Operating expenses reimbursement - property

 

2,131,000

 

2,022,000

 

Operating expenses reimbursement - multifamily leasing

 

367,000

 

410,000

 

Operating expenses reimbursement - administrative

 

551,000

 

550,000

 

Operating expenses reimbursement - other

 

44,000

 

78,000

 

 

 

 

 

 

 

Total operating expenses reimbursed to affiliates

 

3,093,000

 

3,060,000

 

 

 

 

 

 

 

Professional and administrative expenses reimbursed to affiliates

 

968,000

 

870,000

 

 

 

 

 

 

 

Construction supervision and leasing fees

 

71,000

 

71,000

 

 

 

 

 

 

 

Total related party transactions

 

$

5,672,000

 

$

5,410,000

 

 

 

 

 

 

 

Total related party transactions with our investments in tenants in common

 

$

743,000

 

$

699,000

 

 

 

 

 

 

 

Total related party transactions with our investments in joint ventures (1)

 

$

361,000

 

$

497,000

 

 


(1)         Construction supervision fees at 600 North Hurstbourne and 700 North Hurstbourne are charged at a rate of 10%.

 

Property, multifamily leasing, administrative and other operating expenses reimbursed include employee costs charged to us by NTS Development and other actual costs incurred by NTS Development on our behalf, which were reimbursed by us.

 

During the three months ended June 30, 2013 and 2012, we were charged approximately $24,000 and $17,000, respectively, for property maintenance fees from affiliates of NTS Development.  During the six months ended June 30, 2013 and 2012, we were charged approximately $49,000 and $33,000, respectively, for property maintenance fees from affiliates of NTS Development.

 

Until May 31, 2012, NTS Development Company leased 20,368 square feet of office space in NTS Center at a rental rate of $14.50 per square foot. Beginning June 1, 2012, NTS Development Company leased 17,843 square feet of office space in 600 North Hurstbourne at a rental rate of $21.50 per square foot. The average per square foot rental rate for similar office space in 600 North Hurstbourne as of June 30, 2013 was $22.00 per square foot.  NTS Development Company also leased 1,902 square feet of storage space in NTS Center at a rental rate of $5.50 per square foot.  We recognized rents of approximately $3,000 and $52,000 from NTS Development Company for the

 

17



Table of Contents

 

three months ended June 30, 2013 and 2012, respectively.  We recognized rents of approximately $5,000 and $128,000 from NTS Development Company for the six months ended June 30, 2013 and 2012, respectively.

 

Our unconsolidated joint venture, Campus One, LLC, recognized rents of approximately $98,000 and $33,000 from NTS Development Company for the three months ended June 30, 2013 and 2012, respectively.  Our unconsolidated joint venture, Campus One, LLC, recognized rents of approximately $197,000 and $33,000 from NTS Development Company for the six months ended June 30, 2013 and 2012, respectively.

 

Pluris Property Fund I, L.P. (“PPFI”), our joint venture partner, owns a 49% noncontrolling interest in Golf Brook Apartments and Sabal Park Apartments.  Pluris Property Fund II, L.P. (“PPFII”), our joint venture partner, owns a 26.5% noncontrolling interest in Lakes Edge Apartments.  PPFI and PPFII are related parties as the son-in-law of our President and CEO, Brian F. Lavin, is a member of the general partner of each of PPFI and PPFII.

 

Note 14 — Commitments and Contingencies

 

We, as an owner of real estate, are subject to various environmental laws of federal, state and local governments.  Our compliance with existing laws has not had a material adverse effect on our financial condition, cash flows and results of operations.  However, we cannot predict the impact of new or changed laws or regulations on our current properties or on properties that we may acquire in the future.

 

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

 

Litigation

 

On January 27, 2013, we received notice that Dannis, Stephen, et al. v. Nichols, J.D., et al., Case No. 13-CI-00452, a putative unitholder class action lawsuit, was filed on January 25, 2013 in Jefferson County Circuit Court of the Commonwealth of Kentucky against us, each of the members of the board of directors of NTS Realty Capital, NTS Realty Capital, NTS Realty Partners, LLC, NTS Merger Parent, LLC and NTS Merger Sub (“Merger Sub”) alleging, among other things, that the board of directors breached their fiduciary duties to our unitholders in connection with the board’s approval of the Merger between Merger Sub and NTS Realty. On March 14, 2013, plaintiffs filed an amended complaint and added NTS Development Company and NTS Management Company as additional defendants. The amended complaint seeks, among other things, to enjoin the defendants from completing the Merger as currently contemplated. We believe these allegations are without merit and we intend to vigorously defend against them.

 

On February 12, 2013, we received notice that R. Jay Tejera v. NTS Realty Holdings LP et al., Civil Action No. 8302-VCP, another putative unitholder class action lawsuit, was filed on February 12, 2013 in the Court of Chancery in the State of Delaware against us, each of the members of the board of directors of NTS Realty Capital, NTS Merger Parent, LLC and NTS Realty Capital, alleging, among other things, that the board of directors breached their fiduciary duties to our unitholders in connection with the board’s approval of the Merger between Merger Sub and NTS Realty. The complaint seeks, among other things, money damages. We believe these allegations are without merit and we intend to vigorously defend against them.

 

On February 15, 2013, we received notice that Gerald A. Wells v. NTS Realty Holdings LP et al., Civil Action No. 8322-VCP, a third putative unitholder class action lawsuit, was filed on February 15, 2013 in the Court of Chancery of the State of Delaware against us, each of the members of the board of directors of NTS Realty Capital, NTS Merger Parent, LLC, Merger Sub and NTS Realty Capital, alleging, among other things, that the board of directors breached their fiduciary duties to our unitholders in connection with the board’s approval of the Merger between Merger Sub and NTS Realty. The complaint seeks, among other things, to enjoin the defendants from completing the Merger as currently contemplated. We believe these allegations are without merit and we intend to vigorously defend against them.

 

18



Table of Contents

 

On March 19, 2013, the Delaware Court of Chancery consolidated the Tejera and Wells complaints under the Tejera case number and the consolidated case caption of In Re NTS Realty Holdings Limited Partnership Unitholders Litigation.  Then, on June 12, 2013, the Delaware Chancery Court granted a Stipulation and Order of Voluntary Dismissal as to Plaintiff R. Jay Tejera, dismissing the claims of Plaintiff R. Jay Tejera, without prejudice, from In Re NTS Realty Holdings Limited Partnership Unitholders Litigation.  On June 13, 2013, we received notice that Plaintiff R. Jay Tejera joined with Plaintiffs Stephen and Sharon Dannis in filing a second amended complaint in the litigation pending in the Jefferson County Circuit Court of the Commonwealth of Kentucky.  In the second amended complaint, the Dannises and Tejera purport to state claims for breach of fiduciary duty against us, each member of the board of directors, NTS Realty Capital and NTS Merger Parent, LLC.  This second amended complaint, like the amended complaint, seeks money damages.  We believe these allegations are without merit and we intend to vigorously defend against them.

 

We do not believe there is any other litigation threatened against us other than routine litigation and other legal proceedings arising out of the ordinary course of business.

 

Note 15 — Segment Reporting

 

Our reportable operating segments include multifamily, commercial and retail real estate operations.  The following unaudited financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of assisting in making internal operating decisions.  We evaluate performance based on stand-alone operating segment net income (loss).  The non-segment information necessary to reconcile to our total operating results is included in the column labeled “Partnership” in the following information.

 

19


 


Table of Contents

 

 

 

(Unaudited)

 

 

 

Three Months Ended June 30, 2013

 

 

 

Multifamily

 

Commercial

 

Retail

 

Partnership

 

Total

 

Rental income

 

$

12,751,866

 

$

1,379,026

 

$

144,076

 

$

(5,281

)

$

14,269,687

 

Tenant reimbursements

 

-

 

406,257

 

25,313

 

-

 

431,570

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

12,751,866

 

1,785,283

 

169,389

 

(5,281

)

14,701,257

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliates

 

4,636,684

 

656,980

 

27,038

 

-

 

5,320,702

 

Management fees

 

636,761

 

87,034

 

8,210

 

-

 

732,005

 

Property taxes and insurance

 

1,687,482

 

253,507

 

16,037

 

29,173

 

1,986,199

 

Professional and administrative expenses and professional and administrative expenses reimbursed to affiliates

 

-

 

-

 

-

 

1,126,711

 

1,126,711

 

Depreciation and amortization

 

3,622,387

 

445,692

 

40,583

 

-

 

4,108,662

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

10,583,314

 

1,443,213

 

91,868

 

1,155,884

 

13,274,279

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

2,168,552

 

342,070

 

77,521

 

(1,161,165

)

1,426,978

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

6,705

 

1,431

 

-

 

26

 

8,162

 

Interest expense

 

(3,195,175

)

(142,782

)

(63

)

(95,812

)

(3,433,832

)

Loss on disposal of assets

 

(31,792

)

(43

)

-

 

-

 

(31,835

)

Loss from investments in joint ventures

 

-

 

(5,477

)

-

 

-

 

(5,477

)

Loss from investments in tenants in common

 

(207,680

)

-

 

-

 

-

 

(207,680

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

(1,259,390

)

195,199

 

77,458

 

(1,256,951

)

(2,243,684

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

(179,605

)

-

 

-

 

-

 

(179,605

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,079,785

)

$

195,199

 

$

77,458

 

$

(1,256,951

)

$

(2,064,079

)

 

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and amenities, net

 

$

249,843,953

 

$

24,947,699

 

$

3,308,374

 

$

-

 

$

278,100,026

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for land, buildings and amenities

 

$

585,697

 

$

238,559

 

$

-

 

$

-

 

$

824,256

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment liabilities from continuing operations

 

$

241,933,880

 

$

1,942,592

 

$

51,842

 

$

29,141,413

 

$

273,069,727

 

 

20



Table of Contents

 

 

 

(Unaudited)

 

 

 

Three Months Ended June 30, 2012

 

 

 

Multifamily

 

Commercial

 

Retail

 

Partnership

 

Total

 

Rental income

 

$

12,301,604

 

$

1,392,154

 

$

132,090

 

$

(5,775

)

$

13,820,073

 

Tenant reimbursements

 

-

 

454,200

 

22,441

 

-

 

476,641

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

12,301,604

 

1,846,354

 

154,531

 

(5,775

)

14,296,714

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliates

 

4,841,069

 

765,636

 

25,200

 

-

 

5,631,905

 

Management fees

 

608,066

 

92,155

 

7,717

 

-

 

707,938

 

Property taxes and insurance

 

1,524,046

 

219,890

 

14,899

 

29,173

 

1,788,008

 

Professional and administrative expenses and professional and administrative expenses reimbursed to affiliates

 

-

 

-

 

-

 

619,785

 

619,785

 

Depreciation and amortization

 

3,958,666

 

467,968

 

40,629

 

-

 

4,467,263

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

10,931,847

 

1,545,649

 

88,445

 

648,958

 

13,214,899

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

1,369,757

 

300,705

 

66,086

 

(654,733

)

1,081,815

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

13,850

 

305

 

-

 

3,382

 

17,537

 

Interest expense

 

(3,241,063

)

(152,722

)

(13

)

(94,906

)

(3,488,704

)

Loss on disposal of assets

 

(12,893

)

(53,077

)

-

 

-

 

(65,970

)

Loss from investment in joint venture

 

-

 

(71,597

)

-

 

-

 

(71,597

)

Loss from investments in tenants in common

 

(595,941

)

-

 

-

 

-

 

(595,941

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net (loss) income

 

(2,466,290

)

23,614

 

66,073

 

(746,257

)

(3,122,860

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

(256,959

)

-

 

-

 

-

 

(256,959

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,209,331

)

$

23,614

 

$

66,073

 

$

(746,257

)

$

(2,865,901

)

 

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and amenities, net

 

$

263,654,328

 

$

26,211,619

 

$

3,464,896

 

$

-

 

$

293,330,843

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for land, buildings and amenities

 

$

967,961

 

$

114,626

 

$

-

 

$

-

 

$

1,082,587

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment liabilities from continuing operations

 

$

245,843,535

 

$

2,450,978

 

$

49,982

 

$

28,248,291

 

$

276,592,786

 

 

21



Table of Contents

 

 

 

(Unaudited)

 

 

 

Six Months Ended June 30, 2013

 

 

 

Multifamily

 

Commercial

 

Retail

 

Partnership

 

Total

 

Rental income

 

$

25,229,996

 

$

2,816,519

 

$

275,961

 

$

(10,891

)

$

28,311,585

 

Tenant reimbursements

 

-

 

807,297

 

48,803

 

-

 

856,100

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

25,229,996

 

3,623,816

 

324,764

 

(10,891

)

29,167,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and operating expenses reimbursed to affiliates

 

8,556,685

 

1,304,250

 

54,205

 

-

 

9,915,140

 

Management fees

 

1,340,169

 

185,874

 

14,302

 

-

 

1,540,345

 

Property taxes and insurance

 

3,337,705

 

506,910

 

32,074

 

58,346

 

3,935,035

 

Professional and administrative expenses and professional and administrative expenses reimbursed to affiliates

 

-

 

-

 

-

 

2,577,930

 

2,577,930

 

Depreciation and amortization

 

7,417,709

 

916,942

 

81,166

 

-

 

8,415,817

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

20,652,268

 

2,913,976

 

181,747

 

2,636,276

 

26,384,267

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

4,577,728

 

709,840

 

143,017

 

(2,647,167

)

2,783,418

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

1,576,774

 

36,688

 

3,037

 

195

 

1,616,694

 

Interest expense

 

(6,372,395

)

(288,770

)

(118

)

(191,758

)

(6,853,041

)

Loss on disposal of assets

 

(42,244

)

(43

)

-

 

-

 

(42,287

)

Loss from investments in joint ventures

 

-

 

(46,839

)

-

 

-

 

(46,839

)

Income from investments in tenants in common

 

486,784

 

-

 

-

 

-

 

486,784

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income (loss)

 

226,647

 

410,876

 

145,936

 

(2,838,730

)

(2,055,271

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

(330,679

)

-

 

-

 

-

 

(330,679

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

557,326

 

$

410,876

 

$

145,936

 

$

(2,838,730

)

$

(1,724,592

)

 

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and amenities, net

 

$

249,843,953

 

$

24,947,699

 

$

3,308,374

 

$

-

 

$

278,100,026

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for land, buildings and amenities

 

$

815,481

 

$

321,234

 

$

-

 

$

-

 

$

1,136,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment liabilities from continuing operations

 

$

241,933,880

 

$

1,942,592

 

$

51,842

 

$

29,141,413

 

$

273,069,727

 

 

22



Table of Contents

 

 

 

(Unaudited)

 

 

 

Six Months Ended June 30, 2012

 

 

 

Multifamily

 

Commercial

 

Retail

 

Partnership

 

Total

 

Rental income

 

$

24,304,789

 

$

2,845,057

 

$

264,180

 

$

(11,549

)

$

27,402,477

 

Tenant reimbursements

 

-

 

891,253

 

44,512

 

-

 

935,765